BRICS summit gives IMF gang a run for its money
Western-led order’s unraveling on full display as BRICS gathering in Russia gives IMF meet in US an economic reality check
October 22, 2024
It’s going to be a busy, tense and challenge-laden International Monetary Fund gathering in Washington this week.
There, the economic glitterati will confront a bewildering number of hot-button issues ranging from China’s slowdown to Germany’s recession to geopolitical risks galore to a toss-up US election that’s testing nerves everywhere. Throw in the IMF’s warnings about a US$100 trillion public debt timebomb.
Amazingly, Washington could be hosting this week’s second most impactful economic gathering. The more tantalizing event will be in Moscow, where the BRICS nations are holding their annual summit.
Just a few years ago, many pundits figured the grouping roping together Brazil, Russia, India and South Africa was destined for sideshow status. In 2001, then-Goldman Sachs economist Jim O’Neill coined the BRIC acronym. In 2010, the four original members added South Africa.
In the years since, the BRICS seemed to lose forward thrust. In a 2019 report, Standard & Poor’s said the bloc had lost relevance. Around that same time, O’Neill himself took some shots at his creation.
“The diverging long-term economic trajectory of the five countries weakens the analytical value of viewing the BRICS as a coherent economic grouping,” O’Neill wrote recently. “I myself have occasionally joked that perhaps I should have called the acronym ‘IC’ based on the clear disappointment of the Brazilian and Russian economies in the current decade since 2011, where both have clearly significantly under-performed compared with what the 2050 scenario path laid out.”
Yet the BRICS have since gotten some of their groove back and is expanding, adding five new members. This week, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates will join the fold.
Mariel Ferragamo, an analyst at the Council on Foreign Relations, notes that “the addition of Egypt and Ethiopia will amplify voices from the African continent. Egypt also had close commercial ties with China and India, and political ties with Russia.”
As a new BRICS member, Egypt “seeks to attract more investment and improve its battered economy,” Ferragamo notes. “China has long courted Ethiopia, the third-biggest economy in sub-Saharan Africa, with billions of dollars of investment to make the country a hub of its Belt and Road Initiative. The addition of Saudi Arabia and the UAE would bring in the two biggest economies in the Arab world and the second and eighth top oil producers globally.”
The timing of this expansion dovetails with a top BRICS strategy: de-dollarization.
In February, the BRICS unveiled plans to create a “multilateral digital settlement and payment platform” it called BRICS Bridge, which “would help to bridge the gap between the financial markets of BRICS member countries and increase mutual trade.”
Reports suggest this week’s gathering will float a new strategy to accelerate efforts to displace the US dollar. Udith Sikand, an analyst at Gavekal Dragonomics, notes that one idea is for a gold-backed BRICS monetary unit.
“It seems unlikely that any one currency could overcome this binding constraint to fully replace the US dollar’s central role,” Sikand says.
“However, it is plausible that in an increasingly multipolar world, a wide range of currencies could collectively chip away at its outsized role. The logical implication of such a shift would be that while the dollar remains vital to global trade and capital flows, its tendency to be a safe haven in times of stress would be diminished as investors weigh up their options among a host of alternatives.”
And for that, the West needs to own the extent to which it’s making it easier for the BRICS. This opening for Global South nations is, after all, partly thanks to the Bretton Woods gang making a mess of their individual economies – and by extension the global system.
Take the US, which is ablaze in political chaos at a moment when the national debt has topped $35 trillion. The risks posed by the upcoming November 5 election alone have credit rating companies on edge, particularly Moody’s Investors Service, which is the last to assign Washington a AAA grade.
Germany is flatlining, highlighting headwinds bearing down on the broader continent. As Germany’s Economy Ministry puts it, “economic weakness likely continued in the second half of 2024, before growth momentum gradually increases again next year,” adding that “technical recession” risks abound.
The level of concern can be seen in the European Central Bank’s move last week to slash rates for the third time this year.
Michael Krautzberger, global chief investment officer at Allianz Global Investors, says that “this pick-up in the speed of rate cuts is justified as the mix of sub-trend euro growth and at-target inflation argues for a much less restrictive monetary policy than is currently the case.”
Krautzberger adds that “there are some hopes that recent Chinese policy support will help trade-sensitive markets like Germany, but we doubt this will be enough to offset the weak domestic demand picture within the region. There is also a risk that after the upcoming US elections in November, trade conflicts may return to the policy agenda — not just between the US and China, but also with the EU — presenting further downside growth risks.”
Making matters worse, public debt levels globally are set to reach $100 trillion this year, thanks in large part to the borrowing trajectory of both the US and China.
“Our forecasts point to an unforgiving combination of low growth and high debt – a difficult future,” says IMF managing director Kristalina Georgieva. “Governments must work to reduce debt and rebuild buffers for the next shock – which will surely come, and maybe sooner than we expect.”
Such unthinkable debt levels are a clear and present threat to the global financial system. As IMF analysts write in a recent report: “Elevated debt levels and uncertainty surrounding fiscal policy in systemically important countries, such as China and the United States, can generate significant spillovers in the form of higher borrowing costs and debt-related risks in other economies.”
Those spillovers could complicate monetary policy decisions across Asia — in both directions.
In Tokyo, Bank of Japan officials are voicing their determination to continue raising rates. Yet that’s despite data showing renewed weakness in retail sales, exports, industrial production and private machinery orders. And concerns among Ministry of Finance officials that deflationary forces might return in the months ahead.
Even though inflation is easing in Japan, “the central bank has made clear that it will raise interest rates,” says Danny Kim, an economist at Moody’s Analytics. “At best, this will slow growth. At worst, it could trigger a wider economic decline.”
All this raises questions about whether the globe’s top economies are complacent about risks on the horizon.
As officials arrive in Washington, there’s considerable relief that the US hasn’t experienced the recession that the vast majority of economists predicted. Or that China’s downshift hadn’t pushed mainland growth too far below this year’s 5% target.
But there’s reason to think this is the calm before the proverbial storm. The geopolitical road is as perilous as they get. Aside from the scary debt milestone flagged by the IMF, Middle East tensions are soaring as Russia’s war in Ukraine grinds on. And then there’s the return of the “Trump trade.”
Polls suggest a very tight race between former US President Trump and current Vice President Kamala Harris. The betting markets, though, suggest Trump might prevail. If so, Asia could quickly find itself in harm’s way.
Trump’s threat to slap 60% tariffs on all Chinese goods is just the beginning. Many predict a Trump 2.0 administration will impose far bigger taxes and trade curbs, all sure to wreck Asia’s 2025.
Even if Trump loses to Harris, he’s hardly going to accept defeat and move on peacefully. Many already fear his supporters could attack the US capital again to protest his defeat on the grounds the election is stolen. That’s likely to imperil Washington’s credit rating anew and spook investors pushing Wall Street stocks to all-time highs.
The fallout from the Trump-inspired January 6, 2021 insurrection was among the reasons Fitch Ratings revoked its AAA rating on US debt, joining Standard & Poor’s. The question now is whether Moody’s downgrades the US, too.
This uncertainty is playing into the BRICS’ hands. Southwest Asia is also making a discernible pivot toward the BRICS nations. All this is a global game-changer that few in the West saw coming.
Earlier this year, Malaysia detailed its ambitions to join the intergovernmental organization. Thailand and Vietnam are also among the Association of Southeast Asian Nations members expressing similar interest. In Indonesia, an increasing number of lawmakers are BRICS curious, too.
Southeast Asia’s involvement could be a particularly impactful blow to US President Joe Biden. A hallmark of the Biden era since 2021 has been creating a regional bulwark against China’s rising influence and efforts to replace the US dollar in trade and finance.
The BRICS phenomenon represents a widening crack in relations between the US and many ASEAN members. This, at a time when Saudi Arabia is looking to phase out the “petrodollar.” Riyadh is intensifying de-dollarization efforts as China, Russia and Iran line up against old alliances.
“A gradual democratization of the global financial landscape may be underway, giving way to a world in which more local currencies can be used for international transactions,” says analyst Hung Tran at the Atlantic Council’s Geoeconomics Center.
“In such a world, the dollar would remain prominent but without its outsized clout, complemented by currencies such as the Chinese renminbi, the euro, and the Japanese yen in a way that’s commensurate with the international footprint of their economies,” Tran says.
Tran notes that “in this context, how Saudi Arabia approaches the petrodollar remains an important harbinger of the financial future to come as its creation was fifty years prior.”
That potential future is on full display in Moscow this week. Officials making the rounds in Washington ignore those machinations 7,800 kilometers away at their own peril.
Follow William Pesek on X at @WilliamPesek