The next summit of the leaders of the BRICS nations (Brazil, Russia, India, China, South Africa) is set to be held today (Wednesday the 25th of July) in Johannesburg South Africa. Not only is South Africa hosting the summit, but they are also the current chair of the group. The five countries making up the bloc account for 28% of global GDP and 42% of the world’s population, with the cumulative territory of these countries making up a quarter of the globe’s land mass. The BRICS summit has been held every year since 2011 (previous summits had been held among the 4 BRIC countries, with South Africa joining the group later). In general, the leaders at these summits tend to discuss economic cooperation between member states, as well as other forms of cooperation, and global issues such as climate change, energy security, gender equality, and so on. The 2018 summit, however, promises to be a bit special.
First of all, one of the BRICS countries, namely China, has been forced into a trade war with the USA, and must therefore conduct a managed devaluation of its national currency. Russia, another BRICS member, has recently had sanctions tightened again by the US, whose Congress is discussing a bill to extend these sanctions to any transactions connected with the Russian national debt.
It’s also important to note that the G20 summit of financial ministers wrapped up in the last few days, which unanimously condemned the USA’s trade war with China, the EU, other North American countries, and essentially the rest of the world. Even the IMF’s top management directed some criticism towards the US, which has previously always been an obedient upholder of US policies. We reckon that the BRICS countries won’t hold back in this regard, perhaps offering some even harsher criticisms of the US and Donald Trump than the IMF.
Moreover, over the last two months, Russia has reduced its purchases of US Treasury bonds from 96bn USD to 15bn USD, and is no longer on the list of top national investors in US bonds. This decision by Russia has created a bit of frenzy across US media, as the sale by Russia of large packages of US government debt has led to a rise in bond yields and lending rates, which could bring about a slowdown in American economic growth; something that Donald Trump has previously chalked up as one of his presidency’s successes. China is still the US’ biggest creditor, but we can’t rule out the possibility that if dialogue with the US breaks down, that China could start selling US Treasury bonds. If this were to happen, it could trigger panic on the debt market, causing yields to increase along with interest rates.
It’s also worth noting that the BRICS countries are making their first steps towards integration, for example, by creating the New Development Bank. It’s been proposed that this institution would replace the World Bank and its institutions within BRICS countries. The bank has already approved financing for 5 major investment projects in Russia.
Interestingly, this year’s BRICS summit will be attended by potential future member states: Turkey, Argentina, Indonesia, Egypt, and Jamaica. In our view, the most viable candidate for expanding the BRICS bloc is Turkey. Moreover, financial institutions have used the acronym BRICST in the past to include Turkey in the group. Turkey accounts for just over 1% of global GDP (for comparison, Russia accounts for about 2%). In order for BRICS to become BRICST, Turkey would first need to shore up its national currency and stop its collapse. Argentina has been experiencing similar problems with its national currency this year, as well as with hyperinflation. However, this country is heavily credited and is able to rely on the US both financially and politically. As such, talk of them joining the BRICS nations is premature at this stage. However, joining BRICS remains open to other developing countries. If the US continues its aggressive policy of protectionism by any means, and starts trade wars with the rest of the world, then the anti-American leanings of the BRICS bloc, which has previously been an interpretation limited to the Western media, could intensify and result in a lot of countries starting to gradually reduce their reserves of USD.
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Forecasts which are made in the review constitute the personal view of the author. Commentaries made do not constitute trade recommendations or guidance for working on financial markets. Alpari bears no responsibility whatsoever for any possible losses (or other forms of damage), whether direct or indirect, which may occur in case of using material published in the review.
Director of Alpari's analytical department
## ojimadu position
Senior Alpari analyst
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