REMARKS BY MR. JAVIER GUZMÁN CALAFELL, DEPUTY GOVERNOR AT THE
BANCO DE MÉXICO, AT THE OMFIF-RAMP DISCUSSION ON "NAVIGATING THE
MULTICURRENCY RESERVE ENVIRONMENT", Washington, DC, 6 October
1
2016.
Let me start by expressing my appreciation to the organizers for the invitation
to participate in this panel.
In recent years, central banks around the world have shown an increasing
interest in investing their international reserves in assets denominated in a
wider array of currencies. This is explained by a number of reasons, including
a more active search for yield in a low interest rate environment and
diversification from a risk management perspective.
To what extent is this leading to a multicurrency environment?
There are a number of attributes that a currency needs to fulfill to reach
international status and take on a significant global role. First and foremost, it
must be seen as a reliable store of value by both private and official non-
residents, thus implying that they are willing to hold assets denominated in
that currency. Secondly, it has to be considered an efficient medium of
exchange for international transactions, in turn reflected, for instance, in its
active use in the invoicing and settlement of global trade of goods and services.
Lastly, it should also be widely regarded as a unit of account, be it for
commercial or financial flows.
Undoubtedly, these requirements are difficult to meet, if not unsurmountable,
for the vast majority of national currencies. Therefore, at present only a
handful can be considered as truly international assets. Naturally, the US dollar
is the most important among them. According to the most recent IMF data,2
the US dollar accounts for 63 percent of all allocated foreign exchange reserves
globally, more than three times as much its nearest competitor, the euro.
Additionally, as the BIS points out in its latest triennial central bank survey,3
the US dollar is involved in close to 90 percent of all foreign exchange
transactions, nearly three times as much as the euro, its closest competitor in
this regard as well.
New currencies, from both advanced and emerging economies, have been
added to the stock of global international reserves in recent years. However,
most of them do not fully meet the requirements to be considered a global
currency. Furthermore, they remain a tiny portion of the total. If we exclude
the US dollar, the euro, the British pound and the yen from the estimates, the
share of other currencies in global international reserves amount to around 7
percent at present. When in addition to the above the Swiss franc, the
Australian dollar, and the Canadian dollar are omitted, other currencies
account for only around 3 percent of the total.
The predominance of the US dollar and a few other currencies in the global
system is at first glance incompatible with ongoing changes in the world
economy. In particular, the rise of emerging market economies (EMEs) as key,
systemic players at a global scale deserves special attention. Currently, these
economies are estimated to represent nearly 60 percent of world GDP, and
their rates of growth are projected to remain significantly higher than those in
the advanced economies (AEs),4 which points to a continued upward trend in
their participation in the global economy. With this in mind, it would seem
reasonable to expect emerging market currencies to play a more important
role in the composition of international reserve assets.
However, economic size of the issuing country is only one, and not necessarily
the most important, determinant of a currency's internationalization. Other
elements, such as an economy's role in trade networks; macroeconomic and
financial stability; the depth, liquidity and openness of national financial
markets; and the stability and convertibility of its currency, are important
contributing factors to the latter's role in the global arena.
Certainly, fulfillment of these conditions is challenging, to say the least. Among
EME currencies, the Chinese renminbi seems to be the one most likely to
achieve a significant role in the global system, partly in view of China's position
in the world economy, but also because of the interest the authorities of this
country have shown in the internationalization of their currency, for instance
through the gradual opening of its financial markets to foreign participation,
the renminbi ́s inclusion in the SDR basket, and the negotiation of currency
swap agreements with a significant number of countries.
Nevertheless, a swift move of the renminbi's role to rival some of the main AE
currencies looks at this stage uncertain. On the one hand, previous experience
with the US dollar during the early 20th century shows that major shifts in the
international monetary system can occur rapidly. On the other hand, China is
still far away from meeting all the above noted conditions to provide its
currency with international status, and the road ahead does not seem to be an
easy one. In this respect, Barry Eichengreen has noted that the race to the
consolidation of the renminbi as a global currency should be seen as a
marathon, and not as a sprint.5
But irrespective of the above comments, would an international monetary
system with more international currencies be stronger than the present one?
In my view, with a long-term perspective in mind, the answer is affirmative.
For one, the more individual economies that enjoy macroeconomic and
financial stability, are open to trade and financial flows, and have deep and
liquid capital markets, among others, the more the system as a whole is likely
to be sound and efficient. In addition, a higher number of international
currencies entails greater possibilities to diversify overall portfolio risk, a
certainly valuable opportunity for asset managers, and especially reserve
managers. A multicurrency reserve system, once established, will probably
reduce the risk of a persistent overvaluation of assets, including exchange
rates. To this, one may add more evenly distributed benefits among countries
from their role as reserve issuers, such as seigniorage gains and lower interest
rates on their debt, as well as a decreased risk of major and persistent global
external imbalances.
On the other hand, it is important to stress that a multicurrency reserve
system, as well as the road leading to it, is not free of difficulties. Take the case
of renminbi internationalization. This process requires, among other things, a
comprehensive opening of China's financial markets to foreign transactions, as
well as a floating exchange rate. As shown by recent episodes, any moves in
this direction could have unintended consequences, both for the domestic
economy and for the global financial system. More generally, experience
demonstrates that the process of financial and exchange rate liberalization in
other countries may be accompanied by periods of turbulence. It should also
be taken into consideration that, irrespective of the challenges that may be
faced in the transition towards international status, the risk of sudden
portfolio shifts and the consequent potential for exchange rate volatility will
not disappear under a multicurrency reserve system. In fact, it has been noted
that a global multicurrency system may lead to greater short-term capital flow
volatility and the consequent exchange rate adjustments, as a result of the
increased substitutability between currencies. Also, currency
internationalization may give rise to other risks, such as a reduced control over
monetary aggregates.
Notwithstanding these and other challenges, all in all in the long term the
benefits of an international monetary system characterized by a wider
availability of international currencies should outweigh the potential costs.