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Let’s take a look at the reserve currencies held by the BRICS (Brazil, Russia, India, China and South Africa). As we said earlier, the BRICS alone hold one third of all reserve currencies held in the world. So it’s a very concentrated picture of these holdings (Listen here).

Now, within that share of BRICS holdings, China alone represents 22% of these global reserves. It actually makes sense if we look at the last 20 years and consider that China alone has been able to pull close to 850 million people out of poverty. Its economy alone has been able to push the poverty rate from 88% in 1981 to 0.7% in the mid 2010’s. That volume of foreign exchange reserves alone represents increased participation of the Chinese economy in the global market, which is reflected in the accumulation of reserves. The Chinese economy is the only economy that has been able to achieve such results in such a short period of time.

Within that list of BRICS, Russia comes second at 4.23% of Global Reserves. Russia’s story is totally different and relies heavily on its position in energy markets. The current sanctions will clearly undermine that position in the years to come and we will probably have to devote a separate more in depth look to that situation alone.

Right after Russia in that list of BRICS comes India at 4.10% of reserves. Here it’s worth noticing that something special is going on. As a whole, India’s reserves are now 5th in the world and very close to Russia alone.

That improvement in fundamentals reflects government policies of self-reliance and higher attractiveness for foreign investments  that should start to show effects despite the current global turmoil.

India is then followed by Brazil at 2.10% of global reserves. For Brazil, the story is a little more complex to read with an outlook that remains a lot more uncertain. Yet its reserves built up thanks to a mix of exports in agricultural products, petroleum and minerals. The increased demand out of Asia and especially China contributed to that build up of foreign exchange reserves.

Finally South Africa at 0.36% of global reserves provides an overall outlook that looks a lot like Brazil. Increased demand of gold, diamonds, cars and other agricultural products created the impetus behind these foreign exchange reserves, though in a much less extent than for the other BRICS.

However, broadly speaking, it would be a mistake to conclude that the US$ is declining in the mix of currencies held by these central banks. The demand for raw materials and agricultural products out of China has increased significantly. That trend alone in the last few years has caused the RMB to increase its share in the mix of currencies at central banks, especially since its inclusion in the SDR basket in 2016. Yet it still remains well behind the US$, the Euro and the Yen. Overall, the US$ represents 55% of that portfolio for all central banks in the world by the end of 2021, compared to 20% for the Euro and 4% for the Japanese Yen. The RMB remains at 2%. However the increased levels of exchanges with the rest of the world will likely push that share much higher. But it will not happen overnight and the US$ will certainly remain the currency of reference for quite a while.

It’s important to highlight that last point, because recent events may give the impression that the shift is about to happen suddenly and all at once. That unfolding of events remains open for discussion and quite debatable. As I mentioned in an earlier post, that date of March 23 is a key date. As a reminder, this is when Russia announced it was only accepting Rubles for payment of oil and gas sold to “unfriendly countries”.

Meanwhile, the UN FAO Food prices indicator continued to climb to new record levels. It made a giant leap in March 2022 to a new highest level ever reached since the inception of that indicator in 1990.

Everywhere in the world, all the signals are pointing to untenable tensions on distribution channels and value chains.

Let me know if you have questions and I look forward to hearing your thoughts. Feel free to comment.


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