SE Asia should 'de-dollarise', but slowly: experts

In Vietnam, the local dong is a popular currency but dollars still account for 20 percent of all currency in circulation

 

via CAAI

By Michelle Fitzpatrick (AFP)

PHNOM PENH — Southeast Asian countries that rely heavily on the dollar might be alarmed at its recent steep decline, but analysts warn against sudden moves to reduce their dependence on the greenback.

In Cambodia, the dollar is far more prevalent than the riel, the local currency, while neighbouring communist-run Laos sees shoppers paying for goods in kip, dollars or even Thai baht.

In communist Vietnam, the local dong is popular enough, but dollars still account for 20 percent of all currency in circulation there. And in Myanmar (Burma) a volatile domestic currency has left locals distrustful of the kyat.

"Not a single Burmese person I have ever met has savings in the local currency," said Myanmar economics expert Sean Turnell from Australia's Macquarie University.

Such heavy reliance on the greenback is known as "dollarisation" and reflects "a general lack of confidence in the local currency", said Jayant Menon, principal economist at the Asian Development Bank (ADB).

The dollar has fallen sharply in recent weeks, but analysts say the US currency's woes are unlikely to immediately affect the use of domestic currencies much in these Asian nations.

It might, however, influence the way people in these countries save or store wealth.

"In Vietnam it could result in a greater switch to gold. In Laos, a move to baht," said Menon.

"The long-term objective for these countries should be to de-dollarise," said the economist, who has co-authored a new book about dollarisation in Cambodia, Laos and Vietnam.

But reducing reliance on the greenback can only work if governments address the underlying problems that caused the shift in the first place, he said, and for now the dollar is still "a safer bet".

Reliance on the dollar has benefits -- it can bring stability to an otherwise volatile market and makes it more difficult for governments to simply print money to make up for budget shortfalls, according to experts.

But it also limits the power of central banks to control the money supply or determine exchange rate policies.

"Before the global financial crisis, a lot of these countries, especially Cambodia and Vietnam, had inflation building up and central banks couldn't do much in terms of mopping up the extra liquidity to try and keep inflation in check," said Menon.

"In a funny way, the global crisis was a bit of a blessing when it comes to controlling inflation because demand fell off sharply and these countries were then able to control inflation."

Another downside to dollarisation is that these countries lose out on seigniorage -- the revenue accrued when the cost of printing money is lower than the face value of that money.

The ADB estimates that Cambodia, Laos and Vietnam miss out on 20 to 90 million dollars a year this way, with impoverished Cambodia being the biggest loser. That income instead goes to the United States, where the money is printed.

But Hang Chuon Naron, secretary general of the Cambodian government's Supreme National Economic Council, defended his country's reliance on the US currency.

"Because of dollarisation, people are not scared to put money in the bank," he said. "And it imposes discipline on the government."

Still, while "de-dollarisation" -- moving away from the greenback -- is not a priority, Hang Chuon Naron said he can see a time when the riel will be the dominant currency in Cambodia.

"The issue is to accumulate national reserves, and promote a high growth rate and long-term confidence. We have to do this step by step."

Menon said he agreed with a long-term approach to reducing dependence on the greenback.

"If governments try to change the system overnight, by requiring the use of domestic currency, the experience is that it's actually counterproductive and delays further the process of de-dollarisation," he said.

But there are shorter-term measures available to governments to lessen their dollar reliance.

In Cambodia, for instance, the government "could try to increase the incentive for people to save in the domestic currency", Menon suggested, or some private-sector wages could be paid in riel.

In the medium term, Menon said all these countries could benefit from a Currency Board Arrangement -- a pegged exchange-rate system, where countries can only issue currency that is fully backed by foreign exchange reserves.

"Long term, it's about improving institutions, financial markets, capital markets, political and economic stability," he said.