Shades of Chiang Mai as BRICS unveil currency fund
BRICS countries' creation of a fund to support their currencies has echoes of a similar initiative 13 years ago, which has never been used
David Loevinger, a former senior US Treasury official, says recollections of the Chiang Mai Initiative flashed through his mind when the largest developing countries unveiled a US$100 billion emergency fund last week.
In the 13 years since Asian countries created what they called an alternative to the International Monetary Fund by pooling together US$240 billion to help support their currencies, not a penny has been drawn from the Chiang Mai kitty.
"It's easy to announce the intention," Loevinger, who served as the Treasury's China affairs co-ordinator from 2009 to last year and is now an emerging-markets analyst at TCW in Los Angeles, said this week. "It's more difficult to make [it] operational."
Brazil, Russia, India, China and South Africa are forming their own lender of last resort as speculation the US will scale back monetary stimulus sparks the worst emerging-market currency selloff in five years.
The rand has tumbled 15 per cent this year, while the rupee touched a record low last month and the real reached a four-year low before rebounding in the past two weeks.
Implementation of the fund might be undone by central bankers' aversion to taking on risk, particularly as investors flee developing countries' assets, Loevinger said.
Citigroup, expecting that the fund would follow the guidelines used by Chiang Mai, estimates each country would have access to only US$8 billion before needing IMF backing for further funds. That figure is about 7 per cent of India's foreign reserves and less than the country's own contribution of US$18 billion to the pool. It represents 2 per cent of Brazil's US$373 billion reserves, which the country has yet to use in its defence of the real.
Currencies from South Africa, India and Brazil are among the six worst-performing in emerging markets this year as a surge in US benchmark bond yields to a two-year high lures away the investment that those countries needed to finance their current account deficits.
The BRICS pledged on September 5 during the Group of 20 summit in St Petersburg to create the fund, named the Contingency Reserve Arrangement (CRA), to shield themselves from "unintended negative spillovers" from monetary policies in advanced economies.
China, which holds US$3.5 trillion in foreign reserves, will contribute US$41 billion. Russia, India and Brazil will each put up US$18 billion, while South Africa will provide US$5 billion. The fund represents 2.2 per cent of the combined US$4.3 trillion reserves among the BRICS. The group also agreed to seed a development bank with US$50 billion of capital.
The countries did not provide details on how the fund will work. Brazilian Finance Minister Guido Mantega said in October it would be modelled on Chiang Mai.
The fund, which may start operating by 2015, "is not designed to address the current situation", said Carlos Cozendey, secretary for international affairs at Brazil's Finance Ministry. The programme "will be helpful as a buffer to face problems in balance of payments" without seeking to defend exchange rate levels, he said.
The BRICS countries have been seeking a bigger role in international financial institutions as their importance to the world economy grew.
Together, they have 11 per cent of the voting rights at the IMF, about half their 20 per cent share of global economic output. The US, which makes up 22 per cent of production, has 17 per cent of IMF voting rights. An agreement reached in 2010 to give developing countries more voting rights has yet to be implemented because the US Congress has not approved it.
Vivienne Taberer, who helps oversee US$14 billion in emerging-market bonds at Investec Asset Management, said the BRICS fund may help boost investor confidence by giving the countries another tool to defend their currencies.
"The important thing here is it's a sign of co-ordination and working together in putting something in place," Taberer said. "If you're going to use these types of lines to fight something that is fundamentally justified, then you're not going to win the battle."
Japan, China and South Korea led the creation of the Chiang Mai Initiative following the 1997 Asian financial crisis that sank currencies across the region.