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Asian developing countries expect mutual investment boom
Frederic NeumannOne of the heads of the Asian economy research in the banking holding HSBC
Take the recent announcement of the BRICS countries (Brazil, Russia, India, China and South Africa) about the intention to create a New Development Bank. Filled with part of the currency reserves of the organization's member countries, the BRICS Bank, which is scheduled to open in Shanghai and which Indians will be leading at the beginning, is being created with a view to financing infrastructure and “continuous development projects”. It will have a certain weight: secured by 50 with billions of dollars of capital, the bank will be able to give loans that total this figure. Over time, when the number of countries participating in the organization increases, the bank’s capital may increase to 100 billions of dollars. The World Bank last year invested slightly more than 52 billion dollars in capital.
These formal agreements complement the process in which independent capital funds have taken over part of the functions of large interstate investments. Instead of injecting currency reserves exclusively with easily convertible financial instruments in developed markets, these organizations are increasingly more strategic in investing in companies, both public and private, and infrastructure projects in emerging markets.
Too much good?
What conclusions can we draw from the growing trend of mutual investment in developing countries? In principle, this is a positive trend. For the common good, capital should be where it makes the most profit. This is possible in economies that are in the initial stages of development, where there is not enough cash. Nevertheless, a large share of foreign exchange reserves remains in the markets of developed countries, primarily the United States. This is partly due to the fact that such markets are very mobile and volatile, and in the event of unforeseen circumstances assets can be quickly converted into currency with only small losses.
At the same time, the growth of foreign exchange reserves in many emerging markets may exceed the level required for prudent considerations. Given the relatively strong fundamentals, a very small number of economies will be faced with the need to instantly liquidate all their assets, if such a situation occurs at all. The surplus can be invested in more profitable, albeit less convertible, venture capital. Infrastructure and other projects in emerging markets are among the options, the attractiveness of which is constantly growing for lenders and borrowers.
However, not everything is concentrated around currency flows. Bilateral and multilateral investment in development projects is accompanied by the necessary expertise. Ambitious infrastructure projects, as a rule, are partially outside the competence of local governments, which leads to unnecessary errors and delays in execution. What defines organizations like the World Bank is not financial strength at all, but experience that has been carefully accumulated over decades of work. For example, now his projects are under much greater pressure in connection with the protection of the environment and various social phenomena than before. The World Bank and similar institutions also embody relatively stringent management standards to make the tender process and the entire project transparent.
Translated by Mikhail Botvinnik exclusively for EastRussia.ru