By Yaroslav Lissovolik
This year the focus on the BRICS summit may finally reach a point when it is going to be followed closely not just by the BRICS scholars, but by the wider global community, including the global financial markets. The reason is simply that the BRICS agenda centered on the block’s expansion as well as the possible introduction of a new reserve currency is becoming material to the ongoing changes in the architecture of the world economy. Going forward, in case the BRICS continues to move towards a more pragmatic economic framework the market relevance of BRICS summits may become more significant, particularly with respect to EM market dynamics.
Thus far, academic research into the market relevance of the annual summits of national leaders in key global fora such as the G20 suggests that they do not appear to matter to markets that much. One of the analytical forays in this sphere undertaken by the European Central Bank (ECB) concludes: “Our main finding is that G20 summits have not had a strong, consistent and durable effect on any of the markets that we consider, suggesting that the information and decision content of G20 summits is of limited relevance for market participants”[1]. Since the year 2014 when that research was produced the situation has arguably changed somewhat as intensifying crisis conditions associated with global imbalances and the COVID pandemic necessitated coordinated stimuli from the largest economies. Accordingly, the 2020 G20 summit was widely tracked by financial markets to ascertain the sufficiency of the coordinated stimulus in averting a pronounced global economic decline.
As regards the BRICS summits the last time that they mattered to financial markets was arguably in 2017 when China launched its BRICS+ initiative. The main focus at the time concerned the composition of the BRICS+ economies as well as the essence of the new format. In the end, the lack of a coherent message on the future of BRICS+ rendered the market impact insignificant. Nonetheless, economies that in 2017 were invited to take part in the BRICS+ platform used it to their advantage in dealing with capital markets. A case in point was Tajikistan that after becoming part of BRICS+ staged a successful Eurobond debut with the BRICS+ status being highlighted to investors during roadshows.
This year the situation with the BRICS summit is different in that the expansion in the core that is set to be discussed may have sizeable implications not only for the EM domain, but also for the entire global economy. Part of the reason is the sheer scale of the number of large developing economies that expressed the desire to join the bloc. Another reason why it matters to financial markets is because the BRICS are set to discuss the possibility of creating a new reserve/transactions currency of their own with palpable implications for the global monetary system. So, in view of how the discussions are shaping up in the run-up to the BRICS 2023 summit, what are the likely implications?
As regards the issue of BRICS expansion, the main focus of the financial markets is likely to be on economies such as Argentina and Saudi Arabia. For Argentina and other emerging markets with sizeable financing needs the accession to the New Development Bank (NDB) is likely to be a positive (for the main market segments such as equities and bonds) in terms of greater optionality of sources of financing and the possibility to obtain more funds for development with less stringent/burdensome conditionality. The significance of market’s reaction is likely to depend on the scale of Argentina’s and other EMs participation in the core BRICS or the expanded BRICS+ circle.
As for Saudi Arabia, its closer cooperation with BRICS may be important for solidifying the links with other partners of the Global South in the sphere of policy coordination in the oil and gas sector. BRICS/BRICS+ may become yet another venue for “resource diplomacy” in addition to OPEC+, which may further improve coordination mechanisms between developing economies in regulating commodity output and price levels. With the addition of economies such as Saudi Arabia and UAE the BRICS+ apart from being a formidable platform for the Global South regional powers and middle-income economies also becomes a key resource player globally. The market implications of such developments for commodities may imply a bias towards higher commodity prices in the medium- to longer term.
The factor that could affect the FX markets is the discussion at the summit on the possibility of a BRICS common currency. The main effect from these discussions is likely to be on the Chinese yuan as it is likely to receive the largest weight in the prospective BRICS currency basket and is currently seen as the main EM alternative to the US dollar. The yuan could be supported in international markets if the creation of a BRICS currency is discussed at the summit, with the results reflected in the final summit declaration. At this early stage, however, when the uncertainty over the future of the common currency is still significant, the market effects are likely to be moderate at best.
In the longer term, another possible ramification of the BRICS+ expansion may be the relative performance of EM assets vs. developed markets. A lot will depend on the modalities of this expansion and the degree to which it is going to be accompanied by greater trade and financial/investment liberalization on the part of the core BRICS economies. In case this pragmatic liberalization agenda is not forthcoming and if we see largely rhetorical declarations, the market effects could well turn out to be negative, particularly when the results fall short of elevated expectations. Be as it may, the markets will keep a close eye on BRICS developments in the coming weeks and it is very much in the hands of the BRICS economies to keep the market interest growing in the years to come.
[1] https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1668.pdf
This article originally appeared at https://brics-plus-analytics.org/