The BRICS Bank Utilitarian Undertaking
The New Development Bank with $50 billion in initial BRICS capital held its first organizational meeting in Uta, Russia with the former head of Indian lender ICICI appointed president. He will seek local and external credit ratings for borrowing and consider requests from oil giant Rosneft and other companies under Western sanctions. Banks could also apply as consolidation intensifies among the 750 competitors remaining since a central bank regulatory crackdown. The mid-market has been active in particular as industry assets fell 7 percent in the first half and retail NPLs hit 7.5 percent. State leader VTB, which is still in the process of absorbing Bank of Moscow, estimates half the field could disappear by end-decade. Along with Sberbank it got $17 billion in government recapitalization to withstand the commodities and embargo crunch, as the benchmark interest rate remains steep at 11.5 percent. Capital flight was again $20 billion in Q2, just above the current account surplus as the ruble continues to strengthen alongside $7.5 billion in dollar buying since May. President Putin declared that fluctuations were now “acceptable” after last year’s plunge as the free-floating exchange rate goal is indefinitely sidelined.
Russia and Brazil among the group are in recession and South Africa is close, as the IMF downgraded the emerging economy growth forecast to 4 percent. EPFR’s equity fund data tell another grim story of $21 billion in first half outflows across all regions led by Asia’s $8 billion. The dedicated BRICS strategy was off $1 billion mirroring other acronym approaches, and the frontier class also lost $850 million. By country China and greater China exit was $19 billion even as weekly numbers turned positive before the mainland crash and trading suspension. India was the runaway inflow destination at $9.5 billion, followed far behind by Russia’s $425 million. Brazil and Mexico each slipped $1 billion and Korea was another spurned Asian market (-$3.5 billion). Africa’s appeal also ebbed (-$180 million) as the developed world dominated the positive category with Europe and Japan together receiving over $100 billion. By sector energy regained popularity and consumer goods were shunned, while financials took in a modest $500 million. Bond funds overall led by the US were allocated $100 billion, but emerging market local currency was negative as hard currency gained slightly.
The fixed-income funk was also evident in the Islamic sukuk space, where issuance through July was $30 billion less than the $67 billion in 2014, mainly due to Malaysia’s choice to use other instruments for liquidity management. According to S&P the Islamic Development Bank may partially fill the void, but this year’s total will drop 40 percent. Outside Malaysia first half activity softened 10 percent as Gulf States reconsidered programs in light of lower petroleum revenue. Saudi Arabia and the UAE are likely to refrain the rest of the year as Oman and Bahrain tap the market. Indonesia and Hong Kong returned and a number of African candidates, including Egypt, Tunisia, Kenya and Nigeria are in line. The Basel III liquidity ratio will spur medium term growth for top-tier sharia-compliant assets, the agency believes, even as standard definitions and structures are not yet solid.
