ARTHUR KAMP: Brics members too heterogeneous to make a reserve currency viable
Giving up their monetary policy sovereignty will be a hard sell while institutional strength is so hugely lacking
Much of the news ahead of the recent Brics summit focused on calls for a common currency to challenge the dominance of the dollar as the world’s reserve currency. In part this was prompted by the nascent tightening in US monetary policy and, by extension, global financial conditions.
The effect on the currencies and interest rates of emerging-market economies was significant. This was accompanied by balance of payments difficulties in some countries, while exposing the debt vulnerability of developing economies with large foreign currency external borrowing requirements.
However, the bottom line is that the position of the dollar as the world’s reserve currency isn’t likely to change any time soon. Admittedly, the dollar’s share of total global central bank reserves is decreasing. IMF data shows this has decreased from 71.5% in the first quarter of 2020 to 59% in the first quarter of 2023. However, to a significant extent this reflects diversification by central banks into higher-yielding assets rather than any aversion to the dollar as the world’s reserve currency.
There is also no obvious alternative to the dollar at present. China’s currency is not fully convertible, while the euro area must shift to a fully functioning fiscal union before we can eliminate disintegration risk and consider the euro as an alternative to the dollar.
At 29% of global GDP the soon-to-be-expanded Brics bloc of countries does represent a sizeable share of the global economy, though the pending new members — Saudi Arabia, United Arab Emirates, Iran, Ethiopia, Egypt and Argentina — collectively account for just 3% of global GDP. Even so, the odds are stacked against the viability of a common Brics currency challenging the dominance of the dollar any time soon.
A reserve currency requires institutional strength and a deep pool of investable assets. However, the expanded Brics is a heterogeneous group of countries with potential underlying tensions among some members. They have widely divergent economies. Some have serious concerns relating to fiscal sustainability. Giving up monetary policy sovereignty may also be a hard sell to all members.
Another contentious point is the increasing use of financial sanctions against targeted countries, notably exclusion from SWIFT, the messaging system that facilitates the exchange of information between financial institutions that is required to make international payments happen.
Exclusion from SWIFT is especially damaging. For example, in its most recent financial stability review the Reserve Bank noted that about 90% of SA’s international payments are processed through SWIFT. Exclusion from the system, should secondary sanctions ever be applied against SA, implies these payments would not be possible. SA is a small, open economy with a high share of exports and imports to GDP, and a large share of this trade is with Europe and the US.
The country is also heavily reliant on foreign capital to supplement domestic savings. Indeed, at the end of 2021, Reserve Bank data shows total foreign liabilities related to investments into SA (including foreign direct investment, portfolio investment and other investments) by countries in Europe and the US amounted to R5.7-trillion. This data includes investment by Russia, but this is a small share of the total.
Considering this in addition to SA’s high level of trade with Europe and the US, access to Swift is essential. Alternative messaging systems are being developed, including China’s Cross-Border Interbank Payment System (CIPS) and Russia’s System for Transfer of Financial Messages (SPFS). However, a lot of CIPS transactions make use of SWIFT, while participation in CIPS and the SPFS is nowhere near the level of SWIFT.
It is clear the world economy is leaning towards increased fragmentation and reversal of many of the gains made during the era of greater global economic co-operation and integration. Look no further than, for example, the revival of trade protectionism and global realignment of strategic direct investments. Amid all of this there is a strong argument to be made that reversing the gains of global economic co-operation and integration is likely to dampen economic growth and keep inflation higher than we would like.
One view is that the expansion of Brics is likely to promote polarisation and fragmentation in the global economy. Considering this, it is encouraging that despite the confrontational rhetoric surrounding the summit, the Brics joint finance ministers and central bank governors statement penned prior to the commencement of the summit aimed to be practical and constructive, expressing support for facilitating global trade, reducing risks associated with geopolitical and geo-economic “fragmentation”, and using private “capital, expertise and efficiency” in addressing infrastructure gaps in sustainable fashion.
In response to the effects of tighter global financial conditions, the statement steered clear of the debate surrounding the dollar, calling instead for effective and co-operative implementation of the Group of 20 Common Framework for Debt Treatment instead, with due recognition of the need for fair burden-sharing.
Note, this does not preclude the development of a cross-border payment system between Brics countries. There is already a drive towards developing a broad pan-African payment system to facilitate settlement in own currencies among the economies of Africa. The aim is to reduce the need for conversion into intermediary currencies, including the dollar, to enable faster payments at lower cost to facilitate inter-regional trade.
Further, none of the above implies there won’t be disagreement as to what constitutes fair treatment under the World Trade Organisation or fair representation at the IMF and other institutions. However, on balance the emphasis of the joint finance ministers and central bank governors statement was practical and constructive, rather than confrontational. That is a potential win for all.
• Kamp is chief economist at Sanlam Investments.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.