'BRICS bank' wants to boost local currencies

Hobbled by the impact of sanctions against founding shareholder Russia, the New Development Bank (NDB) set up by the BRICS countries needs to increase its local currency fundraising and lending, South Africa's finance minister told Reuters.

South Africa will host leaders of the other BRICS nations - Brazil, Russia, India and China - as the bloc aims to widen its influence at a Johannesburg summit later this month.

Finance Minister Enoch Godongwana said boosting local currency usage among the NDB's members will also be on the agenda, with the aim of de-risking the impact of foreign exchange fluctuations rather than de-dollarisation.

The greenback has gained against emerging market currencies since Russia invaded Ukraine and the Federal Reserve began raising interest rates to fight inflation in early 2022, making dollar debt more costly for those countries to service.

"Most countries that are members of the NDB have been encouraging it to provide loans in local currencies," Godongwana said.

Established in 2015 as the flagship financial project of the bloc, the NDB's ambition to serve emerging economies and de-dollarise finance have been curbed by economic realities and Moscow's invasion of Ukraine.

"It is not doing as much as member countries require, but that is the strategic direction we are pushing the bank in," Godongwana said in a telephone interview.

Increasing local currency fundraising and raising capital from new members could help the NDB in tough times, cutting its dependence on US capital markets where sanctions against Russia have driven up its borrowing costs, analysts said.

Loans

The NDB has expanded from its original core of five to eight and only makes loans in member countries.

Chief Financial Officer Leslie Maasdorp told Reuters in an interview at the NDB headquarters in Shanghai that the bank aims to increase local currency lending from about 22% to 30% by 2026, but that there were limits to de-dollarisation.

"The bank's operating currency is dollars for a very specific reason, US dollars are where the largest pools of liquidity are," he said.

The bank is responsive to its members and will decide the mix of currencies it lends in based on their demands, Maasdorp said in emailed comments.

Of more than US$30 billion in loans approved by the NDB, two-thirds were in dollars, an April investor presentation showed.

That dependence became a liability when the United States imposed sanctions on Russia last year.

The NDB stopped loans to Russia, but this did not prevent a Fitch downgrade in July 2022 and its dollar borrowing costs have spiked by more than others.

Bond

A five-year US$1.5 billion bond the NDB issued in April 2021 had a 1.125% coupon. Two years later, a US$1.25 billion five-year bond had a 5.125% coupon. That is more expensive than other multilateral development banks with similar credit ratings, S&P Global Ratings analyst Alexander Ekbom said.

As a result of this risk premium, which Maasdorp put at about 25 basis points, the NDB has had to rein in new lending.

"Because of the capital market challenges of 2022, and in an endeavour to preserve the bank's core financial ratios, there was indeed a slowdown," Maasdorp said.

"You cannot step outside of the dollar universe and operate in a parallel universe."

While the NDB has approved loans worth US$32.8 billion for projects ranging from Mumbai metro lines to solar lighting in Brasilia, the loans on its balance sheet were worth less than half that amount at end-March. In 2022, the bank disbursed only about US$1 billion of loans.

So far, China is by far the NDB's most successful local currency market. It issued 13 billion yuan (US$1.8 billion) across three "panda bonds" last year and more than half of its lending there has been in yuan.

"The renminbi market has increased in significance," said Ekbom of S&P Global Ratings, which rates the NDB "AA ". "But that has been more because raising money in the U.S. dollar market has been unfavourable for them."

Other markets have lagged behind, though the bank is hoping to raise up to R1.5 billion in debut bonds in South Africa on August 15. It is also aiming to issue its first rupee bond in India by the end of 2023.

Nevertheless, the NDB, established with US$10 billion in paid-in share capital from each BRICS country, wants to expand.-Fin24