A number of countries across the globe have initiated plans to reduce the reliance on the US dollar, especially after recent interest rate hikes. This is especially true for a number of countries across Southeast Asia, which are rapidly increasing their ‘de-dollarisation’ efforts.
At the beginning of May 2023, the Association of Southeast Asian Nations (ASEAN) held its 42nd Summit, in which its members signed an agreement to accelerate the enhancement of regional payment connectivity and increase the use of local currencies.
Ultimately, the move aims to reduce reliance on the likes of the US dollar – which has become a less attractive option due to significant increases in interest rates by the US’ Federal Reserve. In response, countries in the region have had to resort to raising their own interest rates to tackle the threat of depreciation of their currencies.
While the objective of the countries in Southeast Asia is clear, reducing reliance on the US dollar (a process known as de-dollarisation) will be no easy feat.
To find out more, The Fintech Times sat down with Edward Dovey, head of Asia Pacific (APAC) at cross-border payments system provider RTGS.global, to hear his expertise in the area to find out whether complete ‘de-dollarisation’ will be possible at any point in the future.
What has caused the ‘de-dollarisation’ trend in countries across Southeast Asia?
The US dollar is coming under increasing pressure to maintain itself as the world’s chief reserve currency after claiming the top spot as the world’s primary reserve currency since WWII. Many APAC countries aim to reduce the influence of the US and their reliance on the dollar. As a result, they are exploring alternate options and in some instances looking to trade emerging currencies against each other, despite the large spreads between them.
Countries in APAC seem to be increasingly electronically advanced and tech-savvy, with many non-interbank payments being executed via home electronic devices on non-interbank platforms, and the end user no longer being dependent on the US dollar.
However, dollars still play a key role in interbank transactions – spreads are usually much wider in non-USD currency pairs and it is more cost-efficient for banks to conduct multiple trades to cross the dollar to achieve the end goal.
How has recent cross-border payment technology development changed the economic landscape for these countries?
The cross-border payments business has grown significantly in the last five to ten years, fuelled by increased global trade, borderless e-commence and multinational web-based businesses.
The demand to make instant or faster payments has grown significantly, prompting banks and fintechs to innovate via a variety of means – through blockchain solutions, technological improvements to existing systems, new payment rails, and smoother connectivity via APIs. Retail payments have taken the lead in this space with remittance companies filling inefficiencies, but the interbank payments space still has room for much improvement in order to catch up.
How important will strategic partnerships be in ensuring future success for Southeast Asian economies?
Strategic partnerships will be key to success for Southeast Asian countries given the growth and innovation emerging from the APAC region.
According to a study by Atlantis Press, fewer than 40 per cent of partnerships survived beyond four years. However, the partnerships that did endure were often in complementary fields and were able to pool resources to achieve shared goals.
What could the trend mean for the future of these economies, as well as for the US dollar?
At this stage, it is appropriate to note that de-dollarisation, while garnering much discussion, is happening slowly and gradually in most parts of the world. However, the pace is faster in the APAC region.
For example, India just made its first crude oil payment to the UAE in rupees this week while China is paying for some Russian commodities in renminbi. China has been a major driver of de-dollarisation as its banks have increased renminbi holdings over the last decade.
However, due to China’s tight controls, the shift has not been rapid. In the short-to-medium term, the US dollar looks poised to remain the world’s reserve currency, but the long-term view is more uncertain. If de-dollarisation gains momentum in APAC, it could potentially undermine the dollar’s global dominance.