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 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 currency. Therefore, they are looking for alternate options and in some instances looking to trade EM CCY vs EM CCY despite large spread differences.
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, with the end user no longer being dependent on the USD.
However, dollars are still key in the interbank space – spreads are so wide in non-USD CCY pairs that it is more cost-efficient 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 10 years on the back of increased global trade, borderless e-commence and multinational web-based businesses.
The demand to make instant or faster payments has grown significantly which has caused the banks and fintechs to solve this through innovation; either through using blockchain, solutions, technological advances in current rails, the creation of new rails and slicker connectivity through APIs. Retail payments have taken the lead in this space with remittance companies filling inefficiencies but the interbank payments space still has a lot of improvements to make before it catches 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 due to the growth and innovation coming out of APAC.
Although less than 40 per cent of partnerships were still active after four years according to a study by The Atlantis Press, the ones that did survive were often in the same field 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 outline that de-dollarisation is filling lots of column inches and the phenomenon is something that is gaining momentum but is happening at a very slow and gradual rate in most parts of the globe. In APAC, the story I slightly different, it is happening at an increased pace, for example.
India made its first crude oil payment to the UAE in Indian Rupees earlier this week, as well as China paying for Russian commodities in RMB. China has been a major driver of de-dollarisation and the banks have increased their holdings of Renminbi over the last decade.
However, due to China’s close controls, the shift has not been fast-paced. For the short and medium term, it looks like USD is here to stay as the world’s reserve currency, but the long-term view remains uncertain.
