SLF has bad debts totalling 100 billion baht

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Revised law encourages students to repay loans

PUBLISHED : 21 Jan 2024 at 06:02

SLF has bad debts totalling 100 billion baht
A bank staff member shows students how to repay student loans online. (File photo)

The Student Loan Fund (SLF) has bad debts that have reached 100 billion baht, but new measures under the amended Student Loan Fund Act of 2023 are hoped to encourage borrowers to repay their debts.

Chainarong Katchapanan, manager of the SLF, said the accumulated amount of non-performing loans has almost doubled from 60 billion baht in 2017 to 100 billion baht now.

The bad debts have spiked because borrowers are believed to have prioritised the repayment of other debts, such as credit card debt and mortgages, over their student loans, he said.

However, new calculation methods introduced in the amended act are expected to encourage borrowers to repay their debts, to reduce the number of non-performing loans and ensure the SLF remains financially sustainable in the long term, he said.

Under the revised law, when a borrower makes a repayment on a defaulted loan, the money is first used to pay off the principal balance of the loan, then the accrued interest, and then any outstanding fines.

This runs contrary to the original terms, in which the money was first used to pay off outstanding fines and the accrued interest. In the past, it was only once the fines and accrued interest had been paid off that repayments were used to pay the principal.

Moreover, the amended law caps the interest on loans at no more than 1% per year and requires defaulters to pay a fine of 0.5% annually. This is also opposed to the original term in which the SLF charged borrowers 1% per year and the default fine was 7.5%.

Mr Chainarong said the change is hoped to encourage borrowers to make payments because it ensures the money is used to pay the principal balance first, reducing their loan balance as quickly as possible.

According to the SLF manager, the SLF has 3.5 million borrowers with loans totalling 480 billion baht.

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Student Loan Fund bad debts total B100bn

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In: South-East Asia

Revised law encourages students to repay loans

PUBLISHED : 21 Jan 2024 at 06:02

Student Loan Fund bad debts total B100bn
A bank staff member shows students how to repay student loans online. (File photo)

The Student Loan Fund (SLF) has bad debts that have reached 100 billion baht, but new measures under the amended Student Loan Fund Act of 2023 are hoped to encourage borrowers to repay their debts.

Chainarong Katchapanan, manager of the SLF, said the accumulated amount of non-performing loans has almost doubled from 60 billion baht in 2017 to 100 billion baht now.

The bad debts have spiked because borrowers are believed to have prioritised the repayment of other debts, such as credit card debt and mortgages, over their student loans, he said.

However, new calculation methods introduced in the amended act are expected to encourage borrowers to repay their debts, to reduce the number of non-performing loans and ensure the SLF remains financially sustainable in the long term, he said.

Under the revised law, when a borrower makes a repayment on a defaulted loan, the money is first used to pay off the principal balance of the loan, then the accrued interest, and then any outstanding fines.

This runs contrary to the original terms, in which the money was first used to pay off outstanding fines and the accrued interest. In the past, it was only once the fines and accrued interest had been paid off that repayments were used to pay the principal.

Moreover, the amended law caps the interest on loans at no more than 1% per year and requires defaulters to pay a fine of 0.5% annually. This is also opposed to the original term in which the SLF charged borrowers 1% per year and the default fine was 7.5%.

Mr Chainarong said the change is hoped to encourage borrowers to make payments because it ensures the money is used to pay the principal balance first, reducing their loan balance as quickly as possible.

According to the SLF manager, the SLF has 3.5 million borrowers with loans totalling 480 billion baht.

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China stock rout shows investors want way more reform – Asia Times

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The startling divergence between China’s 5.2% growth and cratering stock market is putting Asia’s biggest economy in global headlines for all the wrong reasons.

Given the chaos of 2023 — a massive property crisis, record youth unemployment, trade headwinds from Washington and deflationary pressures — China’s ability to top 5% growth year on year is impressive indeed. But the stock market continues to stumble, a rout that shows few signs of slowing.

So how bad could things get? In the first two weeks of 2024, global funds sold more than US$1.1 billion of mainland stocks. China’s CSI 300 index this week fell to its lowest levels since 2019, losing more than 25% over the last year. That’s the mirror image of the 24% rally in the S&P 500 over the same period.

China’s stock troubles have many causes. The most recent: disappointment that the People’s Bank of China didn’t loosen monetary rates this week. It left rates unchanged on its seven-day reverse repo and medium-term lending facility. Markets had been expecting cuts.

“The PBOC’s decision to hold rates is negative for market sentiment and economic growth, and suggests policymakers are not trying very hard to present a coordinated, strongly pro-growth message at the start of the year,” says Wei He, analyst at Gavekal Dragonomics.

Recent data show that China entered 2024 with a series of headaches undermining domestic demand and confidence. Property-related spending is sliding and home prices are the weakest since 2015.

Consumer prices have dropped for three consecutive months, suggesting the worst deflationary pressures since the 1997-98 Asian financial crisis. 

Then there are the data trends that fuel “Japanification” chatter. That includes news that the historic decline in China’s population continues, with births falling to a record low in 2023, adding to Beijing’s longer-term demographic challenges.

It’s complicated, of course. As 2024 opens, Xi Jinping’s China finds itself at a transitional crossroads. President Xi’s team has been working to reduce China’s vulnerability to boom/bust cycles.

This means clamping down on runaway borrowing, reducing the role of state-owned enterprises, championing private-sector development and increasing innovation.

Deleveraging is a necessary ingredient to increasing the quality and productiveness of China’s gross domestic product (GDP). It means going easy on the kinds of stimulus Beijing would normally throw at a lethargic economy.

This can be seen in the PBOC’s reluctance to hit the monetary gas. 

People’s Bank of China Governor Pan Gongsheng is reluctant to hit the monetary gas. Image: Twitter Screengrab

“We suspect the main reason the PBOC failed to deliver this time is a desire to avoid triggering renewed depreciation pressure on the renminbi,” economists at Capital Economics said in a note.

Along with hastened capital outflows, a weaker exchange rate would increase default risks among property developers already struggling to make offshore bond payments. It also might draw ire in Washington as the November presidential election heats up.

ANZ Bank analysts add that the “PBOC chose to hold despite strong deflation pressure. This likely reflects its concerns about bank profitability.” The rationale being that the lower rates go, the harder state-owned banking giants might find it to generate healthy returns.

Yet indications that China faces deflation buttress the case for additional monetary easing, says Commonwealth Bank of Australia strategist Joseph Capurso. “We judge the market has more or less priced in an imminent PBOC rate cut” in the near future, he notes.

Weak consumer demand is hardly helping to change the narrative among global investors. When it comes to spending, “sustainability is in doubt amid slowing economic recovery,” says Lillian Lou, analyst at Morgan Stanley.

Adding to the uncertainty at PBOC headquarters, Governor Pan Gongsheng has limited visibility into what the globe’s other top central banks are planning this year.

Bets that the US Federal Reserve would be cutting rates assertively are being reconsidered as the world’s biggest economy expands apace.

Top officials like Fed Board Governor Christopher Waller are signaling that rates will be lowered “methodically and carefully” at best. 

Such comments suggest “there’s no reason to move as quickly as they have in the past, cuts should be methodical and careful,” says strategist Marc Chandler at Bannockburn Global Forex.

At Bank of Japan headquarters, officials are stepping away from plans to exit quantitative easing. Along with likely entering 2024 in recession, BOJ officials worry China’s slowdown will hit Japanese exports hard.

All this “means that the market no longer expects the Bank of Japan to raise interest rates at its late January board meeting,” says economist Richard Katz, who publishes the Japan Economy Watch newsletter.

“That, in turn, means the US-Japan interest rate gap will remain higher for longer than was previously expected, or grow even larger as it has over the past weeks,” Katz says. “If so, that means a weaker yen than previously expected.”

This dynamic could complicate the PBOC’s options for major steps to add liquidity. Gavekal’s He says that “policymakers are still likely to reduce policy rates later in the first quarter, meaning bond yields will probably remain at their current low levels.”

PBOC officials, He adds, “are unlikely to change the benchmark loan-prime rates later this month.”

“Commercial bank net interest margins remain at an all-time low, and it is hard to imagine that policymakers would exacerbate that squeeze by lowering bank lending rates but not their funding rates. Still, bond-market participants appear optimistic about an eventual rate cut,” He adds.

Thanks to looser liquidity conditions, lower deposit rates and rate-cut expectations, the 10-year China government bond yield has declined to about 2.5% from nearly 2.7% in early December.

Lower yields are narrowing the gap between the 10-year Chinese government bond yields and seven-day reverse repo rate, a measure of growth expectations.

“It is now nearly back to the average in 2022, when Covid lockdowns hammered the economy,” He notes. “The already low-level means room for further narrowing is probably limited, barring a substantial shock to growth.”

Li Qiang has stood by the line that massive stimulus is not on the way. Image: Screengrab / NDTV

Speaking in Davos this week, Chinese Premier Li Qiang gave few hints that Xi’s inner circle expects major shocks. There, Li stuck to the line that Beijing isn’t about to announce “massive stimulus” moves to boost growth or combat deflation.

To be sure, China is mulling a special sovereign bond scheme to issue 1 trillion yuan ($139 billion) of new debt. The idea would be to sell ultra-long sovereign bonds to improve efficiency in sectors like energy, food, supply chains and urbanization planning.

But the real reasons so many global investors wonder if China is safe are an underdeveloped financial system and regulatory uncertainty.

As Bloomberg reports, SC Lowy Financial HK Ltd finds the “credit space uninvestable there” due to murky legal certainty and poor corporate disclosure. Thus, the investment firm has “very little exposure to China.”

At Davos this week, JPMorgan CEO Jamie Dimon told CNBC that the “risk-reward calculation” on China has “changed dramatically” despite Xi’s team being “very consistent” in opening up to financial services companies. That, he added, leaves global funds “a little worried.”

In the short run, Beijing is asking institutional investors not to dump large blocks of Shanghai or Shenzhen stocks. Regulators also are working to curtail big investors’ ability to be net sellers of shares on certain days.

As the Financial Times reports, this so-called “window guidance” is being pursued to calm nerves in both equity and debt markets. Yet this treats the symptoms of Chinese stock troubles, not the underlying causes.

The need for a clear and bold commitment to structural reforms was crystalized by a December 5 downgrade warning by Moody’s Investors Service.

It lowered Beijing’s credit outlook to negative from stable citing “structurally and persistently lower medium-term economic growth” and a cratering property sector. But also, because of China’s increasing financial volatility.

Xi and Li know what’s needed: greater government transparency; better corporate governance; more reliable surveillance mechanisms; a credible independent credit rating system; and a robust market infrastructure that keeps foreign investors engaged.

True, Moody’s noted that the “economy’s vast size and robust, albeit slowing, potential growth rate, supports its high shock-absorption capacity.”

Yet a bewildering array of headwinds slamming cash-strapped local governments and SOEs are “posing broad downside risks to China’s fiscal, economic and institutional strength.”

To its credit, China has made vital progress since 2016 to make its markets more hospitable to overseas investors. That was the year the PBOC secured a place for the yuan in the International Monetary Fund’s “special drawing rights” program.

The yuan’s inclusion in the IMF’s exclusive club of reserve currencies, joining the dollar, euro, yen and the pound, was a pivotal moment for Beijing’s financial ambitions.

In the years since, Xi’s team vastly increased the channels for foreign investors to tap mainland stock and bond markets. Shanghai stocks were added to the MSCI index, while government bonds were included in the FTSE Russell benchmark. among others.

China has resisted depreciating the yuan. Image: Twitter Screengrab

As demand for the yuan and its global usage in trade and finance grows, China’s tolerance for a stronger currency has surprised markets.

Perhaps no policy lever would hasten Chinese growth faster or more convincingly than a weaker exchange rate. However, Xi’s Ministry of Finance has avoided engaging in a race to the bottom versus the Japanese yen, earning it points in market circles.

Yet the opacity that still pervades Beijing decision-making and Shanghai dealing remains a turnoff for all too many global punters.

Not all, of course. JP Morgan strategist Marko Kolanovic thinks the big drop in Chinese equities is “disconnected from fundamentals” and buying opportunities abound.

“We believe this is a good opportunity to add given an expected growth recovery, gradual Covid reopening, and monetary and fiscal stimulus,” Kolanovic says.

The odds are even greater, though, that China’s stock rout deepens further as Xi and Li navigate this transitional moment.

At some point, China will fix the property sector and build broader social safety nets to increase consumption. And its capital markets will one day be ready for global primetime. In the meantime, the CSI 300 could be in for quite a rocky ride.

Follow William Pesek on Twitter at @WilliamPesek

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Can the Pacific Islands remain ‘friends to all’? – Asia Times

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Most Pacific Island countries claim the foreign policy of “friends to all and enemies to none” amid the mounting geopolitical disputes between the United States and China. But what does this foreign policy mean?

This policy seeks to identify short- and long-term national interests on an ad hoc basis with bilateral partners, including superpowers the United States and China. Many developing states profess this foreign policy to ensure they remain neutral during this period of intense rivalry.

Among the key issues discussed by Pacific Islands Forum (PIF) leaders including Australia and New Zealand during their recent 52nd meeting in Rarotonga, Cook Islands, was great-power competition, with the region increasingly being used as a geopolitical playground for hard power projection.

On geopolitics, the host of the PIF meeting, Cook Islands Prime Minister Mark Brown, stated that the Pacific region was seen as the focus of “heightened geo-strategic interest.”

Nevertheless, he said, the region would not shift attention away from the key issue of climate change, especially when dealing with the PIF’s 21 dialogue partners, which include the United States and China.

China has its footprint in the region through its Belt and Road Initiative, an infrastructure program largely funded by China’s Exim Bank in the form of loans to countries in the Pacific and developing countries in other regions of the world. However, recent studies indicate that the populations of a few countries in the Pacific already disapprove of the BRI because of debt risks.

China’s official development finances in the Pacific region have decreased significantly since 2016, according to the 2023 Pacific Aid Map launched by the Lowy Institute, but China maintains support in a few places, such as Solomon Islands and Kiribati. In 2019, Solomon Islands and Kiribati shifted their diplomatic ties from Taipei to Beijing.

China in 2022 solidified its diplomatic relationship Solomon Islands to a more comprehensive strategic standard by signing a security pact to improve Solomon Islands’ policing. This controversial pact triggered increased PIF engagement from the United States and its traditional allies, such as Australia.

Of course, Washington has long been regarded as a “Pacific power.” Now, for the first time since the end of World War II, the United States, under President Joe Biden’s administration, has hosted PIF leaders at the White House.

At those sessions in 2022 and 2023, Washington pledged more than half a billion dollars to address climate change, among other key issues in the region. (Solomon Islands Prime Minister Manaseh Sogavare was absent during the second meeting.)

At the PIF meeting, held on November 6-10, 2023, US Ambassador to the UN Linda Thomas-Greenfied said she wanted to “listen to better understand how the US can continue to support the region’s priorities.”

US support has immensely increased in the region this year, both economically and strategically. For instance, in May 2023, the United States signed a defense cooperation agreement with Papua New Guinea, the largest country in the region. The agreement allows unlimited access by US military personnel to six of PNG’s major ports, including sea, air, and land.

And in collaboration with Australia, Washington has already announced funding for a new undersea Internet cable initiative for Pacific Island countries, largely implemented by US tech giant Google.

Such economic and strategic support to the region is to ensure “a free and open rules-based order” in the Pacific and is the aim of the Biden administration’s 2022 Indo-Pacific Strategy, as the region stretching from the Indian to the Pacific Ocean is considered bedrock to global peace.

However, even with closer defense cooperation between the United States and PNG, island countries’ view of the great-power competition should still be thought of as neutral.

Furthermore, while both the United States and China are making moves to meet the Pacific region’s key development priorities, as envisaged in the 2050 Strategy for the Blue Pacific Continent, those two countries have also aroused the concern of region’s political leaders regarding great-power competition.

Speaking at the Pacific Islands Forum leaders’ summit in Fiji in 2022, Papua New Guinea Prime Minister James Marape stated that the foreign policy of “friends to all and enemies to none remains despite the current geopolitics in the region, where the bigger forces are at play. We have no intention of making enemies and our Pacific ways must pacify all forces and interests in our region.”

To ensure order and stability within the region and simultaneously address key emerging issues like maritime security, nuclear testing, cybersecurity and climate change will require commitment and regional cooperation from all PIF leaders. PIF states are among the world’s most aid-dependent countries and their 21 dialogue partners, including the United States and China, are seen as PIF development partners, multilaterally and bilaterally.

At the PIF summit this year, Fiji Prime Minister Sitiveni Rabuka proposed declaring the Pacific region a “zone of peace” because of current geopolitics. Rabuka’s proposal was accepted by Forum Leaders and a declaration will be made in Tonga in 2024 at the PIF’s 53rd meeting.

It must be similar to the  Biketawa Declaration and the Boe Declaration, the two declarations that fully recognized forum members’ sovereignties and their values such as peace, harmony, security, social inclusion and prosperity underpinning the Framework for Pacific Regionalism.

Being friends to all and enemies to none under the Framework for Pacific Regionalism and the 2050 Strategy for the Blue Pacific Continent signifies peace, stability, and order.

As PIF states are small island developing countries, they will still need external assistance from development partners – including the United States and China – to achieve their development goals, even if great-power competition subsides.

In the meantime, while big powers have their own interests in the region, regional interest should be the key for PIF countries when engaging with their development partners, including the United States and China.

To maintain that foreign policy at the regional level necessitates solidarity from all forum members both at the present and in the future to ensure they remain neutral and to avoid any conflict within the region.

Moses Sakai ([email protected]) is a research fellow at the Papua New Guinea National Research Institute and is designated as a young leader of the Pacific Forum. He previously taught at the University of Papua New Guinea from 2018-2023.

This article was originally published by Pacific Forum and is republished with permission.

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Handout scheme cannot be rolled out by May as targeted

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The digital wallet scheme faces delay in its May rollout, with no new timeline given

PUBLISHED : 17 Jan 2024 at 13:08

Handout scheme cannot be rolled out by May as targeted
People purchase grocery items at a fresh market in Rangsit area, Bangkok. (Photo: Nutthawat Wicheanbut)

The Pheu Thai-led government’s controversial 500-billion-baht (US$14.3-billion) “digital wallet” handout scheme, aimed at reviving a sluggish economy, cannot be rolled out in May as originally targeted, Deputy Finance Minister Julapun Amornvivat said on Wednesday.

The delay will be a setback for Prime Minister and Finance Minister Srettha Thavisin’s coalition government, which has been touting the signature handout policy as essential in boosting an economy that is lagging regional peers.

The scheme would give 10,000 baht (around $285) to 50 million Thais to spend in their local communities.

“Today, looking at the timeframe, it’s unlikely for May,” Mr Julapun said, without specifying a new timeline.

Deputy Finance Minister and Pheu Thai Party MP Julapun Amornvivat. (Photo: Chanat Katanyu)

The programme, originally slated for February and delayed to May, would have allowed Thais to receive funds via a mobile application.

The digital wallet was a key election campaign policy of the ruling Pheu Thai Party. It is core among a raft of stimulus measures that Mr Srettha’s government has promised for Southeast Asia’s second-biggest economy, including debt suspension for farmers and a minimum wage hike.

The money from the digital wallet scheme can only be used for food and consumer goods. It cannot be used to buy online goods, cigarettes or liquor, cash vouchers and valuables like diamonds, gems or gold. 

It also cannot be used to pay off debts or cover water or electricity bills, fuel, natural gas or tuition fees. The money must be spent in the district where the recipient’s home is registered.

The National Anti-Corruption Commission (NACC) has recently warned the government of possible illegalities in its planned digital wallet handout.

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Is digital handout legal?

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NACC warns scheme may break the law

Is digital handout legal?
Niwatchai: Govt must be responsible

A panel studying the government’s planned 10,000-baht digital wallet handout has warned that the government could break the law if it proceeds with the scheme, according to a National Anti-Corruption Commission (NACC) source.

The NACC formed the panel in October last year to study Pheu Thai’s digital wallet policy amid fears of loopholes allowing corruption.

The panel is chaired by commissioner Supa Piyajitti, who played a key role in probes into the rice-pledging scheme of the former administration of then-prime minister Yingluck Shinawatra.

In its recommendations to the government, the source said the panel stated that the scheme could breach laws that govern elections and financial discipline. Such a warning follows the government’s decision to defer Tuesday’s scheduled meeting on the planned handout at Government House and wait for the NACC’s opinion on the scheme.

The source said what the Pheu Thai Party promised voters during election campaigning last year differed from the details of the scheme announced in parliament.

During the election campaign, Pheu Thai promised to give 10,000 baht to every citizen aged 16 years or older to attract votes, making 56 million people eligible for the money. However, according to the source, the ruling party later unveiled additional conditions that would benefit only 50 million people.

The party had said in campaigning that the scheme would be financed from the national budget. It now plans to raise 500 billion baht in loans to fund the project.

“It is also unclear which agency will be responsible for implementing the scheme,” the source said.

The source went on to say that the changes could breach the election law. The law provides for fines and imprisonment of MPs found guilty of offences.

“Such a policy could also violate Section 73(1), which prohibits election candidates from promising to offer voters assets or other benefits in exchange for their votes,” according to the source.

The source also said that if the government issues a bill to seek a loan of 500 billion baht to finance the digital wallet scheme, this could violate the State Fiscal and Financial Discipline Act because the country showed no sign of being in a crisis that needed such a scheme to urgently shore up the economy.

Section 53 of the law stipulates that the government is allowed to take loans for reasons other than those provided in the law on public debt administration, but only where there is a need for urgent action to address critical problems and where annual appropriations cannot be fixed in due time.

The source said the panel advised the government to review the scheme fully to avoid possible legal violations.

NACC secretary-general Niwatchai Kasemmongkol said Tuesday that the panel had sent the study to the main NACC.

However, the NACC has not forwarded the study to the government yet as it needs to consider its details to see if any additional information is still required, Mr Niwatchai said.

But if the study is sent to the government, it is up to the government to decide whether to proceed with the digital wallet scheme. The NACC only offers recommendations and warnings.

“If the project is implemented and does not cause any damage to the economy or there is no corruption, that will be fine. But if damage occurs, the government must take responsibility,” Mr Niwatchai said.

The Council of State’s secretary-general, Pakorn Nilprapunt, said the government should listen to recommendations from relevant agencies, including the NACC and the Bank of Thailand, before deciding whether to proceed with the scheme.

Deputy Prime Minister and Commerce Minister Phumtham Wechayachai said the digital wallet policy committee postponed its meeting Tuesday as it had to wait for the NACC’s recommendations first.

“The NACC is expected to send the letter to the committee shortly. We have to wait and see. The NACC may have different opinions,” Mr Phumtham said.

He added that the committee may have to wait for Prime Minister Srettha Thavisin to return from Switzerland, where he is attending the World Economic Forum, before the cabinet can meet to discuss the matter thoroughly.

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Sub purchase ‘still an option’

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PUBLISHED : 16 Jan 2024 at 04:49

Sub purchase 'still an option'
Royal Thai Navy top brass hold a press briefing at the force’s headquarters in Bangkok in 2020 to defend their submarine purchase project. (Photo: Apichit Jinakul)

Defence Minister Sutin Klungsang on Monday insisted buying a Chinese-built submarine is still an option, but a final decision must be made by the cabinet.

Mr Sutin was speaking to the media after the Office of Attorney-General (OAG) backed the use of a Chinese engine on the submarine and extending the contract, saying he plans to meet navy chief Adm Adung Phan-iam soon for talks before seeking a final decision from the cabinet.

Mr Sutin said the navy chief was away on a foreign trip and would return to Thailand today.

“I will meet him after he returns, so this issue can end as soon as possible,” said Mr Sutin.

He added that he will approach the cabinet for a definitive decision soon.

The submarine project hit a significant stumbling block when Germany refused to supply a diesel engine for the vessel.

German law prohibits the use of a German-made engine in weaponry made by foreign nations, thus stopping one from being used on Chinese submarines. In response to the problem, China proposed a locally manufactured engine as an alternative, a proposition that was rejected by the Royal Thai Navy (RTN).

In a move to end the impasse, the RTN proposed acquiring a frigate from China, but the plan was put on hold due to the additional 1 billion baht cost associated with the vessel.

Mr Sutin said the cabinet’s decision would be based on three critical factors: the navy’s operational needs, protection of national interests and avoiding any adverse impact on Sino-Thai diplomatic relations. Since the OAG’s deliberation, the navy has asked for the opinions of the Council of State, the National Economic and Social Development Board, Budget Bureau, Volunteer Defence Corps, State Audit Office, and the Foreign Affairs and Finance ministries.

The RTN has also considered extending the contract duration by another 1,217 days to take possession of the sub after the original ended on Dec 30 last year.

The navy chief or representative would sign the contract, which extends the debt obligation from 2017 to 2027.

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Why the world is turning away from the buck

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The invasion of Ukraine in February 2022 prompted the US Treasury Department to impose unprecedented sanctions on Russia, to hold it “accountable for its premeditated and unprovoked invasion.”

The aim was to prevent Russia from “prop[ing] up its rapidly depreciating currency by restricting global supplies of the ruble and access to reserves that Russia may try to exchange to support the ruble.” In other words, Russia wouldn’t be able to sell enough US dollars in the foreign exchange market to buy up Russian currency and bolster its value.

Indeed, US Secretary of the Treasury Janet Yellen called this an “unprecedented action” that would “significantly limit Russia’s ability to use assets to finance its destabilizing activities.”

US Treasury Secretary Janet Yellen. Alexandros Michailidis/Shutterstock

Freezing a sovereign country’s dollar holdings (Russia’s in this case) is a seismic event. It risks accelerating a move away from the use of the US dollar for trade or investment by countries that have different geopolitical interests than the US, such as China or the Gulf states.

In fact, several governments outside the West are exploring ways to reduce their exposure to the dollar. Russia is currently settling a quarter of its international trade using Chinese renminbi, and its bilateral trade with China is almost entirely settled in the two countries’ respective currencies.

In March 2023, China settled a payment for UAE gas in its own currency rather than US dollars for the first time. Then in November, China and Saudi Arabia signed a currency swap agreement, citing a desire to expand the use of their currencies.

There are more troubling signs for the US dollar. Even though central banks’ foreign exchange reserves have been growing steadily year-on-year for more than 20 years, the percentage held in US dollars reached its lowest point in the fourth quarter of 2022, as this chart shows:

US$ held by central banks

Line chart showing countries' USD holdings falling.
Currency composition of central banks’ foreign exchange reserves. Author provided using International Monetary Fund data., CC BY-NC-ND

This is not a blip. It is the culmination of a long negative trend that has seen the US currency’s share in foreign reserves held by central banks fall from over 70% in the early 2000s to under 60% today.

While the drop is not dramatic, it’s significant and indicative of a negative trend for the dollar that reflects several developments – economic but also geopolitical.

Leaving the US behind?

The US economy’s share in the world’s output is falling as emerging economies, especially China, continue to outgrow the US and its Western partners.

China, the US’s biggest economic competitor, is now the main trading partner to more than 120 countries, with exports amounting to more than US$3.6 trillion. This risks leaving the US behind in the race for global trade dominance.

Over the last 20 years, China’s share of the global economy has more than doubled from 8.9% to 18.5% while the US’s share declined from 20.1% to 15.5% in purchasing power parity terms (which compare prices of specific goods to determine currency purchasing power).

Last year, the BRICS economies (fast-growth developing countries Brazil, Russia, India, China and South Africa) overtook those of the G7 (developed economies US, Canada, UK, Germany, France, Italy, Japan and Germany) based on their share of world GDP in purchasing power parity terms.

GDP: G7 v Brics

Line chart showing GDP shares of G7 v Bric economies converging before Brics surpasses G7.
Share of GDP, current USD, PPP. Author provided using World Development Indicator data (series: NY.GDP.MKTP.PP.CD), World Bank, CC BY-NC-ND

As more countries join the BRICS, it will give the group even more economic clout.

Meanwhile, the US economy’s global GDP share is falling and its debt is hitting new heights as it issues more Treasury bills, notes and bonds to fund current government spending. The US national debt stands in excess of $33 trillion, or 123% of the country’s annual output. Inflationary shocks followed by interest rate increases have made servicing this debt very expensive for US taxpayers, repeatedly raising the risk of a debt default in recent years.

There is no doubt the US dollar still dominates world markets right now, accounting for most of the transactions in international trade. Its share in the foreign exchange market is colossal at 88% of transactions, and it remains the most widely held “international reserve” by central banks who want to ensure they can cover their countries’ imports and support the value of their own currencies.

But the centrality of the US currency since the Second World War has not always been welcome – certainly not by US foes and sometimes not even by its friends. Valéry Giscard d’Estaing, the 20th president of France and a finance minister in the 1960s, called the dollar’s reserve status an “exorbitant privilege” for the US.

He probably meant that demand for US assets from abroad was so high that it could borrow easily at favorable terms to finance its current account deficit –– a privilege not available to other nations.

Current global geopolitical and economic shifts could now see this exorbitant privilege challenged. The refusal of Russia’s BRICS partners and many UN nations to undertake Western-style sanctions against Russia is evidence of the limitations the West faces in exerting geopolitical influence.

And from an economic perspective, China as the world’s top trader and Russia as one of the world’s richest countries by energy reserves have amassed large gold holdings that could replace some US dollar uses. Both are looking to work with other countries, including those in the Gulf region, to reduce reliance on the US dollar.

Challenger currencies

Convincing non-western investors to use a “challenger currency” – whether the Chinese renminbi or a BRICS currency – could become easier following the US Treasury’s freezing of Russian assets. And these switches could accelerate if the US decides to seize the frozen Russian assets.

It’s increasingly clear that, as non-Western countries assert themselves in the world’s economic arena, geopolitical divisions with the West will cause additional friction. As a result, the US dollar’s role is almost certain to become more limited than it has been at any time since the end of the Second World War.

Alexandros Mandilaras is Associate professor, University of Surrey

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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