This report does not constitute a rating action.
S&P Global Ratings expects a limited near-term economic boost for member countries from the planned expansion of BRICS next year. We do not currently forecast any changes to our sovereign ratings from the group's expansion. We base our view on the experience of the original BRICS group to date, the very different economic structures and financial systems among members, and their lack of political cohesion. That said, BRICS membership could provide global attention for participants' agendas, perhaps reduce existing tensions between them, and increase bilateral cooperation.
On Aug. 24, 2023, the original BRICS countries--Brazil, Russia, India, China, and South Africa--invited Saudi Arabia, the United Arab Emirates (UAE), Iran, Egypt, Argentina, and Ethiopia to join the group.
While the new BRICS group (assuming all invited countries join) would comprise about 30% of the world's GDP and 45% of its population, few factors unite the members economically or politically (see chart). Our foreign currency sovereign ratings on members range from high investment grade to 'CCC'. The prospective new members are at varying developmental levels and face different economic challenges as indicated by their GDP per capita, which ranges from $1,220 in Ethiopia to $51,456 in the UAE. Moreover, the economy of one member state, China, is larger than those of all the other members combined, highlighting potential differences in the power to influence policy within the group.
Common economic goals of an expanded BRICS grouping appear to be to enhance cooperation among emerging markets, provide an alternative to developed-country-dominated forums such as the Group of Seven (G7) or the Organisation for Economic Co-operation and Development (OECD), and reduce the dominance of the U.S. dollar in international trade. In our view, however, the diverse economic and political priorities of the member states could undermine BRICS' effectiveness.
Absent new trade agreements and based on the track record of economic relationships between existing BRICS countries, we do not expect materially higher trade and investment flows for new joiners. The ambition to increase transactions in non-U.S.-dollar currencies will probably benefit the Chinese yuan most, albeit with overall volumes remaining small. However, access to new sources of concessional funding from the New Development Bank (NDB; AA+/A-1+/Stable) could provide some relief to countries with high external vulnerabilities like Egypt, Ethiopia, and Argentina.
Diverging Economic Paths
Real GDP growth has varied for the original BRICS members over the past decade. The relatively strong economic performance of China and India contrasts with the results in Brazil, Russia, and South Africa, reflecting individual policy-making decisions, and geopolitical and idiosyncratic factors (see "Grouping The BRICS Countries Together May No Longer Make Sense, published Oct. 24, 2019, on RatingsDirect). This broadly shows in their respective rating trajectories. Since 2009, we've lowered our long-term foreign currency rating on South Africa by five notches to 'BB-', and that on Brazil by three notches to 'BB-'.
The original BRICS members have increased trade and investment among themselves but mostly with China. Trade with China averaged 25% of the total for Brazil, South Africa, and Russia, and 12% for India in 2022. Overall though, intra-BRICS exports represented 10% of members' total volumes, up from 8% in 2010. Intra-BRICS investment rose more than 500% between 2010 and 2020; however, this reflected just 5% of total foreign direct investment for the group, and about 90% was investment into China.
A BRICS Common Currency?
While BRICS countries have mulled establishing a common currency in the long term, this would be difficult given the different levels of economic development among members. A currency zone would also require members to give up monetary policy flexibility and open up capital accounts, which may not be politically agreeable for some.
In the near term, BRICS countries plan to increase direct transactions in local currencies and bypass the U.S. dollar to reduce dependence on the U.S. financial system. This partly reflects the currently constrained access to external financing in U.S. dollars for some sovereigns and a broader trend of rising alternative payment systems. We do not expect a significant shift away from the dollar. The Chinese yuan will probably be the primary beneficiary of increasing trade in local currencies because it represents the biggest trading nation in the bloc. However, the key constraint on the yuan's potential as a reserve currency remains the absence of full capital account convertibility (see "Economic Research: Four Checkpoints On The Path To Greater Renminbi Internationalization," published July 10, 2023). The NDB had approved loans of about $29 billion as of Dec. 31, 2021, of which 23.3% were in original BRICS currencies--including the Chinese yuan (18.4%), South African rand (4.5%), and Indian rupee (0.3%). The NDB targets an increase in local currency funding to one-third of total lending by 2030.
Access to wealthier BRICS members and the NDB for concessional funding is likely one of the key reasons for lower-rated countries to join. The NDB was established by BRICS in 2014 to fulfil demand for infrastructure investment in member countries. The UAE and Egypt joined the bank in 2021, along with Uruguay and Bangladesh. However, the NDB's outstanding loan portfolio is currently small at about $15 billion, relative to over $400 billion at the World Bank and $144 billion at the Asian Development Bank as of year-end 2022. Future funding growth will partly depend on higher capital contributions from members. The BRICS countries also established a $100 billion foreign currency fund as a contingent reserve arrangement in 2014 to relieve balance-of-payments crises. However, this has yet to be utilized by the member countries.
Some members have more political aspirations for the new BRICS than others. Countries like China, Russia, Argentina, and Iran see it as a geopolitical challenger to the West. Oil-rich producers like Saudi Arabia and the UAE are seeking to expand their reach beyond the Middle East and Africa. Meanwhile, Western-sanctioned Russia and Iran could hope to circumvent restrictions on trade and financial transactions, which if agreed to by the group may damage relations with the West. Competition and conflicts among members will also likely hinder cohesive political dialogue and cooperation. China and India face disputes on border issues, Saudi Arabia and Iran have historically had a tense relationship, and Ethiopia and Egypt disagree over access to the Nile waters.
However, the geopolitical landscape is changing. For example, recent talks between Saudi Arabia and Iran, brokered by China, could signal increasing rapprochement between them. Depending on the will of the participant countries, and backed by their combined economic clout, BRICS may become a more impactful political grouping.
- Economic Research: Four Checkpoints On The Path To Greater Renminbi Internationalization, July 10, 2023
- New Development Bank 'AA+/A-1+' Ratings Affirmed; Outlook Stable, Feb. 27, 2023
- Grouping The BRICS Countries Together May No Longer Make Sense, Oct. 24, 2019
|Primary Credit Analyst:||Zahabia S Gupta, Dubai (971) 4-372-7154;|
|Secondary Contacts:||Trevor Cullinan, Dubai + (971)43727113;|
|Benjamin J Young, Dubai +971 4 372 7191;|
|Research Contributor:||Meghna Ashtekar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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