recent trends in currency cooperation

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Nov 26, 2014 - BRICS has graduated from a concept in investment diversification in early ..... 2002, qualified foreign institutional investors” (generally offshore.
BRICS

RECENT TRENDS IN CURRENCY COOPERATION DR. BANDI RAM PRASAD CEO, GROWTH MARKETS ADVISORY SERVICES MUMBAI, INDIA

BANDI RAM PRASAD 25/26-NOV.2014, CAPE TOWN. SOUTH AFRICA

CURRENCY COOPERATION IN BRICKS KEY ASPECTS CONTEXT AND BACKGROUND MARKETS AND INSTITUTIONS NEW INITIATIVES CURRENCY COOPERATION

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CURRENCY COOPERATION : CONTEXT BRICS has graduated from a concept in investment diversification in early 2000s to a major block of nations with sizeable contributions to the global economy, growth and financial markets depth and diversity. Disparate in political systems and governance structures, but have similarity in approach to exploring growth opportunities

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CURRENCY COOPERATION : CONTEXT Currency Cooperation endeavours are in the realm of initiatives to reduce dependence on current international financial architecture and thus could be viewed as work in progress.

Much of the progress made is in the realm of bilateral trade settlement as it is still a long way to go to display the features of an international currency

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CURRENCY COOPERATION : CONTEXT What makes an International Currency? A Larger share of the official reserves of the central banks

A currency used in foreign countries A large share of international trade is denominated

Dominant currency in international financial markets

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

MARKETS AND INSTITUTIONS Strong economic growth Stronger financial markets Growing influence in global finance Faster growth of intra BRICS trade Intensifying outward foreign flows Development engagement with developing world

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

BRICS : STRONGER ECONOMIES

Source : Jim O’Neill and Alessio Terzi, 2014 BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

RAPID GROWTH IN TRADE

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

RAPID GROWTH IN TRADE

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

BRICS : A LARGER SHARE IN GLOBAL TRADE

Source : Jim O’Neill and Alessio Terzi, 2014 BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

BRICS : FINANCIAL MARKETS GROWTH

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

BRICS : FINANCIAL MARKETS GROWTH

Source : Jim O’Neill and Alessio Terzi, 2014 BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

BRICS : GLOBAL INVESTMENT OPPORTUNITY

Source : Jim O’Neill and Alessio Terzi, 2014 BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

GROWTH IN FINANCIAL MARKETS DEPTH BRICS have Market Capitalisation of us$ 9 trillion China, India and Brazil have market caps of more than 1 trillion dollars each Value of share trading at us$ 8 trillion China has $4.7 trillion of market cap and $ 6.6 trillion of value traded in stock markets BRICS account for 13% of the global market cap and 19% of the value traded in stock markets About 9000 companies listed in BRICS countries Multi asset class market segments are functioning in BRICS Stocks, commodities, currencies and bonds traded BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

KEY DRIVERS : PRODUCTIVE INVESTMENT BRICS account for 216 of the top 1000 world banks 21 of the top 100 banks are from the BRICS ICBC of China tops the world’s 1000 banks (The Banker, london) Major recipients of the foreign direct investment Major recipients of the portfolio investment Intense activity in cross border mergers and acquisitions BRICS dominate emerging markets MNCs BRICS figure prominently in emerging market M&As

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

FINANCIAL MARKETS DEPTH Well developed derivatives markets in BRICS Among the top 30 derivatives exchanges BRICS account for 12 exchanges Largest IPOs coming from the BRICS countries Growing retail domestic investor base Rapid rise in the foreign institutional investors Non deliverable forward markets very active for BRICS currencies is sizeable and attracts international investor interest BRICS currencies are described as having potential for internationalisation

Source : Jim O’Neill and Alessio Terzi, 2014 BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

KEY DISTINCTIONS China, Brazil and India among top market cap China among the top in value of share trading India among top 5 in equity derivatives, top in equity options Russia and South Africa top bond trading Brazil among the top in interest rate derivatives India among the top in currency derivatives traded South Africa among the top 5 in Exotic ETFs traded BRICS accounted for nearly 50% of the new IPOs in the recent period. China alone accounted for 40% of the new capital raised in recent period BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CURRENCY COOPERATION : TRIGGERS In 2008, in the context of the global economic and financial crisis, many countries in particular those of emerging markets, have faced severe problems of scarcity of USD currency.

USD is most prominent currency and any setbacks in its availability will severely hinder the trade and payment prospects of other countries that could lead to high costs of transaction and problems of liquidity. Emerging market currencies are volatile against USD and the Dollar itself is volatile against major global currencies Source : Jim O’Neill and Alessio Terzi, 2014 BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

TRADE CONCERNS A large part of the world trade, anywhere up to 70 to 80 percent depends on trade credit/guarantees with very low default rate (0.2%).

Most trade finance is short term and pricing depends on interbank rates. Liquidity crisis can affect currency availability required for international trade. Incentives to match disproportionate share in global trade and payments. For instance China accounts for 11 percent of global trade where as its share in global payments is only 0.2% BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

VOLATILITY Concerns and constraints that surfaced for the emerging markets in the aftermath of the financial crisis triggered the need for exploring alternatives in view of the growing economic strength and positive trade position of some countries that now form the BRICS group. To overcome the challenge of possible shortage of international currencies, many countries looked at the swap arrangements between them and the pooling of reserves to provide short term liquidity assistance (bilateral swap and repurchase agreements – using USD, yen and other currencies – repayment possible using local currency). BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

SUDDEN CHANGES TO GLOBAL DEVELOPMENTS

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

SCOPE FOR CURRENCY COOPERATION Major factors thus giving scope for currency cooperation

Increasing volatility Growing intra regional/BRICS trade Faster growth of trade with other developing countries Growing pace of loans/assistance to other countries Mismatch of share in global trade and payments Sharp growth in financial markets operations Search for alternatives Growing acceptance of local currencies BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

THE CONSENSUS

At BRICS summit in Delhi, India, in March 2012, the nations of the grouping declared that the “immediate priority at hand [is] an improved international monetary and financial architecture” .

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

OBJECTIVES OF CURRENCY COOPERATION • Reformation of the world currency system in order to create a representative, stable and predictable system of world reserve currencies ⦁ Reduction of the risks of destabilization of currency and equity markets linked to massive cross-border flows of capital; ⦁ Increasing the use of national currencies in the trade between BRICS countries; ⦁ Increasing the level of cooperation between BRICS countries in order to promote their interest in the domain of world trade; ⦁ Strengthening the BRICS Exchange Alliance ⦁ Creating independent rating agencies. Source : Jim O’Neill and Alessio Terzi, 2014 BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

SCOPE OF THE CURRENCY COOPERATION

“Key EM currencies with potential for internationalization are the Brazilian Real, Chinese Renminbi, Indian Rupee, Russian Ruble, and South African Rand. All these economies have significant regional importance and economic weight. Despite severe data limitations, there is evidence that the use of these EM currencies in international transactions has increased markedly in the past few years. For instance, use in foreign exchange derivatives increased by 50 percent for the real, doubled for the rupee and the ruble, and increased about twelve-fold for the renminbi” : International Monetary Fund,2011 BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

INITIATIVES SUPPORTING COOPERATION The proposed New Development Bank that may promote further use of local currencies

The US$100bn Contingency Reserve Fund that will give immediate access to members for emergency foreign exchange requirements to counter dependence on existing multilateral arrangements The scope of Shanghai Cooperation Organization (estd. June 2001) Shanghai Five agenda that engages on a number of issues in development cooperation including economic and financial Establishment of a BRICS Exchange Alliance to counter the global derivatives markets and an energy alliance to challenge the speculative activities of the commodities exchanges.

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

INITIATIVES SUPPORTING COOPERATION Proposal to establish a fuel reserve bank and a energy policy institute (proposed by Russia) Cross listing of benchmark equity indices Local currency for settling bilateral trade China’s proposal to play an important role in creation of global infrastructure, Silk Road Economic Belt, 21st Century Maritime Silk Road, Asia Infrastructure Investment Bank China and Russia contemplating to set up an alternative to SWIFT international payment systems Developments in local payments systems to counter the influence of international card issuing companies BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CHINA AND RMB More than 1,050 financial institutions in over 90 countries are already doing business in the Chinese currency: the Renminbi (RMB). RMB now ranks the ninth most traded currency in the world, and the most traded in Asia

China has currency swap agreements with 21 countries worth. The Yuan currently can be freely converted into US dollars, Euros or other currencies in Hong Kong, London or Singapore. Central Banks which decided to convert parts of their reserves into Yuan, include; Indonesia, the United Kingdom, Brazil, Singapore, Ukraine, Australia, Turkey, the United Arab Emirates, Hong Kong, South Korea and New Zealand, among others BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CHINA AND RMB A recent report of the Bank for International Settlements brought out important aspects of the internationalization of Renmimbi which among others include; (a) Peoples Bank of China setting up bilateral local currency swap facilities with 20 overseas central banks and monetary authorities to the tune of RMB 1.6 trillion (b) growth of Renminbi deposits and CDs in Hong Kong growing from about RMB 322 billion at the end 2010 to nearly One trillion RMB by end 2013, off shore Renminbi bonds outstanding reaching a level of nearly RMB 500 billion from RMB 100 billion in 2010 etc.

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CHINA AND RMB The roots of the use of RMB to settle trade goes back to the 1980s when China used to use its domestic currency to settle trade between border countries such as such as Vietnam, Myanmar, Mongolia and Russia. The early part of the last decade saw a gradual progression towards making RMB international in character by promoting its use in bilateral trade settlement.

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CHINA AND RMB 2002, qualified foreign institutional investors” (generally offshore subsidiaries of mainland asset managers with a base in Hong Kong) were permitted to purchase and sell a limited range of Renminbidenominated exchange-traded securities in China.

2004, residents of Hong Kong and Macau were permitted to conduct personal business in Renminbi and were permitted to open renminbi-denominated deposit accounts). 2007 saw authorization for corporations to issue renminbidenominated “Dim Sum” bonds in Hong Kong, principally for funding their investments in China. There was also an increase in the limit on foreign exchange purchases by Chinese residents for purposes of remittance abroadBANDI for personal reasons. RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CHINA AND RMB 2008

Renminbi funds were made available for official transactions. Later that year saw negotiation of the first renminbi-local currency swap line between the People’s Bank of China and a foreign country, namely South Korea. This was followed by the negotiation of renminbi-local-currency swap arrangements with additional countries (five in 2009, two in 2010, seven in 2011, six in 2012, and three in 2013. These central bank swap agreements differed from earlier arrangements under the Chiang Mai Initiative of 2000 of the ASEAN+3 countries (ASEAN plus China, Japan and South Korea), in which currency swaps were denominated in U.S. dollars. BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CHINA AND RMB 2009 select Chinese companies were authorized to settle traderelated transactions with Hong Kong, Macau and ASEAN in renminbi. Also came a pilot scheme for cross-border direct foreign investment in the currency, with the elimination of review and approval requirements for outward remittances of funds for FDI abroad by Chinese corporations and financial institutions

2010, companies in select Chinese provinces were permitted to settle import and export transactions with the rest of the world in renminbi. Qualified foreign institutional investors with renminbi funds were permitted to invest them in the Chinese interbank bond market (previously, qualified foreign institutional investors had been limited to purchasing the small number of exchangeBANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CHINA AND RMB In addition, where renminbi swaps initially involved only other East Asian economies (Korea, Hong Kong Malaysia), over time they evolved to include countries in other parts of the world (Argentina, Iceland, New Zealand, Pakistan, the United Arab Emirates, Turkey, Brazil, Australia, and most recently the United Kingdom and the Euro Area). The role of these agreements is to permit foreign central banks to provide renminbi liquidity to local banks and firms in need, thereby encouraging those foreign authorities to liberalize restrictions on the use of renminbi by such companies. Source : CIFR, Australia

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CHINA AND RMB 2011

authorization to settle commercial transactions in renminbi was extended to the entire Chinese economy.

2012,

the ceiling or quota for investment by qualified foreign institutional investors (QFII) in the Chinese securities market was increased from US$30 billion to US$80 billion. Quotas were extended from investors in Hong Kong and Macau to investors in London and then Singapore in 2013. The ceiling for QFII was then raised from US$80 billion to US$150 billion in July 2013. In addition, RQFII eligibility was expanded to London and Singapore in July 2013 Source : CIFR, Australia

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CHINA AND RMB Chinese authorities announced the intention of allowing essentially full capital account convertibility in the free trade zones of Qianhai and Shanghai.

2013 At the Third Party Plenum in December 2013, the authorities announced the intention of taking further steps in the direction of capital account liberalization. These included launching an internationally compatible international payments system, allowing for additional individual cross border investments. Source : CIFR, Australia

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CHINA AND RMB The renminbi is now used in more than 15 per cent of China’s trade settlements from essentially zero in 2009. 80 per cent of China’s renminbi settlements are of trade between China and Hong Kong. The renminbi accounts for 4 per cent of global issuance of letters of credit for trade-related purposes,making it the third most important currency of denomination for such credits. But it is still far behind the dollar, which accounts for 84 per cent of the world total (the euro is second with 7 per cent) Source : CIFR, Australia

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CHINA AND RMB There are now more than US$100 billion of renminbi deposits in Hong The renminbi is now used in trade settlements and as a currency of denomination for non-resident bank deposits, letters of credit, bond issuance, and foreign-direct-investment finance. The PBOC has negotiated renminbi swap arrangements with central banks in both the Asia-Pacific region and the rest of the world, encouraging the holding of renminbi reserves

Source : CIFR, Australia

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CHINA AND RMB .

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

LONG TERM GOAL AND ASPIRATION

Source : CIFR, Australia

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

CHINA’S OFFSHORE INVESTMENT

Source : CIFR, Australia

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

NEW INITITIAVE FROM INDIA India in the aftermath of the sharp fall in the currency in the early September 2013, planned to enter into planned to sign swap deals in rupees with 23 countries to promote trade settlement in local currencies A Russian-Indian Group was set up under RBI to explore possibilities of using national currencies in bilateral trade settlement. Central Bank initiatives in management of currency Currency Swap arrangements with Japan.

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

RUSSIA AND THE RUBLE The Concept of Long Term Socioeconomic Development until 2020 envisages “establishing the Russian Ruble as a leading regional reserve currency in the Commonwealth of Independent States”.

Trade with Russia accounts for 44 percent of the trade between the CIS countries. Countries strongly oriented towards trade with Russia include the CIS countries, Mongolia, Finland and Turkey. Russia also trades intensively with the Baltic countries, Bulgaria, Syria and Poland.

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

RUSSIA AND THE RUBLE Settlement of border trade in national currencies between China and Russia which has begun as a pilot project in 2003 now accounts for 99 percent of all transactions settled in Rubles

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

RUSSIA AND THE ROUBLE In April 2009 Garanti, one of the Turkey’s largest banks became the first bank in the country to switch to Ruble settlements with Russia.

In November 2008, Russia and Belarus agreed that the ruble would be adopted in oil and gas trading. Initiatives of trade integration using national currencies/ ruble are under various stages of progress with CIS, GUAM, SCO and EurAsEC..

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

RUSSIA AND THE RUBLE Ruble is used approximately 48 percent of trade within the EurAsEC including 25 percent of the trade between Kazakhstan and Belarus. By early 2011, 59 percent of the transactions with Kazakhstan were denominated in rubles, as were 57 percent with Belarus, 31 percent with Tajikistan and 25 percent with the Kyrgyz Republic. The Eurasian Economic Community (EurAsEC),comprising the Russian Federation, Belarus, Kazakhstan, the Kyrgyz Republic and Tajikistan, seemed the most logical route to promote greater regional use of the ruble. BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

RUSSIA AND THE ROUBLE Russian Federation and Kazakhstan cofounded the Eurasian Development Bank (EDB) in 2006: Armenia, Tajikistan, Belarus and Kyrgyz Republic all joined the EDB between 2009 and 2011.

PRC became Russian Federation’s top trading partner in 2011 with $83.5 billion in mutual trade turnover. Russian federation is the PRC’s eighth largest trading partner. The Russian Federation’s Vneshtorgbank (VTB), a major state-owned bank, announced in October 2011 that it would begin accepting deposits in RMB.

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

RUSSIA AND THE RUBLE As a key currency diversification move in December 2010, VTB also became the first non- Asian emerging market company to issue dim sum bonds. This was followed with first successful issue with another one in October 2012.

Major Russian energy producers Gazprom and Lukoil have expressed interest in pursuing borrowing arrangements in RMB. In late December 2010, the Russian Federation’s MICEX exchange (now the Moscow Exchange after its merger with the Russian Trading System) began RMB-ruble trading following the PRC’s own launch of RMB-ruble exchange trading . BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

RUSSIA AND THE RUBLE In September 2014, that Russia and China have entered into a new trade agreement where both countries will settle future transactions using their own currencies, the Ruble and Yuan. Additionally, the deal will allow Russian banks to set up accounts with Chinese banks and will also allow Russian companies to accept loans from Chinese financial institutions

Russia entered into new trade deals with Iran, North Korea, China, and India.

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

INITIATIVES IN SOUTH AMERICA In South/Latin America, Mercosur—an economic bloc that includes Argentina, Brazil, Paraguay, Uruguay, and Venezuela—is the third largest trade grouping in the world. Associate members include Chile, Colombia, Bolivia, Ecuador, and Peru, while Mexico and New Zealand have observer status. The newly formed Union of South American Nations (USAN) includes every country in South America, including Cuba, and has largely replaced the Organization of American States (OAS), a Cold War relic that excluded Havana.

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

ROAD AHEAD : GROWTH SLOW DOWN REAL GDP GROWTH : BRICS in percent PRE AND POST CRISIS 15

10

5

0 BRAZIL

RUSSIA

INDIA

CHINA

S.AFRICA

-5

-10 AVG 1996-2005

20008

2009

2010

2012

2014

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

DOMESTIC PRIORITIES

Internal concerns including internal security issues Issues of growing income inequities Governance related challenges Political developments International conflicts

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

NEW GROUPINGS

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA

THANK YOU [email protected]

BANDI RAM PRASAD 24/26-NOV.2014, CAPE TOWN, SOUTH AFRICA