The BRICS summit puts the IMF gang in trouble

It will be a busy, tense and challenging meeting of the International Monetary Fund in Washington this week.

There, economic experts are confronted with a bewildering number of explosive topics, ranging from China’s economic slowdown to the recession in Germany to geopolitical risks galore and a false election in the USA that is unnerving everywhere. Added to this are the IMF’s warnings of a $100 trillion national debt time bomb.

Amazingly, Washington could host the second most important economic meeting this week. The more tantalizing event will take place in Moscow, where the BRICS countries are holding their annual summit.

Just a few years ago, many experts thought the grouping, which includes Brazil, Russia, India and South Africa, was destined to produce a side effect. In 2001, then-Goldman Sachs economist Jim O’Neill coined the acronym BRIC. In 2010, the four original members were joined by South Africa.

In the years that followed, the BRICS countries seemed to lose forward momentum. In a 2019 report, Standard & Poor’s said the bloc had become less important. Around the same time, O’Neill himself made some recordings of his creation.

“The diverging long-term economic trajectories of the five countries weakens the analytical value of viewing the BRICS as a coherent economic grouping,” O’Neill recently wrote. “I myself have occasionally joked that perhaps I should have called the acronym ‘IC’, based on the clear disappointment of the Brazilian and Russian economies in the current decade since 2011, where both have performed significantly worse compared to the 2050 scenario laid out.”

Nevertheless, the BRICS have now regained some of their momentum and are expanding to include five new members. Joining them this week are Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates.

Mariel Ferragamo, an analyst at the Council on Foreign Relations, notes that “the addition of Egypt and Ethiopia will amplify the voices of the African continent.” Egypt also had close trade ties with China and India, as well as political ties with Russia.”

As a new BRICS member, “Egypt is seeking to attract more investment and improve its struggling economy,” notes Ferragamo. “China has long courted Ethiopia, the third-largest economy in sub-Saharan Africa, investing billions of dollars to make the country a center of its Belt and Road Initiative.” By welcoming Saudi Arabia and the United States “The Arab Emirates would add the Arab world’s two largest economies and the world’s second and eighth largest oil producers.”

The timing of this expansion fits with a top BRICS strategy: de-dollarization.

In February, the BRICS unveiled plans to create a “multilateral digital settlement and payments platform” called BRICS Bridge, which would “help bridge the gap between the financial markets of BRICS member countries and increase mutual trade.”

A new strategy to accelerate efforts to replace the US dollar will reportedly be unveiled at this week’s meeting. Udith Sikand, analyst at Gavekal Dragonomics, notes that one idea is a gold-backed BRICS currency unit.

“It seems unlikely that a single currency could overcome this binding constraint and completely replace the central role of the US dollar,” says Sikand.

“However, it is plausible that in an increasingly multipolar world a variety of currencies could collectively lose their outsized role. The logical consequence of such a shift would be that while the dollar remains crucial to global trade and capital flows, its tendency to be a safe haven in times of stress would be reduced as investors weigh their options among a variety of alternatives. “

And to do this, the West must be clear about the extent to which it is making things easier for the BRICS states. This opening for the countries of the global south is ultimately thanks in part to the Bretton Woods bond, which is disrupting their individual economies – and thus the global system.

Take the United States, which is burning in political chaos at a moment when the national debt has exceeded $35 trillion. The very risks posed by the upcoming Nov. 5 election are worrying credit rating firms, particularly Moody’s Investors Service, which is the last country to give Washington a AAA rating.

The economy is stagnating in Germany, which highlights the headwind across the entire continent. As the German economy ministry puts it: “Economic weakness is expected to continue in the second half of 2024 before growth momentum gradually picks up again next year,” adding that the risk of a “technical recession” is high.

The extent of the concern can be seen in the fact that the European Central Bank cut interest rates last week for the third time this year.

Michael Krautzberger, global chief investment officer at Allianz Global Investors, says: “This acceleration of rate cuts is justified, as the mix of below-trend euro growth and target inflation suggests a far less restrictive monetary policy is currently the case. “

Krautzberger adds: “There are some hopes that China’s recent policy support will help trade-sensitive markets such as Germany, but we doubt that this will be enough to offset weak domestic demand in the region.” There is also a risk that after With the upcoming US elections in November, trade tensions will return to the political agenda – not just between the US and China, but also with the EU – posing further downside risks to growth.”

Making matters worse, global government debt is expected to reach $100 trillion this year, thanks in large part to borrowing by both the U.S. and China.

“Our forecasts point to an unforgiving combination of low growth and high debt – a difficult future,” says IMF Managing Director Kristalina Georgieva. “Governments must work to reduce debt and build buffers for the next shock – which is sure to come, and perhaps sooner than we expect.”

Such unimaginable debt levels pose a clear and present threat to the global financial system. As IMF analysts write in a recent report: “Increased debt levels and uncertainty about fiscal policy in systemically important countries such as China and the United States can lead to significant spillover effects in the form higher borrowing costs and debt-related risks in other economies.”

These spillovers could complicate monetary policy decisions across Asia – in both directions.

In Tokyo, representatives of the Bank of Japan expressed their determination to further raise interest rates. This comes despite data showing renewed weakness in retail sales, exports, industrial production and private machinery orders. And Treasury officials worry that deflationary forces could return in the coming months.

Although inflation is easing in Japan, “the central bank has made it clear that it will raise interest rates,” said Danny Kim, an economist at Moody’s Analytics. “In the best case scenario, this will slow growth. In a worst-case scenario, it could trigger a major economic downturn.”

All of this raises the question of whether the world’s largest economies are complacent about the looming risks.

As officials arrive in Washington, there is great relief that the U.S. has not experienced the recession that the vast majority of economists predicted. Or that China’s downturn hasn’t pushed mainland growth too far below this year’s target of 5%.

But there is reason to believe that this is the calm before the proverbial storm. The geopolitical path is more dangerous than ever. Aside from the scary debt milestone highlighted by the IMF, tensions are rising in the Middle East as Russia’s war in Ukraine continues. And then there is the return of the “Trump trade.”

Polls indicate a very close race between former US President Trump and current Vice President Kamala Harris. However, the betting markets suggest that Trump could win. If so, Asia could quickly find itself in danger.

Trump’s threat to impose 60% tariffs on all Chinese goods is just the beginning. Many expect a Trump 2.0 administration to impose far higher taxes and trade restrictions, which is sure to ruin Asia’s 2025.

Even if Trump loses to Harris, he is unlikely to accept defeat and move on peacefully. Many already fear that his supporters could attack the US capital again to protest his defeat on the grounds that the election was stolen. That is likely to jeopardize Washington’s creditworthiness again and spook investors, driving Wall Street stocks to all-time highs.

The fallout from the Trump-fueled insurrection on January 6, 2021 was one of the reasons Fitch Ratings revoked its AAA rating on U.S. debt and joined Standard & Poor’s. The question now is whether Moody’s will also downgrade the USA.

This uncertainty plays into the hands of the BRICS countries. Southwest Asia is also clearly turning towards the BRICS countries. All of this is a global game-changer that few in the West expected.

Earlier this year, Malaysia outlined its ambitions to join the intergovernmental organization. Thailand and Vietnam are also among the Association of Southeast Asian Nations members expressing similar interest. In Indonesia, too, more and more lawmakers are curious about the BRICS countries.

Southeast Asia’s involvement could be a particularly serious blow to US President Joe Biden. A hallmark of the Biden era since 2021 has been the creation of a regional bulwark against China’s growing influence and its efforts to replace the U.S. dollar in trade and finance.

The BRICS phenomenon represents a growing rift in relations between the US and many ASEAN members at a time when Saudi Arabia wants to phase out the “petrodollar.” Riyadh is stepping up its de-dollarization efforts as China, Russia and Iran push back against old alliances.

“A gradual democratization of the global financial landscape may be underway, giving way to a world in which more local currencies can be used for international transactions,” says analyst Hung Tran of the Atlantic Council’s Geoeconomics Center.

“In such a world, the dollar would continue to play a prominent role, but without its outsized influence, complemented by currencies such as the Chinese renminbi, the euro and the Japanese yen in a manner consistent with the international presence of their economies,” Tran says.

Tran notes that “in this context, the way Saudi Arabia handles the petrodollar remains an important harbinger of the financial future to come, since its founding dates back fifty years.”

That potential future is on clear display in Moscow this week. Officials making the rounds in Washington ignore the machinations 4,800 miles away at their peril.

Follow William Pesek on X at @WilliamPesek