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SINGAPORE (Sept 3): When I visited Cambodia for the first time in the early 2000s, I was intrigued by the way people there used two different currencies seamlessly, often in a single transaction. For instance, I would pay for goods at a market in US dollars, but receive any change of less than US$1 in Cambodian riel. And, while I made many small purchases in riel, I found that US dollars were just as acceptable everywhere.
This experience came to mind as I was trying to decide whether to keep accumulating US dollars for investment purposes. While the return on holding the currency has been rising as the US Federal Reserve has been normalising its monetary policy, I am conscious of the risk of being overly exposed to a foreign currency — even if it is the US dollar. Almost all my ongoing expenses are denominated in Singapore dollars. Among the largest of these expenses is income tax, which governments across the world collect in their own national currencies, an important factor that contributes to the use of their currencies within their borders.
Moreover, the Singapore dollar has actually been very resilient over the last couple of years. Tightening monetary policy in the US has drained capital from around the globe, and has been at least partly responsible for steep depreciations in currencies of some emerging markets, such as Turkey and Argentina. Yet, the Singapore dollar is around the same level as it was two years ago, though it has fluctuated a fair bit. In fact, the Singapore dollar has been strengthening recently against currencies of its key trading partners. It is reportedly now close to the top end of its trading band, in anticipation of the Mone-tary Authority of Singapore’s possible tightening of its monetary policy later this year. In April, MAS shifted from a neutral stance on the Singapore dollar to a path of slightly faster appreciation.
Despite the risk of losing out in terms of spending power in Singapore, I am continuing to look for opportunities to accumulate US dollars for now. In my view, the US dollar is likely to continue leading other major economies in tightening its monetary policy. The Fed is widely expected to raise its benchmark interest rate by 25 basis points in September. It has already hiked rates by 25bps twice this year, and indicated that there are likely to be two more hikes before year-end. As a result, the US dollar is likely to be among the strongest of Singapore’s trading partner currencies for the next year or two.
More importantly, there are far more investment opportunities in the US that are likely to suit me than in Singapore, especially after the last round of property cooling measures were announced on July 5. Deep and broad capital markets are what makes big, developed countries resilient in the face of turmoil. It gives them the flexibility to loosen fiscal and monetary policy, even if they happen to be running budget and current account deficits. And, the US has the added advantage of having a currency that is used by the rest of the world to trade.
By contrast, emerging-market countries are often forced to tighten fiscal and monetary policy just when their economies are weakening, in order to keep investors from fleeing and prevent their currencies from depreciating too sharply. And, when it all proves to be too much, some turn to the International Monetary Fund for a bailout, which comes with the condition of an onerous austerity programme. Countries such as Indonesia and Malaysia, which were battered by the Asian financial crisis 20 years ago, are all too familiar with this risk. And, even though these countries are in far better shape now, their currencies haven’t been entirely spared in the recent emerging-markets selloff. Tightening global liquidity is likely to keep these Asian markets, and even Singapore, on the back foot in the months ahead.
Would global financial markets be more stable if there were fewer currencies? Would heavily trade-dependent countries be better off if they just adopted the US dollar or some other major currency as their own? Would that keep them safe from crises?
Dollars and discipline
Between 1944 and 1971, many currencies maintained adjustable pegs to the US dollar, which in turn was convertible to gold at US$35 an ounce. As we explain in our cover story this week (see Pages 12 to 14), this so-called Bretton Woods system was doomed to fail from the beginning. Since then, however, many countries have sought stability for their currencies by either fixing them against the US dollar or managing their exchange rates against the US dollar.
The more rigid an exchange rate system, the less scope there is to pursue independent monetary policy to support the local economy. And, a sizeable pool of reserves would be required to withstand the occasional run on the currency. In particular, Hong Kong maintains its exchange rate versus the US dollar through a currency board mechanism, which requires its monetary base to be fully backed by foreign reserves, and any change in the monetary base to be fully matched by a corresponding change in foreign assets. The stability of the Hong Kong dollar’s exchange rate to the US dollar is maintained through an automatic interest rate adjustment mechanism.
Some countries — including El Salvador and Ecuador — have sought to regain lost stability by adopting the US dollar as their own currency. Earlier this year, the idea of dollarisation was mooted by Venezuelan presidential candidate Henri Falcon to put an end to hyperinflation that has destroyed the country’s economy and sparked an exodus of its people. With much of Venezuela’s export revenue dependent on oil, priced in US dollars, it seems logical to just replace the bolivar with the US dollar, which the Venezuelan government cannot control. Of course, this would have had to be followed with sound economic policies and fiscal discipline to revive the Venezuelan economy.
As it happened, the incumbent president Nicolas Maduro won the re-election in May and is now trying to stem the crisis in a different way. This past week, Venezuela began issuing new currency notes stripped of five zeros called sovereign bolivars, which are fixed to a cryptocurrency called the petro. The petro, which was unveiled earlier this year, is supposedly linked to the price of a barrel of Vene-zuelan oil. The plan hasn’t instilled much confidence in the market.
Greek euro tragedy
Adopting the use of a major international currency doesn’t always end happily, though. On Aug 20, Greece completed its third bailout programme, in a gripping saga that began eight years ago and nearly precipitated its “Grexit” from the eurozone.
By some accounts, Greece landed in trouble partly because it had access to relatively cheap loans from enthusiastic German banks in the mid-2000s. But the tide of funds receded in the wake of the global financial crisis, and Greece was left floundering with few options. It didn’t have an independent currency it could devalue to boost exports, and it could not cut interest rates or pursue its own quantitative easing programme. In 2010, eurozone finance ministers agreed to a €110 billion loan, which came with austerity measures. Yanis Varoufakis, former finance minister of Greece, described the move in a column this past week: “Insolvent Athens was given, under the smokescreen of ‘solidarity with the Greeks’, the largest loan in human history, to be passed on immediately to the German and French banks.”
Varoufakis went on to grumble that the media emphasised that Greece had emerged from its third bailout, instead of the fact that it still has a crushing debt load that will require decades of tough austerity. “After having bailed out French and German banks at the expense of Europe’s poorest citizens, and after having turned Greece into a debtor’s prison, last week Greece’s creditors decided to declare victory,” he said in the column.
At the other end of the spectrum, some communities have created their own currencies to spur spending in their local shops. For instance, in the UK, there are local currencies such as the Bristol pound and the Brixton pound. In Switzerland, there is the léman, a currency launched in Geneva in 2015 and extended to Lausanne last year. The aim of the léman is to spur local spending in the Lake Geneva area. In fact, there are said to be some 5,000 such local currencies around the world.
Many of these currencies are designed to exist alongside national currencies, and be easily convertible. For instance, one Bristol pound is conveniently equivalent to one British pound, and one léman is conveniently equivalent to one euro. But these currencies keep spending power within their communities, in a way that national currencies might not.
At the national level, money is created as banks extend credit, giving financial institutions significant influence in where the money rolls. And, it often rolls out of small communities, especially during recessions. The more local businesses and local tax authorities accept payment in a local currency, the more likely the community’s spending power will remain with the community. In fact, local currencies are said to circulate more quickly because there is no return on holding them.
Remembering my first trip to Cambodia, I’m convinced that local currencies do indeed promote local spending. After all, I made an effort to spend all my Cambodian riel before leaving, while any leftover US dollars stayed in my pocket as I got on a plane back to Singapore.
This story appears in The Edge Singapore (Issue 846, week of Sept 3) which is on sale now. Subscribe here