We believe that the creation of a new multinational development bank will have a positive impact on the infrastructure markets in the BRICS and emerging countries. This is because it could not only increase the amount of funds available for infrastructure development among these countries, but could also encourage the private sector to provide more long-term financing for infrastructure as the bulk of the development bank's authorised capital will be in the form of guarantees. Most emerging countries do not possess a sufficiently deep and sophisticated debt market to meet their infrastructure needs, while an immature business environment and insufficient institutional capacity are holding back private sector financers from taking on large-scale or sub-sovereign projects in these countries.

In addition, we are expecting infrastructure investment to become ever more crucial in unlocking economic growth among emerging countries. This is due to greater pressures from a growing and urbanising middle class over the next decade. We are forecasting the combined urban population for the BRICS countries to increase from around 1.5bn in 2014 to 1.8bn by 2025.

Driving Infrastructure Demand

BRICS Countries - Urban Population Forecasts

e/f = BMI estimate/forecast. Source: Various Statistical Agencies, BMI

Lastly, existing multinational development banks such as the World Bank and Asian Development Bank are primarily receiving financial backing from developed economies such as countries in Western Europe and Japan. These developed countries have limited scope for increasing overseas investment as they are, on average, running relatively high fiscal shortfalls and are in need of funds for upgrading their own aging infrastructure. Banks based in developed economies, traditionally the main source of infrastructure financing, are also set to face stricter capital controls over the coming years, with the Basel III framework already being implemented since January 1 2013 and to be fully implemented by March 31 2018.

Near-Term Impact Likely Immaterial

However, we believe that the BRICS development bank will only have a material impact on infrastructure development over the long-term and not over the near-term. This is primarily due to three factors.

Lacklustre Investment Climate: While the authorised capital of the bank is set at USD100bn, the bulk of it will be in the form of guarantees. This means that the bank's impact on infrastructure development will be dependent on private sector participation and that would in turn depend on prevailing economic conditions. At the moment, global economic conditions are very uncertain, with the BRICS countries experiencing slower economic growth than the past decade. Combined with their relatively risky business environments, we believe the BRICS countries are currently not particularly well placed to attract strong private sector investment. Our Infrastructure Risks Ratings show that the Risks scores for the BRICS countries are around the global average and significantly below the average for the G20 economies.

Not Particularly Conducive

BRICS Countries - Real GDP Growth, 2014 And 10-Year Historical Average (2004-2013), % chg y-o-y (LHS); And BMI Infrastructure Risks Ratings*, Scores out of 100 (RHS)

*Higher Score = Lower Risks. e/f = BMI estimate/forecast. Source: Various State Agencies, BMI

Small Initial Capital Outlay: The initial capital outlay from each of the five founding members to the development bank will only be USD2bn. This amount is to be paid over a seven year period, which divided equally over the years, is about USD290mn per annum from each founding member. Conversely, data from our Key Project Database show that the combined value of the infrastructure projects yet to progress beyond the pre-tendering stage in the BRICS countries is about USD1.2trn.

Obstacles To Development Bank Operations: We continue to believe that there will be significant obstacles to the smooth running of the BRICS development bank (see 'BRICS Bank: Opportunities And Limitations', March 26 2014). These obstacles are brought on by geopolitical factors, divergent economic interests, a lack of ideological coherence and political pressures from the US. As it is, it has already taken around two years of negotiations for the BRICS countries to formally agree upon the structure of the new development bank.

To Focus On Multilateral Projects First

At present, no specific projects has been highlighted to receive financing from the development bank, but there have been suggestions that the bank will initially focus on financing bi-or multilateral infrastructure projects involving companies from participant countries.

In our opinion, this could mean financing projects that are economically relevant to several BRICS countries. For example, after the BRICS summit, Chinese and Brazilian leaders met separately and signed several agreements to further the development of Brazil's agriculture, infrastructure, energy and mining sectors. One of the agreements is a memorandum of understanding to jointly encourage government agencies and private sector investors in both countries to build railway lines that could improve Brazil's ability to export commodities such as grains and minerals to China. One such project is the 1,630km Lucas do Rio Verde-Campinorte railway project, highlighted specifically by the Ministry of External Relations of Brazil. If completed, the railway project is expected to significantly reduce the time taken to transport soybean produced in western Brazil to ports in eastern Brazil.