Following the conclusion of the three-day summit of the BRICS association of countries, which includes Brazil, Russia, India, China and South Africa, we learned, among other things, of plans to add six more members. The expansion aims to create a stronger coalition of developing countries to represent the interests of the Global South on the international stage. The decision comes after more than 40 countries expressed interest in joining BRICS, with 23 of them submitting official applications. The suspension of plans to introduce a single currency to dethrone the US dollar was also discussed. However, it is worth considering what impact such a decision might have on the individual local currencies of the BRICS countries.
What is BRICS?
BRICS, an acronym for the five countries Brazil, Russia, India, China and South Africa, is an international economic and political bloc of five emerging national economies. BRICS was formed as a group in 2009, becoming the largest economic association in the world. Today, BRICS accounts for, as much as 32.1% of global GDP, while the G7 accounts for 29.9%.
Source: Statista
The BRICS aims to foster cooperation between countries in economic, financial, political and strategic areas. This bloc represents a significant share of the global economy, encompassing a substantial population and natural resources. The main goals of the BRICS include increasing the influence of these countries in international financial institutions such as the International Monetary Fund and the World Bank, and promoting balance in the global economic system. The first of these goals seems particularly important. The BRICS countries account for the majority of global GDP, yet they are in a minority in global financial institutions. Currently, the G7 has 41.7% of the voting rights in the IMF, while the BRICS countries have only 14.3%. Including the countries aspiring to join the association (provisionally named BRICS+), this share would rise to 18.8%.
udzia%C5%82_w_MFW_30.08.png)
Source: IMF
BRICS holds annual summits where the leaders of these countries meet to discuss common goals, challenges and initiatives. The bloc focuses on a number of areas of cooperation, such as trade, finance, investment, science and technology.
In 2010, South Africa joined the group, changing the acronym from BRIC to BRICS. In 2023, six new countries were invited to become full members: Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates. Accession would place an emphasis on the Middle East, which would be another step towards supporting the BRICS members' complete raw material and energy independence from the West.
Dominance of the dollar as a reserve currency
Before going on to analyse the individual BRICS currencies and the impact of the latest meeting, let us consider the reasons for the power of the United States. Here, it is useful to go back in history to a few decades ago.
After the Second World War, the United States initiated the Bretton Woods Agreement to rebuild European states. The system envisaged the US dollar as the main reserve currency, and its creation went hand in hand with the creation of two key financial institutions: The International Monetary Fund (IMF) and the World Bank, which were to oversee financial stability and promote economic development.
In the 1960s, the Bretton Woods system began to encounter difficulties. A growing US trade deficit and an excess of dollars on the market increased pressure to convert dollars to gold, which could deplete US bullion reserves. In 1971, President Richard Nixon announced the suspension of the conversion of dollars to gold, which in effect led to the collapse of the Bretton Woods system.
After its collapse, the US dollar still remained the main reserve currency, but was no longer based on a fixed gold standard. The strengthening of the dollar's position was achieved through an agreement with Saudi Arabia, which at the time was the world's main oil exporter. This agreement stipulated that Saudi Arabia would only accept payments for oil in US dollars (USD), and in return, the US pledged to provide military and political support to Saudi Arabia.
This agreement was crucial in cementing the US dollar's position as the main international reserve currency. The introduction of the practice of denominating oil transactions in US dollars significantly increased the demand for dollars, strengthened its value and enabled the United States to finance its trade deficit by issuing dollars. Currently, according to the IMF, the dollar accounts for 59% of the world's foreign exchange reserves at central banks and, despite the best efforts of the BRICS countries, this is unlikely to change over the next decade.
The Bank for International Settlements estimates that the US dollar is involved in almost 90% of foreign exchange transactions and accounts for 85% of spot, forward market transactions. Half of global trade and three-quarters of trade in the Asia-Pacific region is denominated in US dollars, and this is not likely to change any time soon.
Source: IMF
Currencies that stand to gain the most
To understand which BRICS currencies are likely to benefit most from increased exchange in national currencies, it is useful to focus on their self-financing capacity and central bank policies.
We can assess the first of these aspects through, among other things, an indicator related to the current balance of trade accounts in relation to GDP. This indicator measures the difference between exports and imports of goods, services and financial transfers in a country. It indicates whether a country is a net exporter or imports more capital. It indicates whether more money is flowing into the country (positive balance) or more is flowing out (negative balance).
When analysing the BRICS countries, according to the International Monetary Fund (IMF), the Russian rouble and the Chinese yuan are in a particularly favourable position. It is these two currencies that have been gaining the upper hand for many years by exporting more capital than imports, which presumably has a positive impact on the value of these currencies. Nevertheless, when we direct our gaze to the exchange rates of these particular currencies on the international market, we see that there are additional factors that affect their value.
Source: IMF
The mechanism works similarly in the case of currency interventions. A central bank, seeking to strengthen its currency, for example, may carry out a sale of foreign currencies. Such intervention directly affects the exchange rate of the currency in the foreign exchange market. As a result, countries whose reserves are steadily increasing gain global attractiveness and increase their capacity for currency intervention. In this respect, the Indian rupee and the South African rand have come to the fore since 2010.
These developments may also explain why the rouble, despite having the most favourable trade balance behind it, is losing value. Interestingly, it was only after the largest monetary addition in US history that we could see that, at a time when the Fed was increasing its balance sheet dramatically, the dollar was clearly strengthening despite historically low interest rates. This shows that central bank interventions can have a greater impact on quotes than the interest rate differential itself.
Source: Fred
Summary
Summarising the available data on the potential of the BRICS currencies, it can be concluded that the position of the dollar does not appear to be under threat. However, if we focus on the potential to strengthen trade within the BRICS coalition, the rupee, rand and, in third place, the yuan show the greatest potential in this context. Most of these countries have no interest in strengthening their currencies against the dollar, especially when they are net exporters vis-à-vis the United States.
Grzegorz Dróżdż, CAI MPW, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73.02% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Trade this news from Conotoxia Ltd. platforms
Go to your account
