New currency for South Africa, Russia and China – why countries are keen to boot the dollar

 ·11 Jul 2023

There are talks between Brazil, Russia, India, China and South Africa (BRICS) on developing a new currency to take on the dominant dollar.

Adriaan Pask, the chief investment officer at PSG Wealth, said, however, that the group is a long way off from dethroning the greenback.

Pask said that a shift away from the US dollar as the world’s reserve currency would represent a significant realignment in geopolitical forces, which is assisted by talk that up to 80 countries lining up to join the new currency.

Currently, the US dollar serves as the world’s reserve currency primarily due to its petrodollar system, where oil transactions are conducted in dollars, and the proceeds are reinvested in US bond and treasury markets, Pask said.

Being a reserve currency allows for a widely accepted medium of exchange.

“For investors, the credibility and trustworthiness of the reserve currency are crucial factors. Currently, the US possesses a stable democratic system, a mature economy, robust governance, transparent fiscal and monetary policies, and a globally open trade environment,” he said.

These attributes contribute to the trust placed in the US dollar. According to the chief investment officer, 84% of the world’s trade is done in the US dollar.

What has historically made BRICS distinct from the US as a basis for a currency is that it often lacks characteristics of financial stability, economic maturity and openness to international trade.

Pask said that there are two primary reasons behind the recent narrative of why emerging markets are thinking of replacing the US dollar:

Tensions between the US, China and Russia

The US and China tensions escalated significantly during the Trump administration, and obviously, recent developments in Ukraine have put tremendous strain on US and Russian relations, he said.

The war resulted in sanctions which cut off Russia from the global financial system, referred to as the so-called ‘weaponisation’ of the dollar.

China also knows it would not be exempt were the tensions there to escalate.

Broader emerging market impact

“The relatively strong dollar over the last few years, in what’s been a risk-off environment, has put emerging economies under pressure. Importing goods becomes increasingly expensive if your currency is relatively weak, and the offset that you get from exports has less of an impact.”

“That then means that you are ultimately importing some inflation, which in turn leads to higher interest rates, which negatively impacts growth.”

Furthermore, emerging markets continue to hold large sums of dollar-denominated debt, which in a higher interest rate environment and a strong dollar, becomes excessively expensive to repay.

Long term plan

Pask said that implementing a new currency is deeply complex and would take a long time.

He said that the BRICS countries exhibit notable variations in their policy deployment, GDP generation, currency management, interest rates, and inflation policies – adding to the complexity of introducing a new currency.

It is also necessary to evaluate whether the effort invested in creating a BRICS reserve currency is even worthwhile. One could simply opt to hold the individual Brics currencies as reserves if needed.

“That being said, I think it’s a good discussion and debate to have because it forces the hand of some emerging markets to adopt more global investor-friendly policies,” said Pask.

“China, for instance, faces certain constraints, despite its remarkable growth, such as governance and regulations which can be erratic, and the currency is not fully convertible yet. Refinement and improvement in these areas are necessary before it could even be considered a viable alternative.”

Pask said the end goal of a new BRIC currency would be to enhance transparency and integration into the financial system – offering investors greater opportunities.

South Africa’s response

In light of these talks, the National Treasury said that the New Development Bank, created by the BRICS bloc, has no immediate plans to form a common currency.

Responding to a parliamentary Q&A, finance minister Enoch Godongwana said that although there are no direct discussions, the government aims to be more involved in not making non-dollar trades.

A move towards a new currency would also partially bar South Africa from secondary knock-on effects of sanctions placed on other BRICS countries.

Read: Warning over new bank scam in South Africa

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