The Rise of Local Currencies: ASEAN’s Shift Towards De-Dollarization
Written by: Berlian Tama & Ariella Wijayanti
The US dollar’s position as the leading currency in global trade is being challenged. Several countries have begun the process of de-dollarization, replacing the US dollar with local or regional currencies. This starts with Russia who began this movement, transitioning its trade balance, bank assets, and energy companies from the US dollar to the ruble. Then, it is followed by China which has also taken similar steps by using the yuan as a means of payment with some trading partners (Rasdiyanti & Suyeno, 2022). In 2017, four ASEAN countries – Indonesia, Malaysia, Thailand, and the Philippines – signed an agreement to use local currencies in bilateral trade transactions (The Jakarta Post, 2023). The main reason for de-dollarization is to reduce reliance on the US dollar, which can be subject to fluctuations and influenced by US economic and political policies (Norton, 2023).
Utilizing local currencies can enhance efficiency, exchange rate stability, and collaboration within the region. The US dollar was previously the preferred currency for transactions in many countries due to its stability and the high value of US trade with other nations. Its use expanded beyond trade with the US to include countries without direct trade relations with the US. This resulted in a global dependence on the US dollar and compliance with US jurisdiction to avoid economic sanctions imposed by the US.
Recently, at the 42nd ASEAN Summit, held in Labuan Bajo, Indonesia, ASEAN members agreed to enhance regional payment connectivity and promote the use of local currency transactions (LCT) by signing a declaration (Medina, 2023). The initiative is considered the group’s plan to move away from traditional trade currencies like the US dollar (Medina, 2023). The agreement is an enlargement of a structure that has been created and put into action by Indonesia, Thailand, Malaysia, and the Philippines since 2017. However, how far is de-dollarization going in ASEAN and what are the benefits and potential impact of it?
ASEAN ON PROMOTING LOCAL CURRENCY TRANSACTION
Unlike European Union (EU) countries, where intra-regional trade is substantial, the use of the U.S. dollar as the primary currency for invoicing is prevalent in Asia (Shimizu, 2019). ASEAN countries rely on the U.S. dollar for trade with the United States and other nations, including intra-regional trade. This reliance actually stems from the absence of a regional common currency, similar to the Euro in the EU (Shimizu, 2019). The stability, liquidity, and low transaction costs associated with the U.S. dollar have positioned it as a preferred currency in Asia, even, most countries, serving as a widely accepted medium of exchange for an extended period (Shimizu, 2019).
On March 28, the finance chiefs and central bank governors of the Association of Southeast Asian Nations (ASEAN) met in Indonesia for the 42nd ASEAN Summit 2023 and. one of their main topics was reducing dependence on the US Dollar, Euro, Yen, and British Pound in financial transactions and moving towards settlements in local currencies (ASEAN Briefing, 2023). Moreover, the meeting reached agreement resulting in a declaration, which mainly acknowledged the potential advantages of utilizing local currencies to enhance financial stability, promote deeper regional financial integration, and strengthen regional value chains within ASEAN. ASEAN members also reached a consensus to promote the adoption of local currencies for cross-border transactions in the region. Additionally, they agreed to establish a Task Force dedicated to investigating the establishment of an ASEAN Local Currency Transaction Framework (Xhingua, 2023). Moreover, ASEAN is currently developing a cross-border digital payment system to facilitate the use of local currencies in regional trade (Medina, 2023). Prior to this, in 2016, the Bank of Thailand and Bank Negara Malaysia actually had. reached an agreement to facilitate direct settlements using their respective local currencies, the baht and ringgit, which later, in December 2017, Bank Indonesia also joined this collaboration (Shimizu, 2019).
Since the ASEAN Summit, Malaysia is also starting to actively promote de-dollarization. On March 31 2023, Malaysia’s Prime Minister Anwar Ibrahim met with Chinese President Xi in Beijing to discuss plans to weaken US dollar dominance and even create an “Asian Monetary Fund’’ as a challenge to the US-dominated International Monetary Fund (IMF). In that event, Anwar proposed the Asian Monetary Fund at the Boao Forum in China’s Hainan province (Norton, 2023). Moreover, Malaysia’s central bank is developing a payment mechanism to trade with China using its own currency, the ringgit (Norton, 2023). On the other hand, The central banks of Indonesia and South Korea have agreed to expand the use of each other’s local currency for bilateral transactions (Medina, 2023). Indonesia also has made agreements with Japan and China to use LCS as a payment system for trade transactions on September 22, 2020 which was later started to be implemented. in August 2021(Rasdiyanti & Suyeno, 2022).
The utilization of Asian local currencies has been relatively small, but it has been gradually increasing due to both market-driven factors and government initiatives. This development is noteworthy because it offers local small and medium-sized enterprises (SMEs) an additional option to mitigate exchange rate risks by using their own currencies or those of neighboring countries (Shimizu, 2019). Furthermore, the availability of bilateral direct transaction markets expands the range of currency choices for conducting transactions.
ADVANTAGES AND DISADVANTAGES OF DE-DOLLARIZATION
Despite it all, most countries are still in the beginning stages of implementing de-dollarization, meaning that there are still many domains to explore. However, lessons can be learned from past examples and current ongoing studies on the advantages and disadvantages of de-dollarization. De-dollarization is a combination of macroeconomic and microeconomic methods that seek to boost the appeal of the local currency in economic transactions and to increase knowledge of the costs of dollarization associated with exchange risk, thereby giving stakeholders reasons to de-dollarize voluntarily (Kokenyne et al., 2010). One of the main factors of that is the increased efficiency that de-dollarization will bring. Countries will no longer have to convert currencies multiple times in trading and instead immediately convert the trades into their local currency. For example, directly converting from won to rupiahs, instead of having to convert won into dollars and then dollars into rupiahs. Furthermore, de-dollarization allows countries to have more economic independence. By not being tied to the condition of US economic stability, countries will be able to mitigate and prepare for economic crises.
De-dollarization brought a shift in the global economy which resulted in an unstable economic situation. Especially in the early stages of de-dollarization where countries will face frequent exchange rate fluctuations. The existence of the dollar as the dominant currency will be hard to dethrone as many transactions depended on it for many years. Even if other countries try to create a whole new dominant currency to replace the dollar, it will be a risk where global trading, investment, and capital flows will be greatly affected (Gautam, 2023). Furthermore, it is not certain that the global economy would willingly accept a new dominant currency. For example, China has recently established the Petroyuan in response to the previous petrodollar. Some countries might support and follow this example, however, some others might reject it in order to stay in their current comfort zone.
In conclusion, de-dollarization is a rising star in the global economy. Many countries seek to free themselves from the dominance and insecurity that the US poses upon them. However, in order to ensure that de-dollarization will be sustainably successful, local policymakers need to create policies that make local currency as enticing and accessible as the US dollar (Low, 2017). Furthermore, de-dollarization requires a gradual implementation to make sure it doesn’t fail. The remaining barriers to finance in local currency must be understood more clearly and mitigated or removed (Hirschhofer, 2019). The future of de-dollarization is still uncertain, but the surge of it is unavoidable, especially for ASEAN where the power dynamics are still divided.
References
Kokenyne, A., Ley, J., & Veyrune, R. (2010). De-dollarization. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1662261
Low, L. (2017). Dollarization and De-dollarization in Transitional Economies of Southeast Asia. In Springer eBooks. Springer Nature. https://doi.org/10.1007/978-3-319-57768-5
Hirschhofer, H. (2019). Would Gradual De‐Dollarization and More Financing in Local Currencies Boost Trade?. Global Policy, 10(3), 435–439.
Gautam, V. (2023). Explained: What Is Dedollarisation & Why Are Countries Dumping The US Dollar? IndiaTimes. https://www.indiatimes.com/worth/news/what-is-dedollarisation-and-why-are-countries-doing-it-599604.html
The Jakarta Post. (2023, May 10). Less dependent on the dollar. The Jakarta Post. https://www.thejakartapost.com/opinion/2023/05/10/less-dependent-on-the-dollar.html
Norton, B. (2023). Countries worldwide are dropping the US dollar: De-dollarization in China, Russia, Brazil, ASEAN. Geopolitical Economy. https://geopoliticaleconomy.com/2023/04/06/dedollarization-china-russia-brazil-asean/
Medina, A.F. (2023). ASEAN to Increase Local Currency Trade, Reducing Reliance on the US Dollar. ASEAN Briefing. https://www.aseanbriefing.com/news/asean-to-increase-local-currency-transactions-reducing-reliance-on-the-us-dollar/
Shimizu, J. (2019). Exploring Local Currency Usage to Reduce Exchange Rate Risks in Asia. AMRO ASIA. https://www.amro-asia.org/exploring-local-currency-usage-to-reduce-exchange-rate-risks-in-asia/
Rasdiyanti A.D., Suyeno. (2022). Analisis SWOT Kebijakan Local Currency Settlement Indonesia-China. Jurnal Aplikasi Administrasi, 25(1), 10–19.
