Will it be a New Nail in the Coffin of the Dollar?

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Samson:  Will it be a new nail in the coffin of the dollar? .. The story of the new system for payment via phones that will be launched by ASEAN countries

18th July, 2022

In a move that threatens the dollar's dominance of international trade, central banks in a number of Southeast Asia have decided to link private payment systems, allowing people to buy goods and services across the region via mobile phones in local currencies, in what may be the beginning of the establishment of an independent financial system. about the dollar in the region.

In a session on the sidelines of the recent G20 finance ministers and central bank governors meeting, Bank Indonesia Central Bank Governor Piri Wargio said that in November, five of the region's largest economies are set to sign an agreement to integrate their mobile payment network, and payments will be made in local currencies. Without converting via dollars, according to a report by the American Bloomberg Agency.

These countries are Indonesia, Malaysia, the Philippines, Singapore and Thailand, which are members of the ASEAN Community, which includes five other countries: Laos, Brunei, Cambodia, Myanmar and Vietnam. dollars, representing about 3.5% of the world's economy.

Payments made through the system will use local currency settlements between countries, which means that payments made in Thailand using an Indonesian app will be exchanged directly between the Indonesian rupiah and the Thai baht, bypassing the need for the US dollar as an intermediary, with their plans to expand this system to neighboring countries and pools. other regional.

China has sought with some countries in the region to find a competitor to the International Monetary Fund

And at the end of last month, China announced the establishment of a system to collect cash reserves in Chinese yuan (renminbi). The plan includes the central banks of China and Hong Kong of Beijing and three of the ASEAN countries are Indonesia, Malaysia, Singapore, in addition to Chile from South America.

The Chinese Monetary Fund could pave the way for the Chinese currency to play a key role in the Asia-Pacific region, and it is believed that in the longer term, this Chinese Monetary Fund could be a competitor or alternative to the International Monetary Fund, which is dominated by the dollar, according to the American Business Insider website. 

Each country will contribute 15 billion yuan, or about $2.2 billion, to this fund, "and when liquidity is needed, the participating central banks will not only be able to withdraw their contributions, but will also be able to obtain additional financing through a secured liquidity window" to meet market volatility, said the Chinese central bank.

China's monetary fund could attract more members to join in the future, said Ding Shuang, chief China economist at Standard Chartered Bank.

The policies of the Federal Reserve push the countries of the region to search for a financial system independent of the dollar

These moves come amid growing concern about the dominance of the US dollar, with global investors searching for safe havens, while the US begins to try to tame high inflation by raising interest rates.

In addition to political factors, and the concern of many countries of being subjected to a blockade similar to the Western blockade against Russia and Iran, China and many countries of the world are concerned about the situation of the dollar, which in recent weeks has reached its highest level in 20 years, which has led to efforts to find a financial system independent of the dollar.

The sharp appreciation of the dollar as a result of the US Federal Reserve's aggressive and unprecedented rate hike for nearly 30 years poses challenges to currencies and central banks around the world.

The whole world, even America's allies, feel that Washington is exploiting the dollar's status as a major reserve and trading currency, in a way that only serves its economic goals, as the US Federal Reserve accelerated the tightening of monetary regulations, and launched the process of shrinking the balance sheet in June, which led to fears of launching a recession wave. Inflationary in the whole world, and caused the decline of most of the world's currencies against the dollar.

Asian economies, already weakened by the COVID-19 pandemic, are taking another blow recently from this situation, which has led to the decline of many currencies. The Philippine peso fell to its lowest level in more than 16 years, while the South Korean won reached its lowest level against The US dollar for nearly 13 years. Other Southeast and South Asian economies have also experienced significant currency depreciation.

The process of connecting mobile payment systems has already begun in the region

Currently, the payment systems in Malaysia, Indonesia and Thailand are already linked, while Singapore is linked to Thailand and the five countries are seeking to add more countries to the proposed mobile payment system.

The central banks participating in this electronic payment system will then seek to connect this network with other regional groupings around the world, introducing the same structure for bank transfers, and eventually even central bank digital currencies.

"This could be a very moving step that we can build on to the rest of the world," Ravi Menon, managing director of the Singapore Monetary Authority, said at the same session on the Indonesian island of Bali. “It is a public good infrastructure that improves financial inclusion, enhances efficiency and creates new business opportunities for all citizens.”

The region is witnessing an expansion of mobile payments at the expense of banks

Mobile payment wallets have become a vital part of the Southeast Asian consumer landscape, providing financial access to millions of people excluded from the banking system.

The region has a good rate of use of mobile payment systems, compared to a lower percentage of the use of the traditional banking system, in light of the high proportion of rural population and poverty in much of the countries of the region, the use of this technology far exceeds the use of credit cards in the emerging markets in the region.

With online spending on the rise during the COVID-19 pandemic, mobile payment wallets have seen an increase in newly registered users.

The concept of digital wallets has changed, as they are rapidly becoming a front-end interaction channel, enabled by many open and semi-open payment networks. In some cases, they appear as "super apps" or financial giants and hubs for financial communication.

Despite the significant increase in the use of these tools, no Southeast Asian provider has replicated the success of Chinese giants such as Ant, the owner of Alibaba Group, which is a giant in the field of mobile payment and lending applications, an area that has seen rapid expansion in China.

In many Southeast Asian countries, merchants are using mobile apps to receive payments from customers, pay bills, and get credit or loans, especially during COVID-19. People are interacting with these innovations across the region.

In Southeast Asia, more than six out of ten people do not deal with banks, which makes mobile cash transactions a preferred method, and similar to China, the region appears to be moving from direct cash dealing, to dealing via smart phones without standing much in the stage Banks, credit cards.

The first mobile payment system to connect two countries in this region

In April 2021, the Monetary Authority of Singapore (MAS) and the Bank of Thailand (BOT) launched the connection between Singapore's PayNow and Thailand's PromptPay in real time (in real time the operator's order).

This connection is the first of its kind globally, and is the culmination of several years of extensive cooperation between MAS and BOT, payment system operators in both countries, bankers' associations, and participating banks.

Under the system, customers of participating banks in Singapore and Thailand can transfer funds of up to 1,000 Singapore dollars or 25,000 Thai baht per day across the two countries, using only a mobile phone number. Without the need to fill in information fields such as the recipient's full name and bank account details, as with normal remittance solutions.

Triple Benefit

With the dollar's appreciation against most of the world's currencies, Southeast Asia, like others, is suffering from the devaluation of its currencies.

There is a need to boost intra-Asia trade, and a stronger dollar may act as a catalyst in which the already emerging global dedollarization push can accelerate. 

Meanwhile, supply chains in Asia are rapidly reconfiguring away from the West, with the US role largely weakened by sluggish domestic demand and trade protectionism, China's Global Times reports.

Also, dispensing with the dollar as a mediator in settlements between commercial transactions between the currencies of the region, leads to reducing the cost of transfers and purchases.

Therefore, the new system has three advantages, direct linkage between mobile payment systems and not using the inflated dollar in its value as an intermediary, and the provision of fees that are paid for the conversion from the buyer's currency to the dollar and then the seller's currency.

Such systems greatly reduce the dominance of the dollar over the payment and trade exchange systems in the world, especially as it comes from a region that has a close economic link with China, which seems to be moving gradually towards competing with the dollar, and all of this comes within the framework of what can be described as multilateral efforts to find a system a financial system that is independent of the dollar or even more of a financial system of this type.

One of the problems in the expected system in Southeast Asia is the possibility of significant changes in the prices of local currencies compared to the dollar, which is characterized by relative stability, but in general the currencies of these countries are closely related to each other, which means that if one of them decreases, the others may follow it, as happened in the Asian financial crisis in the 1990s. LINK