IN a speech before the Djibouti parliament last week, Kenyan President William Samoei Ruto called upon African nations to shift away from using the US dollar for intracontinental trade. Traders in Djibouti and Kenya are using US dollars when engaging in bilateral trade.
President Ruto questioned the necessity of the US currency in the trade activities between the two nations and emphasized that the African Export–Import Bank (Afreximbank) provides a mechanism that enables traders within the continent to trade using their respective local currencies.
Considering that Kenya imported from Djibouti less than US$100,000 last year (auto/truck tires) and exported about US$10 million (“fatty acids,” soap, and tea), neither economy will be much affected by “local currency settlement.”
But to hear the comments both here and abroad, one might think that President Ruto created a new economic theory. Further, because he spoke of the United States dollar, many acted as if Ruto was the economic reincarnation of African nationalist Jomo Kenyatta or Nelson Mandela.
Because every person holds some money, people think that they are knowledgeable, even wise, about the subject.
Trade settlement in “local currency” is hardly novel or innovative. Regional and international “Clearing Unions” started in the 1930s. While it took the African Export/Import Bank—mentioned by Ruto—until 2022 to establish the “Pan-African Payment and Settlement System” for cross-border payments in distinct local currencies, that is nothing new. The Asian Clearing Union (ACU) started in 1974 for the same purpose. Members include India, Bangladesh, Iran, Sri Lanka, and Pakistan, doing US dollar equivalent of 29 billion in 2021.
Some—many actually—local reactions to President Ruto’s suggestion was something along the lines of “No US dollar trade in Asean; Death to the Great Satan’s currency.” Fortunately for the Philippines, these misguided people are not in control and here is why that is beneficial.
The Philippines imported US$13.9 billion worth of goods from Indonesia in 2022, according to the United Nations COMTRADE database on international trade. Philippine exports to Indonesia was US$725.8 million for a Philippine trade deficit of over US$13 billion. For perspective, US$13 billion is what overseas Filipinos in the US send back here every year. Also for perspective, in 2022, the TOTAL value of Philippine agricultural exports amounted to approximately US$7.5 billion.
If we tell/ask Indonesian exporters to settle our mutual trade in Philippine pesos, their response will be “Apa yang akan kita lakukan dengan peso ini?!?” (What the hell are we going to do with these pesos?).
A similar response would come from Thailand where the Philippines is running a US$4 billion deficit, and Malaysia with a US$3.5 billion shortfall. Also the same from Vietnam where we buy US$2.4 billion more than they buy from us, and even Singapore where we spend about US$1.5 billion more than they do.
We could easily settle trade with Indonesia in rupiah rather than with the US dollar. But then we would pay an additional “friction cost” by first buying rupiah with our US dollar. Genuine “local currency settlement” makes sense between two countries when bilateral trade is reasonably balanced or for reinvestment purposes. Look at Brazil and China.
In 2022 Brazil exports to China was US$89.7 billion. Brazil imports from China was US$67.7 billion for a trade imbalance of US$22 billion in favor of Brazil. However, both Brazil and China want much more Chinese investment in Brazil. As increased Chinese investment comes and as profits are presumably repatriated to China, the “operating” trade deficit will shrink.
The Philippines exported US$10.97 billion to China and imported US$29.8 billion with a US$20 billion deficit. So why is a yuan-peso trade platform necessary? For the Philippines, the need is low today but is part of a broader plan for the BRICS+ (perhaps eventually including INDO, THA, MEX, SAU, and two dozen others) using the CNY for trade settlement. We absolutely should be in on that.
Philippine exports to US was worth US$12.5 billion in 2022, while Philippine imports from US was US$9.7 billion, creating a US$2.8 surplus. Now that’s an economy where we can ask for “local currency settlement.” Obviously, we sort of do that and it is good? Why?
Because we essentially need the US to buy our goods with US dollar so that we can use those dollars to pay for our imports from INDO, THA, MYA, and help fund the China trade deficit. Real life is much more complicated than life on social media.
E-mail me at firstname.lastname@example.org. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.