(Business in Cameroon) – The reform of the CFA franc demanded since 2019 concerns the current mechanisms of monetary cooperation with France.

On November 17 and 18, a symposium was held in Libreville, Gabon, on the theme “Money and development in Central Africa”. During the symposium, university professors, economists and other civil society actors from the CEMAC zone overwhelmingly supported deep reforms of the CFA franc.

“I think this work clearly shows that monetary cooperation with France needs to be reformed. But when it comes to the kinds of reforms needed, opinions are divided. Some will be satisfied, for example, with a change in the name of the currency, given its symbolic meaning. However, the vast majority think deep reforms are needed, not just a name change“, explained Professor Alain Kenmogne Simo, Associate Professor of Law.

Parity with the euro

An example of the profound reforms demanded is a modification of the exchange rate policy, in particular the abandonment of the fixed parity with the euro for a floating or intermediate exchange rate regime.

“Between the floating exchange rate and the fixed exchange rate, there is a range of intermediate exchange rate policies. We are moving towards an intermediate policy and not towards euro-anchoring. We believe that the indexed regime is outdated because we have new ambitions and a new development strategy since the international environment has also changedsaid Professor Gabriel Zomo, a professor at Omar Bongo University in Libreville.

For the economist, at the time of the adoption of the CFA franc, France was the main trading partner of the CEMAC countries (Cameroon, Central African Republic, Congo, Gabon, Equatorial Guinea and Chad). Nowadays, however, the list has changed with the trade of the CEMAC region with countries like China and other Asian countries which has increased considerably in recent years, because New Gabon reports.

In context, “limiting our reserves to a single currency prevents us from being as flexible as we could have been if we were to diversify reserves. Reserves should normally be built up through our trade with our partners. Like China, Brazil and Turkey are positioned as major partners, why build up our reserves only in euros?” asked Dieudonné Mignamissi, Associate Professor of Economics.

“Reserves are used to facilitate trade with foreign countries. So if we have reserves in Chinese currency, US dollars, Euros… I think we would have a more flexible policy for trade with foreign partners,” he added.

For Professor Gabriel Zomo, the CEMAC countries should aim for a low exchange rate given the quality of the products they offer on the international market. “As a rule, parties that offer technology-intensive products have high exchange rates. This is the case in Germany. However, when parties offer “low-end” products, they tend to aim for lower exchange rates because they need to sell. This is why the pegging of the CFA franc to the euro is problematic. This tends to overvalue our motto even though we offer “low-end,he illustrated.

good governance

The participants in the symposium felt that the reform of the CFA franc would not be enough to boost the development of the CEMAC region.

“…whatever the name or the monetary reform implemented, if they are not backed by public action and economic reforms, they will not allow us to achieve the development that we all want. Thus, another set of reforms is needed alongside monetary reformsaid Professor Alain Kenmogne Simo. Geoffroy Foumboula Libeka, member of Copil Citoyen, a Gabonese civil society, added that “the most important thing is not to change currency.”

“As long as there is no discipline in budget management where there are no sanctions punishing the embezzlement of public funds, you can change as many currencies as you want, you can give these currencies any name you like but nothing will change. Good governance is the priority,” he said.

The CFA Franc is a currency created in 1945 during the colonial era. Literally, in French, it means “currency of the French-speaking African colonies”. This is the basis of monetary cooperation with France. The name changed in 1972, after independence, to become “Franc [currency] for financial cooperation in Central Africa.

Since 2019, CEMAC Heads of State have been in motion to evolve the main mechanisms governing monetary cooperation with France. The mechanisms are in particular the guarantee of unlimited convertibility of the currency issued by the BEAC, the fixity of the exchange rate, the transfer without restriction between the member countries of the BEAC and France, and the centralization of reserves in an operations account. open to the French Treasury.

Sandrine Gaingne

The Bank of England bails out British pension funds. The Bank of Japan uses excessive monetary policy to protect its currency and cap interest rates. China encourages its banks to buy stocks. The dollar, the global currency, is collapsing, interest rates are skyrocketing and the financial world is fracturing.

Unlike any other currency, the US dollar is the engine of the global economy and financial markets. Due to the dollar’s status as the world’s reserve currency, the monetary policy actions of the Fed play a vital role in directing the US economy and all global economies and financial markets.

To predict the next crisis, it is imperative to understand the role of the dollar in global finance and the economy and the resulting role the Fed plays in influencing international monetary policy. To do this, we start with an overview of Triffin warned us, an article we published in 2018.

These “steep notes” for the article lay the groundwork for Part 2. After this article, we’ll discuss the risks investors face as the Fed attempts to rein in inflation.

The Bretton Woods Agreement

In 1944, the United States and many countries reached an important financial agreement in Bretton Woods, New Hampshire. The deal has brought huge economic dividends to the United States. However, it has a flawed incongruity with an expensive price pointing the tip of its nose today.

Under the terms of the 1944 Bretton Woods agreement, the US dollar supplanted the British pound to become the world’s reserve currency. The agreement guaranteed that a large majority of world trade would be conducted in US dollars, whether or not the United States participated in that trade. Additionally, he set up a system by which other nations would peg their currency to the dollar. This arrangement is akin to the concept of global currency made popular by John Maynard Keynes. Keynes’ brainchild was the Bancor, a supranational currency.

Under the terms of the agreement, there was a supposed cure for one of the abuses that countries with reserve currency status typically commit, running continuous trade and fiscal deficits. The pact discouraged such behavior by allowing participating nations to exchange US dollars for gold.Therefore, other countries that were accumulating too many dollars, a side effect of US trade deficits, could exchange their excess dollars for gold held by the United States. Accordingly, a rise in the price of gold, indicative of a devaluation of the US dollar, would be a telltale sign that America was abusing its privilege.

London Pool of Gold

The deal began to unravel soon after. In 1961, the major nations of the world established the London Gold Pool. The goal was to fix the price of gold at $35 an ounce. The action was an attempt to maintain the Bretton Woods status quo. By manipulating the price of gold, an important indicator of the size of US trade deficits was shattered. Therefore, there was less incentive to trade dollars for gold.

Seven years later, France comes out of the ranks. France withdrew from the gold pool and demanded large amounts of gold in exchange for dollars. As a result, in 1971 President Richard Nixon, fearing that the United States would lose its gold, suspended the convertibility of dollars into gold.

From then on, the US dollar was a floating currency. There was no longer the discipline imposed on him by the convertibility of gold. Nixon’s actions essentially nullified the Bretton Woods agreement.

The following decade saw double-digit inflation, persistent trade deficits and weak economic growth. These were signs that America was abusing its privilege as a reserve currency. The first graph below shows that, like clockwork, the United States began running annual trade deficits in 1971. The second graph shows how inflation rose sharply after 1971.

In the late 1970s, Fed Chairman Paul Volcker raised interest rates from 5.875% to nearly 20.00% to bring inflation down decisively. Although economically painful, Volcker’s actions not only ended ten years of persistently high inflation and restored economic stability, but, more importantly, kept America’s trading partners happy. The dollar, now at a floating rate, has regained the integrity required to be the world’s reserve currency. And this despite the absence of the checks and balances imposed by the Bretton Woods agreement and the gold standard.

Our August 15 article explains how Nixon’s “suspension” of the gold window triggered the Federal Reserve.

Enter Dr. Triffin

In 1960, 11 years before Nixon’s suspension of gold convertibility and the effective demise of the Bretton Woods agreements, Robert Tiffin foresaw this inevitable problem in his book Gold and the dollar crisis: the future of convertibility. According to its logic, the privilege of becoming the world’s reserve currency would be ultimately bear a heavy sentence for the United States

At the time, few paid attention to Triffin’s thesis. However, he was invited to a Congressional hearing of the Joint Economic Committee in December of that year.

What he described in his book and testimony to Congress became known as Triffin’s paradox. Events unfolded mostly as he had planned.

Essentially, he argued that reserve status forces a good percentage of world trade to be in US dollars. For global trade and economies to thrive in such a system, the United States must supply the world with US dollars.

To supply the world with dollars, the United States must constantly run a trade deficit. Running persistent deficits, the United States would become a debtor nation.

Foreign creditors favor US deficits

Foreign nations accumulate and spend dollars through trade. They keep extra dollars on hand to manage their economy and limit financial shocks. These dollars, known as excess reserves, are invested primarily in US dollar-denominated investments, ranging from bank deposits to US Treasury securities and a wide range of other financial securities. As the global economy grew and trade multiplied, additional dollars were needed. As a result, foreign dollar reserves increased and were lent to the US economy.

Making the world even more dependent on the dollar, many foreign countries and companies are issuing debt securities denominated in US dollars to better facilitate trade and take advantage of the liquid financial markets of the United States.

The arrangement benefits all parties involved. The United States buys imports with dollars lent to them by the same nations that sold the goods. Additionally, the need for foreign countries to hold dollars and invest them in the United States drives down US interest rates, which further encourages domestic consumption and provides relative support for the dollar.

For their part, foreign nations benefit from the shift of manufacturing from the United States to their country. When this happened, increased demand for their products supported job and income growth, increasing the prosperity of their respective citizens.

A win-win or a Ponzi scheme?

While it may seem like the post-Bretton Woods convention is a win-win deal, there is a huge cost for everyone involved.

The United States is too indebted. As such, it has become increasingly dependent on low interest rates to stimulate debt-driven consumption and to pay interest and principal on existing debt.

Interest rates below the appropriate level lead to non-performing debt, as can be seen with the stock of debt growing at a much faster rate than GDP. The growing discrepancy between debt and the ability to pay it, GDP, is simply unsustainable.

Summary

Triffin’s paradox states that with the benefits of reserve currency also comes an inevitable tipping point or failure.

As we see with the current example of rising interest rates and inflation, this point of failure is approaching the United States and the rest of the world.

The second part of this article will focus on dollar and Fed monetary policy and what it may entail as the Fed continues to push interest rates higher.

Twitter: @michaellebowitz

The author or his company may have positions in the titles mentioned at the time of publication. Any opinions expressed herein are solely those of the author and in no way represent the views or opinions of any other person or entity.

The International Trade Administration announced on November 10 that after 20 years it was revoking Russia’s market economy status for the purposes of the ITA’s anti-dumping proceedings, a decision that will likely result in anti-dumping duties. higher on imports from Russia.

The ITA decided to maintain market economy status for Russia in October 2021, but in May 2022 said that in light of developments in the Russian economy (largely associated with its invasion of the Ukraine), reforms related to the six statutory factors governing NME determinations may have backtracked.

Reversing its previous position this week, the ITA said it had found that significant government involvement in the economy had led to distorted prices and costs in Russia that did not accurately reflect whether Russian companies were setting equitably the prices of imports into the United States. analysis of research from unbiased third-party sources” revealed a “significant pushback” by Russia on issues such as currency convertibility, how wages are determined, the foreign investment climate, government control of means of production and government control over business decisions.

The ITA stated that as a result of this change, in future anti-dumping cases involving imports from Russia, it will apply an alternative method of calculating anti-dumping duties using market-based prices and costs from a country at a comparable level of economic development that produces comparable goods. . The ITA said this approach “will ensure that the Department’s dumping calculations reflect the economic realities on the ground and that U.S. industries get the relief from unfair imports to which they are entitled under the law.”

For more information on the impacts of this change, please contact attorney Kristen Smith at (202) 730-4965 or by email.

Copyright © 2022 Sandler, Travis & Rosenberg, Pennsylvania; WorldTrade Interactive, Inc. All rights reserved.

Rating agency S&P yesterday downgraded several Sri Lankan bonds from “D” to “CC” after missed payments, while confirming its long-term “SD” and short-term “SD” sovereign currency ratings.

“At the same time, we confirmed our long-term “CCC-” and short-term “C” sovereign ratings in local currency. The outlook on the local currency’s long-term rating remains negative,” S&P said.

“In addition, we downgraded to “D” from “CC” the issue ratings of the following bonds with missed coupon or principal payments: $1.0 billion, 6.85% bonds due March 14 2024; $1.4 billion 7.85% bonds due March 14, 2029 and $1.5 billion 7.55% bonds due March 28, 2030.

S&P said its assessment of the transfer and convertibility at “CC” is unchanged.

The government remains in default on certain foreign currency obligations, including international sovereign bonds (ISBs).

“We do not expect the government to make payments on ISBs within 30 calendar days of their due dates. We have downgraded the ratings of the affected bonds to ‘D’ from ‘CC’, following missed interest payments due on September 14 and September 28, 2022,” S&P said.

It also confirmed its foreign currency “SD/SD” and local currency “CCC-/C” ratings on Sri Lanka. The outlook on the long-term rating in local currency is negative.

S&P…

“Our FX rating on Sri Lanka is ‘SD’ (Selective Default). We do not assign an outlook to ‘SD’ ratings as they express a condition and not a forward-looking view on the likelihood of default,” S&P added. .

The negative outlook on the local currency rating reflects high risk for commercial debt repayments over the next 12 months amid Sri Lanka’s economic, external and fiscal pressures.

“We may downgrade local currency ratings if there are indications of nonpayment or restructuring of rupee-denominated bonds,” S&P said.

“We could revise the outlook to stabilize it or raise the local currency ratings if we perceive that the likelihood that the government’s local currency debt will be excluded from any debt restructuring has increased. This could be the case if, for example, the government receives significant donor funding, giving it time to implement immediate and transformative reforms,” he added.

S&P also said it would raise its long-term foreign currency sovereign credit rating once the government bond restructuring is complete. The rating would reflect Sri Lanka’s creditworthiness after the restructuring. Our post-restructuring ratings tend to be in the “CCC” or “B” low categories, depending on the new sovereign debt structure and its ability to sustain that debt.

Sri Lanka’s external public debt moratorium prevents the payment of interest and principal obligations due on the government’s ISBs. This would have affected interest payments due on September 14 and September 28, on its ISBs maturing in 2024, 2029 and 2030.

“As a result of the missed payments, and given our belief that payments have not been made within 30 calendar days of the due dates, we have lowered the issue ratings of these bonds to ‘D’ (default ),” S&P said. Rating agency S&P yesterday downgraded several Sri Lankan bonds from ‘D’ to ‘CC’ after missed payments while confirming its long-term ‘SD’ and short-term ‘SD’ sovereign foreign currency ratings .

“At the same time, we confirmed our long-term “CCC-” and short-term “C” sovereign ratings in local currency. The outlook on the local currency’s long-term rating remains negative,” S&P said.

“In addition, we downgraded to “D” from “CC” the issue ratings of the following bonds with missed coupon or principal payments: $1.0 billion, 6.85% bonds due March 14 2024; $1.4 billion 7.85% bonds due March 14, 2029 and $1.5 billion 7.55% bonds due March 28, 2030.

S&P said its assessment of the transfer and convertibility at “CC” is unchanged.

The government remains in default on certain foreign currency obligations, including international sovereign bonds (ISBs).

“We do not expect the government to make payments on ISBs within 30 calendar days of their due dates. We have downgraded the ratings of the affected bonds to ‘D’ from ‘CC’, following missed interest payments due on September 14 and September 28, 2022,” S&P said.

It also confirmed its foreign currency “SD/SD” and local currency “CCC-/C” ratings on Sri Lanka. The outlook on the long-term rating in local currency is negative.

“Our FX rating on Sri Lanka is ‘SD’ (Selective Default). We do not assign an outlook to ‘SD’ ratings as they express a condition and not a forward-looking view on the likelihood of default,” S&P added. .

The negative outlook on the local currency rating reflects high risk for commercial debt repayments over the next 12 months amid Sri Lanka’s economic, external and fiscal pressures.

“We may downgrade local currency ratings if there are indications of nonpayment or restructuring of rupee-denominated bonds,” S&P said.

“We could revise the outlook to stabilize it or upgrade the local currency ratings if we perceive that the likelihood of government local currency debt being excluded from any debt restructuring has increased. This could be the case if, for example, the government receives significant donor funding, giving it time to implement immediate and transformative reforms,” he added.

S&P also said it would raise its long-term foreign currency sovereign credit rating once the government bond restructuring is complete. The rating would reflect Sri Lanka’s creditworthiness after the restructuring. Our post-restructuring ratings tend to be in the “CCC” or “B” low categories, depending on the new sovereign debt structure and its ability to sustain that debt.

Sri Lanka’s external public debt moratorium prevents the payment of interest and principal obligations due on the government’s ISBs. This would have affected interest payments due on September 14 and September 28, on its ISBs maturing in 2024, 2029 and 2030.

“As a result of the missed payments, and given our belief that payments have not been made within 30 calendar days of the due dates, we have lowered the issue ratings of these bonds to ‘D’ (default ),” S&P said.

The New Zealand dollar (NZD) has seen a resurgence since falling to a more than two-and-a-half-year low against the US dollar (USD) in early October 2022.

On November 2, 2022, the NZD was on track to post three consecutive weeks of gains against the greenback. The currency has also emerged as one of the main gainers among G10 currencies in recent weeks.

In this article, we look at the factors that helped the New Zealand currency, also known as the Kiwi, gain against the USD (NZD/USD) and some of the latest analyst forecasts for the NZD.

What is the New Zealand dollar?

The New Zealand dollar is the official currency and legal tender of New Zealand. The currency is also used in the Cook Islands, Niue, Tokelau and the Pitcairn Islands. It was first issued by the Reserve Bank of New Zealand (RBNZ) in 1967, replacing the New Zealand system in pounds, shillings and pence.

It was nicknamed the “kiwi” due to the country’s native bird appearing on the country’s banknotes.

According to Triennial survey of central banks by the Bank for International Settlements (BIS) published in October 2022, the New Zealand dollar is the 14th most traded currency in the world.

What determines the value of NZD?

New Zealand’s interest rate outlook and interest rate differentials between other economies are the main drivers of NZD rates in the foreign exchange (forex) markets.

According to the RBNZ, the country has used almost every form of exchange rate regime. Between 1973 and 1984, the NZD followed a fixed exchange rate period when the Kiwi was pegged to the US dollar at a specific rate. Today, the RBNZ uses an inflation targeting regime to maintain monetary stability.

International trade is another important driver for the kiwi fruit, accounting for almost 25% of New Zealand’s gross domestic product (GDP) between 2019 and 2021. According to the World Trade Organization (WTO), China has ranked as New Zealand’s top export destination, accounting for over 31% of the country’s exports in 2021, followed by Australia, the United States, Japan and the European Union (EU).

Agricultural products accounted for 75% of New Zealand exports, with milk and cream, meat, butter and fruit being among the top export items. The country posted a current account deficit in 2021, with autos and oil being its top import items.

Historic NZD performance: A story of many ups and downs

According to NZD/USD historical data, the New Zealand dollar was valued higher than the US dollar in the 1970s. This was during a time of economic turbulence in the United States when President Richard Nixon broke the Bretton system Woods who ended the convertibility of the US dollar into gold in 1971. The NZD/USD exchange rate reached an all-time high of 1.49 in October 1973.

Two years later, the NZD fell to trade near parity with the USD.

By the turn of the new millennium in October 2000, the kiwi had fallen to an all-time low, hitting 0.39 against the greenback.

Since then, the NZD has been in cycles of ups and downs against the USD. In March 2009, the NZD/USD rate hit a multi-year low of 0.489. In August 2011, it jumped to 0.884, its highest since 1981.

The pair fell to a low of 0.546 at the start of the Covid-19 pandemic in March 2020, and tested this support level in October 2022.

Recent NZD Price Action: Rate Hike Prospects Dominate

In 2022, the global cycle of monetary tightening has become the main driver of exchange rate fluctuations. The NZD reflected similar weakness as seen by its global peers against the USD over the year. On October 13, 2022, NZD/USD rates fell to 0.5512 – their lowest level since March 2020.

Aggressive rate hikes by the U.S. Federal Reserve (Fed) and capital flight to safe havens like the U.S. dollar propelled the U.S. Dollar Index (DXY), which tracks the performance of the USD against a basket of major currencies to a 20-year high in September 2022.

More recently, the US dollar experienced “one of its deepest corrections of the year” on bets of a lower-than-expected rate hike in November and December by the Fed. As a result, the NZD posted its best monthly performance of the year against the USD – NZD/USD gained 3.9% in October.

The October rate hike by the RBNZ, which took interest rates in New Zealand to a seven-year high of 3.5%, also supported the rebound in the NZD.

The RBNZ is expected to maintain its pace of rate hikes as inflation in the country hit a 30-year high of 7.2%. The central bank’s target for the second quarter of 2022 is above the target range of 1% to 3%.

After making its sixth rate hike of the year on October 5, 2022, the RBNZ said:

“New Zealand’s production capacity is still constrained by labor shortages and wage pressures are intensifying. Overall, spending continues to outpace the ability to deliver goods and services, with a range of indicators continuing to point to widespread price pressures.

Daniela Hathorne, senior analyst at Capital.com, noted:

“The rate hike path for the RBNZ is firmly higher, with markets now pricing in a strong likelihood of a 75 basis point hike at their November 23 meeting. In fact, the latest inflation data has showed that prices continued to rise in the third quarter, and with consumer spending remaining robust, we are likely to see the central bank remaining hawkish for the time being.

As of November 2, 2022, NZD/USD was on track to post three consecutive weeks of gains at 0.586. However, year-to-date, the pair’s rate is still 14% lower.

Since the beginning of the year, the New Zealand dollar has lost more than 1% against the euro (EUR/NZD) and lost around 3% against the Australian dollar (AUD/NZD). It showed resilience against some other major global currencies, gaining around 9.9% against the Japanese yen (NZD/JPY) and almost 1% against the British pound (GBP/NZD).

New Zealand Dollar Forecast for 2022 and Beyond: Expert Commentary

Hathorne said the Kiwi is “well positioned to continue challenging the USD”, adding:

“The New Zealand dollar has been quite robust against the US dollar, probably one of the strongest over the last month or so, and that’s partly due to the RBNZ’s determination to control inflation without too much s focus on growth, resonating with the Fed.”

Westpac Institutional Bank expects NZD/USD rates to trend to 0.58 in December 2022, 0.65 in December 2023 and 0.66 in June 2024.

ASB Economics & Research said in its forecast for the NZD on November 1, 2022: “With the FOMC (Federal Open Market Committee) in bullish mode, the NZD top is limited and the NZD resistance of 0.5870 is unlikely. to be broken given the global risk profile, the low yuan context.

Trade economy saw the kiwi trade at 0.54 against the greenback in 12 months from November 2, 2022. The data company did not share the New Zealand dollar forecast for 2030.

Multinational bank HSBC said in a forecast for the New Zealand dollar that the AUD is likely to strengthen against the NZD as “Australia’s fundamentals look stronger than New Zealand’s on a relative basis, with less risk of hard landing and a stronger current account position”.

The National Bank of Australia saw AUD/NZD rates at 1.14 in December 2022. In its forecast for the New Zealand dollar for 2025, it said the pair could trade at 1.09 by the end of December 2022. end of the year.

Finally, economists at ING THINK said employment data from New Zealand was key data to watch. As noted on November 1:

“The labor market is expected to remain extremely tight, and particular attention will be paid to wage dynamics: evidence of slowing wage growth could dampen the good momentum of the New Zealand dollar. We continue to see downside risks for the AUD and NZD given the challenging risk environment and exposure to China’s economic woes.

The bottom line

If you are looking for a New Zealand Dollar forecast to inform your forex trading, it is important to remember that currency markets are highly volatile, making it difficult for analysts and algorithm-based forecasters to come up with accurate predictions. long-term. As such, analysts can and do get it wrong in their predictions.

We recommend that you always do your own research. Read the latest market trends, news, technical and fundamental analysis and expert opinions before making any investment decisions. Keep in mind that past performance does not guarantee future returns. And never invest money you can’t afford to lose.

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The Deputy Governor of the RBI recently advocated floating the Indian Rupee (INR) so that it finds its level based on demand and supply. His suggestion comes as the RBI pumping up to $114 billion to back the INR has failed to stem the rot.

Money, one of mankind’s most important and enduring creations, is once again on the brink of a historic transformation. After evolving over the millennia from cowrie shells to clay tablets to precious metals to paper notes and bank balances, money is taking another big leap forward: it is becoming fully digital.

There are three main candidates for the future of money – a central theme of the next event from the Blockchain Research Institute, W3B and Blockchain World. The first are public cryptocurrencies like Bitcoin, which was designed from the start to be a “peer-to-peer electronic payment system”, i.e. digital cash. The latter are digital dollars issued by individuals, backed by dollars or other collateral. Today, these stablecoins are mostly pegged 1:1 to the US dollar, but could be designed to maintain a link to a basket of currencies, like Facebook’s ill-fated Libra project. The third are central bank digital currencies, aka CBDCs, created by governments and central banks. Each is radically different in composition and potential impact.

“The vast majority of people in the Middle Ages never saw money at all in their entire lives,” James Burnham, a renowned 20th-century scholar and historian, said of the feudal economy, which was based on subsistence agriculture and barter. The capi factories, loans to entrepreneurs, etc.

As in ancient times, precious metals like gold served as the basis of money in the early industrial age of capitalism. Money, according to John Locke, was something people “took by mutual agreement in exchange for the truly useful but perishable means of subsistence”. In other words, gold is useful as a store of value and a medium of exchange because it’s not “really useful”. Gold’s preeminent role as money began to decline in the late 19th century, beginning with the American Civil War, when the federal government issued paper notes backed only by faith in the government itself. . It ended a century later when President Richard Nixon finally closed the “gold window” and ended the international convertibility of the US dollar into gold. Today currencies float against each other and are issued by government fiat.

If gold was the foundation of the early industrial age and fiat currency the foundation of our modern globalized economy, then some form of digital currency will be the foundation of the digital economy. Once again, we are on the verge of another epochal change in money. But which one will succeed?

three suitors

Bitcoin has been a remarkable achievement. It is worth nearly half a billion dollars and is used everywhere as a store of value and medium of exchange, and has been a lifeline for the unbanked who can stomach its volatility and slowness. It is permissionless and censorship resistant, making it a favorite of freedom fighters as well as alt-right groups. It is also energy intensive and volatile, just like gold and other commodities. It will likely become more important as a store of value, but will be insufficient as a medium of exchange.

CBDCs are being touted by governments and central bankers as a better alternative that can make the economy more inclusive, reduce volatility, and improve central bank responsiveness to crises. But CBDC boosters have to answer some tough questions. For example, how exactly do we protect privacy rights when the government can see in real time how every dollar is being spent in an economy? Because of the disturbing impact on civil liberties, CBDCs are likely to find more success in authoritarian regimes like China than in the United States or Canada, where I expect they will find a fierce resistance from some.

This brings us to the final contender to be the money of the future: stablecoins. Synthesis of CBDCs and crypto-assets like Bitcoin, these are digital assets issued by companies backed by fiat currencies held in financial institutions. The major releases, USDC and USDT, are worth over $100 billion combined. Facebook’s attempt at a stablecoin, Libra, was originally based on a basket of assets. This was met with fierce resistance from the US government, which slammed it as a potential threat to the dollar system – a cautionary tale for any business trying to reinvent currency.

There are also “decentralized” synthetic stablecoins, which are backed by assets held in smart contracts (like software with a bank account). DAI is one example, albeit somewhat centralized as much of its collateral is in USDC and now in US Treasuries. A decentralized stablecoin is the synthesis of private currency and public crypto-assets. They are pegged to the US dollar but are permissionless and do not depend on a third party to operate. They are difficult to close and can be used by anyone. Although small compared to the others (the outstanding DAI is worth around $6 billion), they are the frontier of money, and we should all pay attention to them. Intuitively, one would assume that the decentralized digital economy of Web3 should embrace these types of decentralized money, but at this point it seems that centralized stablecoins like USDC have the commodity market fit and advantage first come.

Alex Tapscott is co-founder of The Blockchain Research Institute, host of W3B and Blockchain World, in Toronto, November 8-9. Alex is also the Managing Director of The Ninepoint Digital Asset Group. This article is for informational purposes only and should not be considered investment advice. A version of this article originally appeared in the Ninepoint Weekly Note, Summary of digital assets.

The opinions expressed in Fortune.com comments are solely the opinions of their authors and do not reflect the opinions or beliefs of Fortune.

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Emerging market (EM) central banks are becoming increasingly sensitive to currency depreciation and several of them have sold a significant portion of their foreign exchange (FX) reserves to slow the pace of decline.

Most emerging markets have sufficient reserves to avoid old-fashioned crises, but further pressure on currencies could lead some to take more aggressive action to prevent further depreciation. Swap lines and interest rate hikes are the most likely course of action; however, some may consider capital controls if the US dollar continues to rise.

The resilience of emerging market currencies has often been overlooked in the current market chaos. While the US dollar index (DXY) has appreciated by around 25% since mid-2021, emerging currencies that are not included in the DXY have generally fared less poorly. Indeed, some such as the Brazilian real delivered positive total returns against the dollar, supported by a combination of wide interest rate differentials, cheap valuations, light positioning and positive shocks to the terms of trade.

However, liquidity in currencies – particularly in US dollars – is clearly reduced, as aggressive interest rate hikes in developed markets, deteriorating demand for exports from emerging markets and risk aversion sentiment led to capital outflows.

High-frequency data points to fairly large outflows of funds in recent weeks and emerging market central banks have clearly become more worried, dipping into their foreign exchange reserves to support their respective currencies. In particular, the central banks of the Czech Republic, Chile and Thailand have seen their reserves fall by a fifth since the beginning of the surge in the US dollar.

To be fair, that is exactly why foreign exchange reserves are held. They are accumulated during good times in order to be used during more difficult times. And it should be noted that the fall in reserves was exaggerated by a decline in the value of underlying reserve assets as developed market fixed income securities sold off.

Indeed, some estimates suggest that rising bond yields (and falling prices) accounted for more than half of the decline in emerging market foreign exchange reserves.

Intervening in the foreign exchange market by selling reserves can help avoid the kind of instinctive moves that tend to shake confidence in a country’s currency. And having a large pot of reserves allows central banks to intervene longer and more aggressively. However, while the sale of reserves can help smooth out exchange rate adjustments, policy rarely completely changes the direction of travel.

Foreign exchange reserves are not a bottomless pit, which means that while most emerging markets have plenty of assets to avoid an old-fashioned balance of payments crisis, at some point direct intervention in foreign exchange markets become unsustainable if reserves become insufficient to cover external obligations.

Policy makers are likely to consider new courses of action

As a result, further capital outflows and currency pressures are expected to force emerging market central banks to look for other ways to support their currencies and avoid a financial market dislocation that would hurt the domestic economy. Decision makers are likely to consider three courses of action.

The first is to secure the foreign exchange swap lines. These have historically been in place with the IMF and several emerging markets such as Mexico have had arrangements such as flexible credit lines in place for some time. This allows the central bank to supplement its reserves if necessary in times of crisis.

The Federal Reserve has also become more proactive in setting up swap lines with emerging markets during the pandemic era to avoid tensions in the US Treasury market, given that a sell-off of Reserve assets put upward pressure on yields. There have been rumors that South Korea has sought to access a new swap line and other Treasury bond holders may be arranging. Such swap lines can bolster confidence in the convertibility of a country’s currency, although, taken in isolation, they are unlikely to prevent further currency depreciation.

A second option for emerging market central banks looking for a more immediate way to stop currency depreciation is to make additional interest rate hikes. The hope is that by making investing in the local currency more attractive, capital outflows will decrease and some inflows will return.

The National Bank of Hungary (NBH) blinked last week when it announced a series of measures to support the Hungarian forint, including steep increases in some of its interest rates. Although the BNH did not raise its official policy rates, it aggressively raised other rates with the apparent aim of draining local liquidity, thereby pushing up market interest rates.

In many ways, Hungary was an obvious candidate for “emergency” rate hikes. It has relatively low foreign exchange reserves, a fragile balance of payments where its current account deficit is financed by short-term capital inflows. Additionally, market rate pricing is accommodative and, on a forward-looking basis, is expected to remain low in real terms.

Under this approach, several other central banks in emerging markets – mainly in other parts of Central and Eastern Europe (CEE) and Asia – may have to make significant interest rate hikes. These are needed in addition to those already priced on the market. These markets warrant an underweight in local fixed income.

The third option for central banks in emerging markets under severe pressure would be to impose capital controls. The “impossible trinity” says that countries cannot have both a fixed (or managed) exchange rate, sovereign monetary policy and the free flow of capital. On this basis, if central banks are unwilling to aggressively raise interest rates – or even seek to ease policy due to weak domestic activity – capital controls could be the order of the day. day.

Some emerging markets have already implemented capital controls for this exact reason, including China and others like Turkey may follow suit in the event of larger outflows. Capital controls are no longer taboo and the IMF now believes they are justified in some cases. However, it is a last resort for emerging market central banks given the long-term damage to credibility and is unlikely to be widely used.

Crédito y Caución (Atradius) | On October 2, general elections were held in Brazil to elect all the seats in the lower house of Congress, one-third of the seats in the Senate, the 27 state governors and the president.

The presidential race will be decided in a runoff on October 30, featuring far-right incumbent Jair Bolsonaro and leftist former president Luiz Inacio Lula da Silva. During a polarized first-round campaign, Lula garnered 48% of the vote, but failed to secure the majority needed for an outright victory. Bolsonaro won 43%, exceeding previous expectations in most opinion polls. Additionally, Bolsonaro’s right-wing Social Liberal Party (PSL) won 99 seats in the 513-member lower house, down from 77, and PSL candidates won 13 of the 27 seats up for election in the Senate.

We expect the campaign for the second round of the presidential election to be polarized again. The election could even be a test for Brazilian institutions, especially if Lula ends up winning by a narrow margin and Bolsonaro refuses to accept the result. As the first round approached, Bolsonaro repeatedly questioned the integrity of Brazil’s electronic voting system and suggested he could not back down if he lost.

Continued political uncertainty could weigh negatively on investor sentiment. Regardless of the outcome of the second round of elections, we expect that deep divisions within Brazilian society and strong polarization between left and right political forces will remain serious issues at this time.

High interest rates remain a major problem

The Brazilian economy returned to pre-Covid levels in the first quarter of 2021, ahead of schedule. With a 3.2% year-on-year increase in the second quarter of 2022, GDP growth exceeded forecasts. Private consumption grew by more than 5%, due to rising employment and increased social transfers, while higher infrastructure investment also supported economic activity.

However, the economic recovery since last year and rising energy and food prices (partly due to a severe drought in 2021) have led to a rapid rise in inflation. The war in Ukraine and increased pre-election government spending also fueled the surge, with inflation rising from less than 2% in mid-2020 to over 12% in April 2022. As a result, the Central Bank raised from aggressively the reference interest rate (Selic) since March 2021, from 2% to 13.75% in August 2022.

Meanwhile, consumer prices appear to have passed their peak, falling to 8.7% in August. This allowed the Central Bank to suspend the tightening cycle and keep rates unchanged in September. However, we expect interest rate cuts to not occur until the second half of 2023 as uncertainty remains high and inflation will only gradually converge to the central bank’s target range of 1.75% to 4.75% for next year.

An economic slowdown expected in 2023

Tight credit conditions, weaker external demand and heightened political uncertainty are expected to dampen economic activity in the coming months. We expect GDP growth in 2022 to reach 2.6%, supported by pre-election spending (eg cash transfers to consumers) and temporary tax cuts (mainly on energy). However, economic expansion will slow to 0.5% in 2023. Persistently high interest rates are expected to slow domestic demand and increase debt service costs for both consumers and businesses. Private consumption, which accounts for around 60% of GDP, is expected to grow by only 0.4% next year. Fixed investments will stagnate as corporate margins are squeezed by high energy and other input prices.

Non-performing loans on the rise, but a solid banking sector

In 2021, non-performing loans (NPLs) increased only slightly to 2.3% from 2.1% in 2020, partly cushioned by loan restructuring and debt moratoriums. With the expiry of these measures, the NPLs increased to 2.7% in June 2022. At 1.5%, the NPLs of businesses were lower than those of households (3.5%). Due to rising interest rates and a slowing economy, we expect NPLs to rise further in the fourth quarter of 2022 and into next year. However, the provisions are sufficient.

The banking sector (37% of assets owned by the state; 16% owned by foreigners) is well regulated and supervised. Low dollarization of domestic credit (15%) and low dependence on wholesale funding protect the system from negative shocks. Banks have well-developed credit risk assessment systems and increased provisioning before the pandemic. Capitalization remains sufficient (solvency ratio of 16.2% in Q2 2022 compared to 16.8% in 2020).

The large budget deficit is expected to widen further in 2022 and 2023

A large budget deficit was already Brazil’s main economic weakness before the coronavirus outbreak, with consistently high annual budget deficits over the past two years. A constitutional amendment to eliminate automatic growth in fiscal spending in line with rising inflation passed in 2016 and the adoption of a comprehensive pension reform in 2019 were necessary steps towards greater fiscal sustainability. That said, additional structural reforms are needed to put public debt on a sustainable path and to maintain investor confidence over the long term. The next administration will have to take up this challenge.

Fiscal developments were positive in 2021, as rising revenues, the withdrawal of most Covid-related support measures and wage moderation sharply reduced the public deficit to 4.4% of GDP, from nearly 12 % of GDP in 2020. However, we expect the deficit to widen again in 2022 and 2023, to 6.2% of GDP and 8.3% of GDP respectively. This is due to higher interest charges (40% of public debt is linked to the Selic benchmark interest rate), as well as pre-election tax breaks and spending measures.

As a result, we expect public debt to decline from 80% of GDP in 2021 to 87% of GDP in 2023. For now, currency, refinancing and sovereign default risks are mitigated by the fact that most of the debt is financed on the domestic market. (89%), in local currency (94%) with an average maturity of more than five years, and that the government is a net external creditor.

Fiscal policy and next administration – concerns remain

Investor concerns over the fiscal framework have grown, particularly that a temporary waiver to comply with government spending rules could be extended. Even Bolsonaro’s pro-business government announced that if he were to be re-elected, he would support a “more flexible” fiscal rule.

If Lula wins the second round of elections, we expect him to pursue less market-oriented policies, with higher social spending and more state intervention. While he appears to support the idea of ​​a new fiscal framework that allows for more short-term borrowing, he also showed good pragmatism during his previous presidency. At the same time, the fragmented composition of Congress, where a group of centrist parties (centrão) traditionally hold the balance of power, will limit the risk of an overall shift in economic policies. The success of Bolsonaro’s PSL and allied parties in congressional elections would further limit Lula’s scope for major policy changes, should he become the next president.

Whoever wins the presidential election will face the challenge of rebuilding fiscal credibility to bolster business and investor sentiment.

Vulnerable to changes in investor sentiment, but resilient to major shocks

Brazil is vulnerable to changes in investor sentiment, due to a relatively high level of non-resident portfolio investment flows. However, a solid financial sector, large official reserves, relatively low external refinancing needs and the use of exchange risk hedges allow the flexible exchange rate to act as a shock absorber.

The exchange rate has been quite volatile this year due to political uncertainty, fiscal concerns and an unfavorable global risk environment. After a sharp depreciation in 2020 and into 2021, the Brazilian real remains undervalued, despite a further overall appreciation in 2022 (supported by high commodity prices and rising domestic interest rates). We expect currency volatility to continue for now, especially ahead of the second round of presidential elections. Moreover, a narrowing of the interest differential with the United States will prevent any further strengthening in the short term.

Solid external finances and manageable foreign currency debt

Brazil’s external financial position is expected to remain strong, keeping transfer and convertibility risks low. Despite a drop in official reserves during 2022, liquidity remains more than sufficient to cover imports (more than 12 months) and external refinancing needs. The current account is benefiting from high commodity export prices and is expected to show only small deficits of 0.7% in 2022 and 0.9% of GDP in 2023. Foreign direct investment flows, averaging of 3.1% of GDP in 2022-2023, will fully cover these deficits.

Companies represent 63%, banks 20% and the government 17% of foreign currency debt. This year, the foreign currency debt will increase slightly in nominal terms. The ratios are low and are expected to decline to 30% of GDP and around 140% of exports of goods and services in 2023, from 36% and 164% respectively in 2021. Most externally indebted companies have hedged their foreign exchange risk . Refinancing risk is also mitigated by a large share of intercompany debt, which accounts for two-thirds of non-financial corporate foreign currency debt.

The story began in 1944. World War II was at its height in Europe. Amid such insecurities, 44 allied nations came together in New Hampshire to establish the Bretton Woods system. According to the system’s stipulations, all countries adjusted their currencies to the US dollar while pegging the dollar to gold. They assumed that setting a gold standard would reduce volatility in the global economy. Ideally, this agreement also established American hegemony over world trade. However, in the early 1970s, this system collapsed when the United States encountered a gold crisis.

The United States faced a balance of payments crisis. The Federal Reserve did not have enough gold reserves to support the dollar. The infamous Nixon Shock ended the convertibility of the US dollar into gold.

Growth and decline of the petrodollar

Now the US dollar has fallen as countries rapidly lost confidence in the greenback. This is the pivotal point in today’s reality. In the mid-1970s, President Richard Nixon entered into an agreement with the Organization of the Petroleum Exporting Countries (OPEC) to trade oil exclusively in dollars in return for US military assistance. Consequently, the petrodollar emerged, oil prices quadrupled, and the rest is history.

Since then, the US dollar has been the undisputed foreign exchange reserve currency in the world. Agreements with Saudi Arabia and the rest of the Middle East have bolstered global oil trade in the greenback currency. Trading in oil and gas futures contracts, denominated in dollars, cemented the position of the United States as a global superpower. As the euro emerged as a strong competitor in the 1990s, dollar-based finance continued to flourish. Developing economies like China and Russia have had no choice but to hold US Treasuries and accumulate massive reserves of dollars to hedge currency risk. And, while rebel elements like Iraq’s Saddam Hussein and Muammar Gaddafi relentlessly tried to derail the petrodollar, those efforts led to invasion, assassination and decimation.

Can the dollar continue to dominate in a changing world?

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Today, multiple geopolitical and economic factors are once again turning the tide against the supremacy of the US dollar. Rapid globalization was already a ticking time bomb situation for the greenback. Today, the rise of China as the next potential economic powerhouse, Russia’s exclusion from the dollar-focused SWIFT system, and a global economic slowdown are challenging the dominance of the US dollar.

The dedollarization trend is not exactly a new phenomenon. Latin America tried to move away from the dollar in the 1990s. In response to US sanctions, Venezuela instead sought to pay oil payments in Chinese yuan. Chile de-dollarized in the 1980s and generally avoided dollarization. In the early 2000s, Iraq attempted to sell oil in euros while Libya actively lobbied for years to forge a pan-African gold standard.

However, the global financial crisis of 2007-2008 reversed this dedollarization trend. Over the past decade, no significant developments have emerged to lessen the dominance of the US dollar. With the emergence of a rift between the United States and Saudi Arabia, the dollar faces a new challenge.

United States and Saudi Arabia separate

With 17.2% of world exports, Saudi Arabia is the world’s leading exporter of crude oil. In the past, it was the largest supplier in the United States. It is thanks to oil that Saudi Arabia has become a key ally of the United States in the Middle East. Saudi Arabia leads OPEC. In the past, this gave the United States indirect influence over world oil prices, which are denominated in dollars. This has allowed successive US governments to run huge trade deficits and run up debt on the cheap. Since 1979, the Saudi Kingdom has been a US proxy against Iran.

In recent years, the United States has boosted shale oil production and built up its Strategic Petroleum Reserve (SPR). In the 1990s, the United States imported about 2 million barrels per day. By 2021, that figure has fallen to just 500,000 barrels per day, a drop of 75%.

[EMBED: https://www.fairobserver.com/politics/saudi-arabia-and-lebanon-a-tale-of-two-economies/]

Recently, Saudi royalty has been particularly unhappy with US President Joe Biden’s policies in the Middle East. Biden’s decision to withdraw support for Saudi Arabia’s military intervention in Yemen has annoyed Riyadh. Houthi attacks on Saudi oil facilities and Biden’s attempt to revive the nuclear deal with Iran have heightened Saudi insecurity. Riyadh believes the United States is backtracking on historic security guarantees given to the House of Saud.

Biden’s recent tour of the Middle East was a dismal failure. He failed to achieve his main objective: to get Saudi Arabia to increase its oil production. More recently, the White House accused OPEC+ of siding with Russia after this group of oil producers agreed to drastically cut oil production. In turn, OPEC+ accused the West of “arrogance of wealth” and hypocrisy.

China and others appear as an alternative to the United States

Over the years, China has become the top importer of Saudi oil. In 2020, Saudi Arabia exported $95.7 billion worth of oil. China accounted for $24.7 billion of that figure, while US imports were just $6.59 billion. China’s Belt and Road Initiative has invested in Saudi Arabia, and Chinese investment is reported to have reached $43.47 billion in 2021.

Saudi Arabia plans to invest in Chinese companies. Aramco has signed a $10 billion deal with Chinese oil companies. Talks about petroyuan oil trading have hit the headlines. Right now, the $13.4 trillion Eurodollar market and the $25 trillion US Treasury market offer depth and liquidity that no one else can match. However, this could change in the future. Rising interest rates strengthened the dollar, causing poorer economies’ import bills to soar and triggering a global debt crisis. This could shake global confidence in the US dollar and at least China’s trading partner may become more willing to trade in yuan.

[EMBED: https://www.fairobserver.com/politics/china-will-decide-who-wins-the-fight-russia-or-the-west/]

Russian President Vladimir Putin recently addressed the summit of BRICS, a grouping of Brazil, Russia, India, China and South Africa. He talked about an alternative mechanism for international payments and an alternative to the International Monetary Fund’s Special Drawing Rights (SDRs). Instead of denominating against the dollar, countries could use a basket of their respective currencies instead.

Discussions about Iran and even Saudi Arabia joining the BRICS have emerged. If that happened, such a consolidation would represent more than a third of world GDP, more than 25% of world oil production, about 40% of world iron production and about half of world agricultural production. Even a weakened Russia wreaked havoc on global oil and commodity markets. An expanded BRICS with its own reserve currency could seriously challenge the dollar.

Russia and China already engage in ruble-yuan trading. Russian energy giant Gazprom recently announced that Beijing would start “making payments for Russian gas supplies in the countries’ national currencies – the ruble and the yuan”. Frozen by the West from SWIFT, Russia now uses China’s cross-border interbank payment system (CIPS). When the time comes, the CIPS could become the clear winner of the Russian-Ukrainian war. India openly defies US pressure by increasing its oil purchases from Russia. Today, Russian oil accounts for 21% of Indian oil imports, up from less than 1% before the war. India is buying Russian oil at a discount to curb inflation and this trade is no longer denominated in dollars. In addition to closer Russia-China ties, Indian imports of Russian oil are hampering dollar dominance. The same goes for Turkey, a member of NATO, which buys Russian oil at a discount. If these trends continue, the US dollar’s days could be numbered.

The opinions expressed in this article are those of the author and do not necessarily reflect the editorial policy of Fair Observer.