New Delhi: There may be growing calls to move away from the US dollar, but a new survey of officials in central banks around the world has shown that such a scenario is unlikely to play out anytime soon. Neither are central banks moving away from the dollar quickly, nor are they adopting any alternate currency with any urgency.
The Official Monetary and Financial Institutions Forum (OMFIF), an international think-tank that’s primarily concerned with central banking, Tuesday released a survey of 75 managers of central bank reserves. Apart from their views on a reserve currency, the respondents also said that their concern has shifted from simple inflation to the prospect of stagflation — a combination of high inflation and stagnating growth.
The survey report, titled Global Public Investor 2023, comes as several countries are calling for trade to be carried out in currencies besides the US dollar.
“A net 6 percent of respondents expect to reduce their dollar holdings over the next 10 years,” the survey report said. “But this shift will be in line with the slow, decades-long trend of de-dollarisation. On average, respondents only anticipate a slight decrease in the dollar’s share of total reserves to 53 percent in the next decade, from just under 60 percent now.”
On the other hand, the survey found that the central bank respondents expected the rise of the Chinese renminbi to be gradual — the currency is expected to reach 6 percent of global reserves over the next 10 years, from just under 3 percent at present.
“In the near term, most reserve managers plan to take a cautious approach to China,” the report said. “The share of respondents looking to increase renminbi holdings over the next two years more than halved to 13 percent, from over 30 percent in 2021 and 2022.”
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Barriers to investing in renminbi & rising interest in Euro
The majority of respondents cited market transparency and geopolitics as the main barriers to investment in the renminbi, the report said. However, it said that there is “significant demand” for the currency in the medium-term. About 40 percent of central banks plan to increase their holdings of renminbi over the next 10 years — higher demand than for any other currency.
This medium-term interest for the Chinese currency is being driven by China’s growing role in the global economy, among other things.
Another development taking place in the way central bank currency managers are handling their portfolios is the rise of the euro as an increasingly attractive option.
“The euro is gaining interest among reserve managers,” the report said. “A net 14 percent of central banks are planning to increase their euro holdings over the next two years, compared to a net zero saying they would do so in 2021 and 2022. No other currency has higher net demand in the near term.”
The report said this could be because of rising interest rates in Europe. However, it added that, despite this surge in interest in the euro, the dollar would remain dominant.
“Overall, central banks overwhelmingly predict the dollar to remain dominant and that the renminbi is unlikely to gain significant traction as a reserve asset anytime soon,” the report said.
The fear of stagflation
The survey respondents said that the prospect of stagflation was now a bigger concern for them than the ongoing inflation.
“It’s not simply inflation but stagflation that’s the key concern this year,” the report said. “Almost 70 percent count a global economic slowdown among their top three concerns — over twice the share from 2022.”
Moreover, 38 percent expect a global economic recession in the next 12 months, the report added.
Another change taking place in the thinking of central bank currency managers is that geopolitical tensions are becoming more of a medium-term issue than a short-term one.
“When OMFIF ran the GPI survey last year, shortly after Russia’s invasion of Ukraine, 85 percent of respondents listed geopolitics among their top three concerns affecting reserve management in the next 12-24 months. That share has dropped to 51 percent this year,” the report said.
However, this doesn’t mean geopolitics isn’t a concern anymore — according to the report, it simply means that the time frame for these concerns has changed.
“But geopolitics is the biggest concern over the medium- to long-term,” the report said. “Geopolitical tensions was considered the number one factor affecting reserve management in the next five to 10 years and 83 percent listed it in their top three.”
(Edited by Uttara Ramaswamy)
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