What is the outlook for a BRICS currency?

The BRICS summit this week in South Africa

The first relates to expanding the group of countries, and the second surrounds the contentious issue of creating a BRICS currency to try to reduce dependence on the US dollar. When it comes to this latter question, rather than standing for Brazil, Russia, India, China and South Africa, many think that the BRICS acronym might be better phrased as - Be Realistic In Championing Separation.

There’s limit ed evidence that surging US policy rates and US dollar strength have caused the sort of rupture in emerging economies that has often been cited as the primary justification for shifting away from the US dollar. Of course, there have been episodes of emerging market strains since the Fed started to hike rates but these “episodes” happen frequently and we’d question whether US dollar strength or surging US policy rates have been the catalyst.

The IMF’s most recent External Sector Report notes as well that emerging market countries can help themselves in the face of US dollar strength if they have flexible currency policies or well-anchored inflation expectations. With respect to the latter, Mr. Steve Barrow, Head of Standard Bank G10 Strategy argues that US dollar dominance imposes a much-needed discipline on emerging market countries to pursue policies that bear down on inflation and inflation expectations. If the US dollar did not perform this role, perhaps because of the emergence of a rival currency, such as a BRICS currency, high-inflation emerging markets might be let off the hook when it comes to aiming for low inflation.

Now clearly none of this denies that there is a burden that comes from higher US rates and/or dollar strength, but Mr. Steve Barrow is not sure that allowing, or creating a rival currency would improve the situation facing these countries. Often it seems that the issues around the formation of a new currency, and the benefits that this could supposedly bring, are confused with the far less ambitious plan of trying to avoid using the US dollar when it comes to trade or financial transactions. The former clearly does not have to be created in order to facilitate the latter as Brazil showed earlier in the year when it agreed with China that bilateral trade will be facilitated through using local currencies and not through the dollar.

“We can certainly see more of this happening, both inside the BRICS countries and between BRICS countries and others. Just whether this provides cost savings is difficult to say and probably depends on a country-by-country basis. Nonetheless, it seems a laudable aim even if it alone won’t challenge the dollar’s dominant global role in our view. But while trade invoicing might prove a viable avenue for de-dollarisation, it is debatable whether anything like the same separation from the US dollar could occur in the area of finance, such as international debt issuance”, said Mr. Steve Barrow.

For instance, international debt issuance in a currency other than the US dollar could potentially scare away overseas investors. This being said, many emerging market debt issuers would argue that international investors from places such as the US and Europe are only ever fair-weather friends in the first place and will refuse to buy when there’s the first sign of approaching storm clouds. That’s as may be but it does not necessarily follow that avoiding the US dollar by issuing debt created in a BRICS currency would solve this problem. All told, Mr. Steve Barrow sticks to the view he puts out back in April that, when it comes to de-dollarisation, many countries should be “careful what you wish for”.