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Brought to you by PSG Wealth

Is a Brics currency a viable option?

In this podcast Adriaan Pask, chief investment officer at PSG Wealth, explains some of the requirements for a reserve currency and why it’s unlikely the US dollar could be dethroned any time soon.

By Ciaran Ryan 29 Jun 2023  00:02 

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ADRIAAN PASK: I think the important thing to remember [is] what the purpose of the reserve currency is first – and, in general, what you’re trying to achieve are some efficiencies on trade. So you’re trying to put essential currency down and have sufficient reserves so that you can have speedy trade across various regions.

That’s the one component, and then obviously the same sort of concept we translate into how investments and the settling of debt obligations are treated as well – again with the aim of efficiency.

But more broadly for investors, whatever you use as a reserve currency – if you’re going to hold a lot of that on your balance sheet – needs to be credible and needs to be trusted.

Those are the key elements that I think should feature in the discussion now.

So if you think of the US at the moment, it’s a stable democratic system, a relatively stable and mature economy. They’ve got very good governance, [and] very reasoned fiscal and monetary policies that are quite transparent and well regulated. And, more importantly, the economy is globally free and open to international trade.

These are some of the substantial differences that we can extrapolate into the Brics environments, which often are characterised by an absence of those characteristics.

CIARAN RYAN: It seems that Brics is a long way from where the US is if they’re going to have a reserve currency of their own. But why do you think these emerging markets want to move away from the US dollar?

ADRIAAN PASK: As I said, I think the first thing obviously between Russia and China is that they’ve seen the power of the dollar and felt it through the weaponisation side of things, and the sanctions – in particular now Russia. But China wouldn’t be exempt were the tensions there to escalate.

But I think the other emerging markets, and even more broadly the Brics countries, are quite keen on looking at this as well, because the dollar has been so strong and the ramifications through the emerging market economies are quite severe.

So firstly, it impacts the current accounts, especially if the prices of exported goods are 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 you are ultimately importing some inflation.

Then obviously, we’ve seen what’s happened now with inflation and how monetary policy has been adjusted to compensate for that and tries to correct that, so looking at higher policy rates. Subsequently, as the economic cycle goes, you’re looking at a strain on GDP, so growth becomes a problem.

The other thing that’s happened through Covid – of course this is something that we’ve spoken of before – is the high levels of debt. Most countries are heavily indebted. But the problem is if your currency weakens, as most emerging market currencies have against the dollar, that debt becomes increasingly expensive to repay and you ultimately risk potential defaulting.

Those are some of the more significant ramifications on emerging markets.
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But you’ve got to ask how realistic it is for a Brics currency to ultimately dethrone the dollar as the primary reserve currency. I think we’re still a very long way off from that. But it can definitely contend, again, [against] something like the euro. I think that’s probably a more realistic thing to try to achieve.

The problem is as soon as you start to implement cross-regional policy it comes with a lot of complexity. The policies that are deployed, or implemented, in each of these regions can differ quite significantly, as well as the different economic backdrops. The countries are quite different in terms of how they generate their GDP and how they manage their currencies – their interest rates and their inflation policies – and the level of integration required is quite complex.

Then you’ve got to think whether the benefits are really worth it. If you could – even in the prevailing environment – just carry more of the individual Brics currencies as reserves, if that’s what you want to achieve, there’s no reason you would want to consolidate that. That would really justify the administrative burden in my view.

For the podcast and whole article:

https://www.moneyweb.co.za/in-depth/psg-wealth/is-a-brics-currency-a-viable-option/

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