Aurelia Butler

Brazil’s president Luiz Inácio Lula da Silva has called on developing countries to work towards replacing the US dollar with their own currencies in international trade, lending his voice to Beijing’s efforts to end the greenback’s dominance of global commerce.Kicking off his first state visit to China since taking office in January, Lula called for the countries of the so-called Brics group of nations — which in addition to Brazil and China includes Russia, India and South Africa — to come up with their own alternative currency for use in trade.“Every night I ask myself why all countries have to base their trade on the dollar,” Lula said in an impassioned speech at the New Development Bank in Shanghai, known as the “Brics bank”. “Why can’t we do trade based on our own currencies?” he added, drawing loud applause from the audience of Brazilian and Chinese dignitaries. “Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”Lula’s call to shed dollar dependence dovetailed with Beijing’s increasing efforts to promote use of the renminbi in settlement of cross-border commodities trades, as Chinese policymakers seek to strengthen the role of the world’s second-largest economy in the global financial system.The warm reception in Shanghai also came as Brazil’s leftist leader has sought to redirect the country’s foreign policy to a more multilateralist stance, with an emphasis not only on good relations with the US — he visited President Joe Biden in February — but also with China and the developing world.

Brazil’s president Luiz Inácio Lula da Silva, right, receives flowers during his arrival to Shanghai on Thursday © Brazilian Presidency/AFP via Getty Images

Lula’s far-right predecessor Jair Bolsonaro had prioritised bilateral ties with the US under former president Donald Trump and other nations led by populist leaders such as Hungary and Israel. China’s leader Xi Jinping will be keen to persuade the Brazilian president when they meet on Friday to demonstrate that appetite for rebalancing by backing a number of Beijing’s foreign policy initiatives. These range from the Belt and Road trade and infrastructure programme to other schemes that seek to create alternative international governance systems to those dominated by the US.Bilateral trade has ballooned over the past decade to $150.4bn last year, with China buying Brazil’s agricultural commodities and minerals and investing in the Latin American country’s large consumer market and infrastructure sector. On Thursday, Lula also visited Huawei, the Chinese telecom equipment company that is subject to US sanctions. The growing economic relationship has encouraged both countries to promote greater use of their respective currencies in bilateral trade. This week, the Brazilian branch of the state-owned Industrial and Commercial Bank of China settled its first transaction directly in renminbi in the country, Chinese state media reported.

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Lula, who was also in Shanghai for the inauguration of his protégé, former Brazilian president Dilma Rousseff, as head of the New Development Bank, used the occasion to make impassioned speech about the need for the Brics countries to trade in their own currencies. Aside from the Brics, the bank’s membership includes Egypt, Bangladesh, Uruguay and the United Arab Emirates.“Who decided that our currencies were weak, that they didn’t have value in other countries?” he said. “Why can’t a bank like that of the Brics have a currency to finance trade relations between Brazil and China, between Brazil and other countries? It’s difficult because we are unaccustomed [to the idea]. Everyone depends on just one currency.”Data from global payments platform Swift shows the Chinese currency’s share of trade finance has more than doubled to 4.5 per cent since Russia’s full-scale invasion of Ukraine last year, largely on the back of a boom in shipments between Russia and China.

Maggie Wei, an economist at Goldman Sachs, said there were structural reasons to expect a growing Chinese share of global trade finance. “In light of the renminbi’s comparatively small role in trade finance relative to China’s market share of around 15 per cent in global goods trade . . . it makes sense for the currency’s share of trade finance to continue rising,” Wei said. But any effort by Brazil to spurn the US currency in the near term will face a substantial challenge. The dollar is vital to global commodities markets and benchmarks, which encourages top Brazilian miners such as Vale to keep most transactions dollar-denominated. More

Goldman Sachs has removed a June rate hike from its Fed forecast after the March CPI report showed inflation is slowing.The bank now expects one more rate hike by 25 basis points in May, which would raise the target range to 5-5.25%.“While the large step down in shelter inflation is encouraging news for the inflation outlook, the March CPI report was in line with our expectations overall and is not the main reason for the change,” Goldman Sachs’ economists said in a client note.“Instead, we have taken out the June hike in part because the limited data available so far appear to confirm that credit is indeed somewhat tight in the aftermath of the banking turmoil, and in part because some Fed officials appear hesitant about even a May hike, which raises the bar for the FOMC to agree at its May meeting to both hike and signal additional tightening not currently implied by the median dot.”While risks are tilted toward rate cuts after May, the bank doesn’t believe the Fed will cut “as much as implied by market pricing.”Goldman also reaffirmed its forecast that estimates chances for the U.S. to enter a recession at 35%. This is “far below” the Bloomberg consensus of 65%.“The risk of an outright banking crisis has declined sharply, as no additional institutions have failed since SVB weekend, Fed lending to banks has come off the highs, and deposit flight has subsided… However, it would be premature to sound the all-clear on the banking stress as significant uncertainty remains,” the bank’s economists added.Overall, the broker doesn’t believe asset market returns will be “stellar”. More

Ruurd Brouwer is the chief executive of TCX, a currency hedging fund set up by several development banks to help developing countries ameliorate FX risks.As part of their Annual Meeting, World Bank and IMF treat observers to a wealth of data, analyses and projections. The focus is on climate finance, debt sustainability of Low Income Countries (LICs) and, preferably, some combination of the two. But countries in debt distress tend not to borrow to invest in green infrastructure — so debt’s the horse, climate the cart. A new IMF working paper with the catchy title ‘Are We Heading for Another Debt Crisis in Low Income Countries?’ compared debt vulnerabilities in the pre-Heavily Indebted Poor Countries Initiative mid-90s with those of today. 

One conclusion is that the world of debt restructurings has become more complex. There are more players, less transparency, more complicated instruments and the Chinese don’t speak debt forgiveness. A combination of factors that made Robin describe the bankruptcy process for countries as “a shitshow”.So, debt resolutions suck — and should be prevented to skip the shitshow. The paper offers some hope:Primary deficits and valuation effects from exchange rate depreciations remain the two most dominant upward drivers of debt accumulation in LICsThe two key variables that drove debt upward late last century are government deficits and currency risk. The 2013-2022 analysis confirms this; in this period too exchange rate depreciation and primary deficits define upward debt dynamics.

So, this is good news, right? The variables are identified. The next question is who can directly influence these variables. In the case of government budget deficits that’s not obvious, as it involves multilateral negotiations, political processes, elections and diplomatic wheeling and dealing. The influence that can be exerted by lenders is, at best, indirect. In the case of currency risk, it is much more straightforward. Currency risk is directly related to the loan product offered by the lender, and accepted by the borrower. That brings the second bit of good news. Although China and private bond holders have grown substantial, multilaterals and the IMF are still the most important lenders to LICs, so it lies within their power to offer a loan product that mitigates currency risk. It would befit the World Bank, which transacted the first ever cross currency swap in 1981. 

Exchange rate risk was a key factor in the Asian debt crisis, the LatAm debt crisis and many if not most EM crises. Given the Bretton Woods institutions’ leading role in lending to and advising the poorest countries, the last step is to assess what lessons they’ve learned from doing so.The independent evaluation group studied “World Bank Support for Public Financial and Debt Management in IDA-Eligible Countries”, evaluating over US$25bn in support over 1,500 activities during 10 years. Despite the focus on public sector debt management, the evaluation mentions the word ‘currency’ once, in Appendix G on page 160. There, a table describes the government of Ghana’s target for currency and interest rate risk management. Yes, Ghana is in default. In late 2021, another evaluation from the independent evaluation group saw the light, requested by donors “to help IDA-eligible countries achieve and maintain debt sustainability by incentivizing their move toward transparent, sustainable financing”.The topic was the World Bank’s Sustainable Development Finance Policy and it had a strong focus on debt sustainability. Yet, the C-word is mentioned just three times in over 150 pages. Twice in a footnote and once in a case study on Papua New Guinea. Never in relation to risk or debt sustainability.The two evaluations and the IMF working paper are no exception. Currency risk is the most unpredictable and largest driver of upward debt dynamics, but has not been identified by the World Bank/IMF as a problem worth solving. Regardless of the upcoming choice between climate finance or debt sustainability, this billion-dollar blind spot should be tackled before it turns into a trillion-dollar debt crisis. This could well be some (scarce) low-hanging fruit for the World Bank’s new president. Further readingHow to slash sovereign debt burdensIt’s the currency, stupid More