Windhoek - Brazil, Russia, India, China and South Africa (BRICS) are not plotting the downfall of the United States dollar, the world’s primary reserve currency, analysts at Standard Bank contend.
Speculation has been growing that the internationalisation of the BRICS currencies, the five Rs - South Africa’s rand, Brazil’s real, China’s renminbi, Russia’s rouble, India’s rupee ‑ could see these becoming the reserve currency of choice above the US dollar.
After all, the BRICS represent over 41 percent of the global population and more than 25 percent of world GDP.
In addition, they hold more than half of all foreign exchange and gold reserves. Since its birth, the bloc has pushed for the establishment of a development institution to rival the World Bank. But economic analysts at Africa’s largest retail bank, Standard Bank Group, say speculation on creation of an alternative reserve currency stems from the fact that BRICS recognise the need to enhance bilateral trade and investment, while de-linking some commercial sustainability and relative value of the US dollar.
Analysts Simon Freemantle and Jeremy Stevens argue that BRICS are not trying to jettison the United States dollar per se while plotting the rise of the five Rs.
While passive currency diversification is already underway, currency internationalisation is a result of the growing commercial and political ties within the emerging markets.
At their recent summit in India, BRICS committed to trading within the bloc using their currencies rather than the US dollar.
The Standard Bank analysts say it could take time before trust and institutions are in place to facilitate such transactions.
BRICS themselves have led calls to reform the global financial system, which has disproportionate reliance on the US dollar.
This has seen China, Russia, Brazil and India reducing their holdings of US treasuries by 11 percent, 5 percent, 12 percent and six percent respectively.
Moreover, the US dollar’s role in facilitating global trade transactions is disproportionate to its relevance to actual trade flows.
For instance, the European Union (EU) accounts for twice as much global trade flows as the US, but the euro is involved in half as much transactions.
This means that each BRICS currency is under-emphasised in global transactions.
“The yet to be detailed currency programme of the BRICS is not a sinister, zero sum plot centred around the inevitable downfall of the US dollar.
“The status of the US dollar as the world’s primary reserve currency is not in doubt at all.
“The US dollar is too far out front,” the Standard Bank analysts contend.
China, the natural BRICS leader, is the largest foreign holder of US treasuries at US$1.314 trillion.
Brazil holds US$229 billion, Russia has US$142b, India has US$44b and South Africa has US$12.5b.
BRICS have 31.5 percent of all offshore holdings of US treasuries.
“BRICS are not about to dump US treasuries and or US-denominated assets.
“Rather, each month a greater proportion of additional reserves accumulated will purchase alternatives to US treasuries.
“And maturing treasuries ‑ once simply rolled over into new treasury purchases ‑ are being invested in alternative assets,” the analysts state.
A Bloomberg blogger concurs, observing that BRICS represent a non-Western ‑ but not anti-Western – growth and development template.
“Despite their calibrated rhetoric, each of the BRICS countries values its relationship with the United States far more than with the four other BRICS countries combined.
“Each is actually quite happy with an international system driven by American economic and technological supremacy, underwritten by American security guarantees,” a Chandrahas Choudhury wrote.
This theory may be true for some BRICS members, but is doubtful when it comes to the two biggest political components of the bloc: China and Russia.
Standard Bank analysts say US financial markets are the only ones large enough to absorb a large chunk of China’s US$3.18t in foreign currency reserves.
“Also the size, depth and sophistication of US financial markets ensure that the US dollar will remain dominant for many years,” Freemantle and Stevens said.
“At best the five Rs are many decades away from sharing the US dollar’s role as a reserve global currency,” they add.
The US dollar only surpassed the British pound as the global reserve currency half-a-century after it had overtaken the UK as the world’s largest economy.
If the same factors that prevailed then were equal now – which they are not – this would mean China’s renminbi would surpass the US dollar around 2080.
“However, the feasibility of growing the role of the five Rs in trade settlement and in investment is greater, which is what BRICS collaboration is all about,” the Standard Bank analysts say.
Currency internationalization is key to BRICS consolidating their roles as economic powerhouses in their respective regions.
A case in point is the South African rand, which plays a leading role in Southern Africa.
Standard Bank analysts believe the rand stands a good chance of internationalization as domestic and foreign companies already invoice services and trade in the currency.
Debt and equity instruments can be issued in rand and it can be part of a basket of currencies used by another nation in its exchange rate policy.
“It is simply an economic reality that more and more trade and investment will occur directly amongst the five Rs ‑ especially because the anemic future economic trajectory of mature economics pushes them to find alternative sources of demand. “We know that BRICS ties are structural. How they partner and find ways to align one another’s macro-economic trajectory is shaping, and will increasingly shape, their economic destinies,” the Standard Bank analysts say.
source: The southern times
Speculation has been growing that the internationalisation of the BRICS currencies, the five Rs - South Africa’s rand, Brazil’s real, China’s renminbi, Russia’s rouble, India’s rupee ‑ could see these becoming the reserve currency of choice above the US dollar.
After all, the BRICS represent over 41 percent of the global population and more than 25 percent of world GDP.
In addition, they hold more than half of all foreign exchange and gold reserves. Since its birth, the bloc has pushed for the establishment of a development institution to rival the World Bank. But economic analysts at Africa’s largest retail bank, Standard Bank Group, say speculation on creation of an alternative reserve currency stems from the fact that BRICS recognise the need to enhance bilateral trade and investment, while de-linking some commercial sustainability and relative value of the US dollar.
Analysts Simon Freemantle and Jeremy Stevens argue that BRICS are not trying to jettison the United States dollar per se while plotting the rise of the five Rs.
While passive currency diversification is already underway, currency internationalisation is a result of the growing commercial and political ties within the emerging markets.
At their recent summit in India, BRICS committed to trading within the bloc using their currencies rather than the US dollar.
The Standard Bank analysts say it could take time before trust and institutions are in place to facilitate such transactions.
BRICS themselves have led calls to reform the global financial system, which has disproportionate reliance on the US dollar.
This has seen China, Russia, Brazil and India reducing their holdings of US treasuries by 11 percent, 5 percent, 12 percent and six percent respectively.
Moreover, the US dollar’s role in facilitating global trade transactions is disproportionate to its relevance to actual trade flows.
For instance, the European Union (EU) accounts for twice as much global trade flows as the US, but the euro is involved in half as much transactions.
This means that each BRICS currency is under-emphasised in global transactions.
“The yet to be detailed currency programme of the BRICS is not a sinister, zero sum plot centred around the inevitable downfall of the US dollar.
“The status of the US dollar as the world’s primary reserve currency is not in doubt at all.
“The US dollar is too far out front,” the Standard Bank analysts contend.
China, the natural BRICS leader, is the largest foreign holder of US treasuries at US$1.314 trillion.
Brazil holds US$229 billion, Russia has US$142b, India has US$44b and South Africa has US$12.5b.
BRICS have 31.5 percent of all offshore holdings of US treasuries.
“BRICS are not about to dump US treasuries and or US-denominated assets.
“Rather, each month a greater proportion of additional reserves accumulated will purchase alternatives to US treasuries.
“And maturing treasuries ‑ once simply rolled over into new treasury purchases ‑ are being invested in alternative assets,” the analysts state.
A Bloomberg blogger concurs, observing that BRICS represent a non-Western ‑ but not anti-Western – growth and development template.
“Despite their calibrated rhetoric, each of the BRICS countries values its relationship with the United States far more than with the four other BRICS countries combined.
“Each is actually quite happy with an international system driven by American economic and technological supremacy, underwritten by American security guarantees,” a Chandrahas Choudhury wrote.
This theory may be true for some BRICS members, but is doubtful when it comes to the two biggest political components of the bloc: China and Russia.
Standard Bank analysts say US financial markets are the only ones large enough to absorb a large chunk of China’s US$3.18t in foreign currency reserves.
“Also the size, depth and sophistication of US financial markets ensure that the US dollar will remain dominant for many years,” Freemantle and Stevens said.
“At best the five Rs are many decades away from sharing the US dollar’s role as a reserve global currency,” they add.
The US dollar only surpassed the British pound as the global reserve currency half-a-century after it had overtaken the UK as the world’s largest economy.
If the same factors that prevailed then were equal now – which they are not – this would mean China’s renminbi would surpass the US dollar around 2080.
“However, the feasibility of growing the role of the five Rs in trade settlement and in investment is greater, which is what BRICS collaboration is all about,” the Standard Bank analysts say.
Currency internationalization is key to BRICS consolidating their roles as economic powerhouses in their respective regions.
A case in point is the South African rand, which plays a leading role in Southern Africa.
Standard Bank analysts believe the rand stands a good chance of internationalization as domestic and foreign companies already invoice services and trade in the currency.
Debt and equity instruments can be issued in rand and it can be part of a basket of currencies used by another nation in its exchange rate policy.
“It is simply an economic reality that more and more trade and investment will occur directly amongst the five Rs ‑ especially because the anemic future economic trajectory of mature economics pushes them to find alternative sources of demand. “We know that BRICS ties are structural. How they partner and find ways to align one another’s macro-economic trajectory is shaping, and will increasingly shape, their economic destinies,” the Standard Bank analysts say.
source: The southern times
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