BRICS Meet in Johannesburg

Potential expansion for BRICS, release of UK borrowing data, and high US yields.

Today sees the start of the 15th meeting of the BRICS as the world watches in anticipation over whether the group will seek to expand. Presently, Brazil, Russia, China, India and South Africa – which collectively make up around half of the world’s population and a quarter of the world’s output – comprise the BRICS, though its possible expansion has been a hot topic of conversation recently. Given the ICC’s arrest warrant for the Russian President, Vladimir Putin will be unable to attend the summit in person with his place being filled by Sergei Lavrov.

At the turn of the millennium, all countries were considered either emerging or actual powers, with Goldman Sachs’ Jim O’Neill arguing that they would dominate the global economy by 2050. While the group was merely an academic reference point for most of the noughties, by 2009 Brazil, India, China and Russia had established themselves as an organised geo-political bloc with multilateral summits subsequently taking place. Now, some 40 countries have expressed interest in joining the bloc, and as such its possible expansion will be a topic of focus over the next two days.

Analysts are also looking to see whether the bloc will provide any further insight into future plans for the New Development Bank – or ‘BRICS bank’. The bank was established in 2014 and seeks to increase funding and settlements in local currencies, thus moving away from the USD. Given that much of these countries’ debt is denominated in USD, financing loan repayments has become a more costly exercise in light of the dollar strength recently seen. Indeed, according to Reuters “the NDB is also expanding, and the summit could become a key platform to attract more member countries. Bangladesh, the United Arab Emirates and Egypt have joined the bank since 2021. Uruguay is part way through the process of joining, while Algeria, Honduras, Zimbabwe and Saudi Arabia have expressed interest.” Hence, markets will be keeping an eye on any announcement relating to the NDB as people around the world consider any changes to the geopolitical landscape.

UK Government Borrowing

Today saw the release of Public Sector Net Borrowing for the month of July which come in considerably lower than expected at £4.3bn. While this was some £700m less than forecast by a Reuters poll, it remains the fifth-highest level of borrowing for the month of July since records began in 1993. Nevertheless, the figure was some £11.3bn less than the OBR predicted in March. This came as spending increased by 9.2% to £97.2bn, while tax revenue increase to £92.9bn having risen 5.4%. One notable increase was the rise in the cost of servicing the UK’s national debt (which now stands at around £2.6tn) as interest repayments rose by £1.5 billion to £7.7 billion.

This UK’s debt to GDP was also downwardly revised to 98.5% with the Chancellor Jeremy Hunt stating that “only by sticking to our plan will we halve inflation, grow the economy and reduce debt.” Nevertheless, one economist at Pantheon Macroeconomics, Gabriella Dickens, stated that “we still doubt, however, that the Chancellor will have enough wiggle room to meaningfully cut taxes or increase expenditure in the run up to the next general election, which must be held by January 2025.”

Yields on US 10-Year Hits Highest Level Since 2007

With markets considering the Fed’s next move in relation to their monetary tightening, the yield on the US 10-year advances north of 4.3% – marking its highest level since November 2007. Last week we saw US retail sales remain resilient despite tighter fiscal and monetary conditions while growth for Q2 also came in considerably stronger-than-expected. Moreover, hawkish undertones to the Fed’s minutes (which underpinned how upside risks to inflation remain) saw markets further consider the possibility of another rate hike. Presently, money markets are implying that there is around a 35% chance of a 25bps hike between now and the end of the year.