Insight & Analysis

De-dollarisation still undesirable for BRICS companies

Published: Aug 2023

While the recent announcement of BRICS expansion, the first since 2010, will increase the bloc’s share of global GDP to 36%, there are no signs a de-dollarisation of the world’s financial systems is on the way.

US dollar with decreasing stock market chart

The recent BRICS summit brought news of expansion, but the bloc is no closer to developing a single currency for its members. Instead, it is still focusing on encouraging member countries to use local currencies, a strategy that has left local firms underwhelmed.

Kobus Volschenk is Group Treasurer at Motus, a South Africa-based automotive group that operates across Africa, Europe and Asia. Volschenk has no strategy in place for possible de-dollarisation and no plans to increase the group’s use of local currencies.

“The two predominant currencies in our world, based on the OEMs we work with, are the dollar and the euro,” he told Treasury Today. “A single currency could have a role to play for us in terms of China because our aftermarket parts business buys extensively from that country. But for now, we are still reliant on the dollar and the euro.”

Volschenk acknowledges that international companies for whom the US is a major market are not going to stop using the dollar simply because it is more convenient for a company like his, adding that many finance professionals in South Africa have grown up with rand volatility.

“There was a time in my life where the rand was trading at parity with the dollar and now USD/ZAR is just under 19,” he says. “We take forward cover on the basis that we know we are going to buy in those currencies and have a reasonable anticipation of what our forward order book looks like to protect ourselves against volatility that we cannot pass on to the consumer in the short term.”

Volschenk’s market view has been backed up by the ING’s Economics team’s recent report looking at how the expansion of the BRICS could determine the speed with which the bloc adopts commercial and financial systems outside of the dollar sphere. According to Chris Turner, ING Bank’s Global Head of Markets and Regional Head of Research for UK & CEE, there is scant evidence the dollar will be de-throned anytime soon or that there would be a wide-spread adoption of a single BRICS currency. Nor is Turner convinced businesses within the BRICS region are keen to use local currencies.

“The volatility of those local currencies is much higher,” he said. “Liquidity is much lower, so bid/offer spreads are wider. While in theory companies could wean themselves off the exposure to the Fed and dollar rates by using local currencies, I am not sure it would be worth it. It would be a case of ‘be careful what you wish for’.”

What ING is seeing, is the renminbi gaining market share at the expense of the yen and Turner predicts it will become the dominant currency in Asia. “Perhaps, after a decade or two of the renminbi establishing itself as the euro of Asia, then it may challenge the dollar as a true global currency,” said Turner. “So rather than a new BRICS currency we will see the world financial systems dominated by the dollar, the euro and renminbi. But considering the renminbi is gaining about 2.5 % market share every five to seven years, it is going to take a while.”

While the possibilities of de-dollarisation might be alluring, it is more likely the BRICS lasting legacy will be geo-political, rather than financial.

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