Anchor’s coffee table economics note by Casey Delport will be distributed intermittently and is a collection of Casey’s opinions on key economic factors and events shaping markets globally and in South Africa (SA). It is essentially Casey’s thoughts and perspectives on the multiple dynamics at play in the global and local economy.
Executive summary
In this week’s edition, we highlight the following:
- The Rocky Dollar Picture Show: Is de-dollarisation a trend to stay? As the world’s premier reserve currency, the US dollar can essentially be regarded as the default currency in international trade and a global unit of account. However, this generalised historical trend appears to be deviating from its standard showing of late.
- Questions of de-dollarisation aside, foreign investors still held US$7.3trn of US debt in 2022. This was mainly in the form of Treasury securities, some of the most liquid assets worldwide. So, who has the most US debt, and why?
- No, Mr Trump- You’re fired: Last week’s drama at the Manhattan Criminal Court produced something truly unprecedented in the US – a former president being treated pretty much like any other criminal defendant in the first of many court cases related to his behaviour during and after his term of office. Whilst actual jail time is unlikely, the indictment will probably have significant implications for American politics.
- Not a light-bulb moment: Why lighting up SA’s old burnt-out coal-fired power stations is a bad idea. In a lengthy press conference held on 6 April, SA’s new minister of electricity made bold statements about extending the life of the country’s fleet of ageing coal-fired power stations. Unsurprisingly, the electricity minister’s latest comments or ideas of intent have unsettled civil society and energy experts.
The Rocky Dollar Picture Show: Is de-dollarisation a fad or a trend here to stay?
As the world’s premier reserve currency, the US dollar can essentially be regarded as the default currency in international trade and a global unit of account. As a result, every central bank, Treasury/exchequer, and major corporate across the globe holds a large portion of their foreign exchange holdings in US dollars. Furthermore, due to the holders of dollars seeking returns on those balances, the pervasiveness of US dollars throughout the global economy, in turn, drives a substantial portion of the demand for US government bonds in world financial markets. However, this generalised historical trend appears to be making a deviation from its standard showing of late.
At the beginning of April, China and Brazil agreed to settle trades in one another’s currencies. Over the past 15 years, China has replaced the US as the leading trading partner of resource-rich Brazil, and as such, that shift may have been somewhat inevitable. However, within the context of recent circumstances, this appears to be another in a series of blows to the central role of the US dollar in global trade. This, in turn, is fuelling a greater debate around the trend of de-dollarisation across the greater global economy. It is important to note that dollarisation usually occurs in developing countries with a weak central monetary authority or an unstable economic environment. It can occur as an official monetary policy or a de facto market process. From thereon out, either through official decree or through adoption by market participants, the US dollar comes to be recognised as a generally accepted medium of exchange for use in day-to-day transactions in the given country’s economy. Sometimes the dollar assumes official status as legal tender in the country. Conversely, de-dollarisation is a process of substituting the US dollar as the currency used for (i) trading oil and/or other commodities (i.e., petrodollar); (ii) buying US dollars for forex reserve requirements; (iii) bilateral trade agreements; and (iv) dollar-denominated assets.
Overall, there appears to be a slow (albeit steady) emergence of evidence pointing towards the more generalised de-dollarisation trend. At the beginning of the month, China and Brazil agreed to a deal that will see trade between the two countries conducted in their currencies and not the US dollar, as is still a widespread practice. This is not a small measure, particularly for Brazil, given that China is its largest trading partner. It follows other similar actions, some of which have been caused by the US itself due to the sanctions levied on Russia (as inevitable as they were). Nonetheless, the switch from dollars to a yuan-real settlement basis in Chinese-Brazilian trade is only the latest in a growing trend.
Debates around a more politically neutral reserve currency have gone on for decades. However, the profound economic disruption experienced by Iran and, more recently, Russia after being evicted from dollar-based trading systems like SWIFT has led many nations to consider imminent contingency plans. India and Malaysia, for example, have recently begun using the Indian rupee to settle certain trades, and there is growing rhetoric around Saudi Arabia and other energy exporters moving away from the dollar. In that same vein, China also recently executed a test trade for natural gas with France settled in yuan.
Closer to home, one of the most significant objectives the increasingly influential BRICS (Brazil, Russia, India, China, and SA) nations appear to be working to achieve is a shift away from reliance on the US dollar. Even before Russia invaded Ukraine, which seems to have expedited de-dollarisation initiatives across much of the non-Western world, Russia and China had embarked on clear policies of local-currency promotion (invariably at the dollar’s expense) as their relationships with the US continued to deteriorate. But it is not just in terms of trade invoicing where there has been this slow de-dollarisation trend. It can also be observed in terms of global foreign exchange reserve holdings as more central banks have shifted away from the dollar. But, of course, there is still a massive gap between the trade in goods, services and financial claims done in dollars and those in other currencies.
Still, it is well worth remembering that simply replacing the fiat currency of the largest economy in the world with the fiat currency(s) of (a) smaller economy(s) is hardly a viable replacement strategy. Moving away from the dollar brings substantial barriers to exit and network effects to overcome owing to historical, technological, financial, and habitual obstacles. At the end of the day, the US dollar is the de facto currency of East Timor, Ecuador, El Salvador, the Federated States of Micronesia, the Marshall Islands, Palau, Panama, and Zimbabwe. Furthermore, the relatively transparent conduct of monetary policy in the US has led no less than 22 foreign central banks and currency boards to peg their currencies to it. In addition, dollars are the cheapest means of access to acquire nominally risk-free US Treasury instruments.
Naturally, the big question at the end of the day is that if this apparent trend of de-dollarisation is here to stay, what are some of the possible long-term effects for the greater global economy? Well, owing to the role that dollar pervasiveness plays in the international appetite for US Treasuries, a side effect of the long-term attempt to establish alternative reserve currencies may be decreasing interest in tradeable US debt. Over shorter time frames, that would likely result in higher yields and higher debt servicing costs on securities issued by the US Treasury. Over generational time frames (and we emphasise generational), that shift could force a reduction in US government spending. Should that scenario play out, the long-term effect of using access to dollars to counteract American foreign policy could well lead to higher average inflation and/or higher taxes on US citizens. However, it is painstakingly obvious that any move to a more multi-polar currency would take a very long time. Therefore, unlike during the global COVID-19 pandemic (which, on the face of it, has turbo-charged the inflationary effects of deglobalisation), we will not see any plunge in inflation due to a turbo-charging of de-dollarisation. Nevertheless, over the long term, efforts to reduce reliance on the US dollar could be disinflationary for most global economic participants. For example, transaction costs for companies (and thus prices) could be lowered through more immediate, level transacting trade through direct currency exchange rather than the third party of the dollar. Additionally, if de-dollarisation reduces the ability of tighter monetary policy in the US to impart significant currency weakness on other currencies, then inflationary pressure can logically be minimised.
The bottom line
In the long-term (and we mean long-term), if US efforts to supply dollars are supplemented by lower demand for dollars (due to de-dollarisation), then the scope for dollar strength to emerge and, in turn, weaken other global currencies – and thus lift global inflation- will be reduced. Still, we believe that a strong US dollar (in whatever shape or form) will be around for a long time to come. However, the more instances we see of weaponising dollar dominance and permitting expanding mandates to disorient US monetary policy (ahem, BRICS), the greater the de-dollarisation trend will be.
Which countries held the most US debt in 2022, and why?
Questions of de-dollarisation aside, foreign investors still held US$7.3trn of US debt in 2022. This was mainly in the form of Treasury securities, some of the most liquid assets worldwide. US Treasuries are important to the global economy for several reasons. These include:
- They are safe-haven assets: US Treasuries are widely considered safe-haven assets – meaning they are seen as low-risk investments during market volatility or economic uncertainty. This makes them an attractive investment for foreign investors looking to protect their capital during turmoil in their economies.
- They are used as a reserve currency: The US dollar is the world’s primary reserve currency. Many countries hold US dollars and US Treasuries to conduct international trade and stabilise their currencies. This has the effect of supporting demand for US Treasuries from foreign central banks.
- They help set global interest rates: The interest rate on US Treasuries is a benchmark for interest rates on other types of debt worldwide. This means that changes in the US Treasury yield can impact borrowing costs for governments, companies, and consumers in other countries.
- They are a key component of global financial markets: US Treasuries are widely traded in global financial markets, providing liquidity to investors and institutions worldwide.
Interestingly, with U$1.1trn in Treasury holdings, Japan is the largest foreign holder of US debt. Japan surpassed China as the top holder in 2019 as China shed over US$250bn, or 30% of its holdings in four years. That particular bond offloading by China was for the country to manage the yuan’s exchange rate, a common practice on the part of the secretive nation. If China sells some of its holdings of US dollars, it can buy the yuan when the currency falls. At the same time, China does not solely use the dollar to manage its currency – it now uses a basket of currencies. Aside from the titans of the East, the UK is the third highest holder, at over US$655bn in Treasuries. Across Europe, thirteen countries are notable holders of these securities, the highest in any region, followed by Asia-Pacific, with eleven different holders. Curiously, a handful of small nations own a surprising amount of US debt. With a population of 70,000, the Cayman Islands own a towering amount of Treasury bonds to the tune of US$284bn. This is unsurprising, considering that more hedge funds are domiciled in the Cayman Islands per capita than any other nation worldwide. Aside from the Cayman Islands, other notable tax havens such as Bermuda, Bahamas, and Luxembourg (with a combined population of just 1.2mn) own a staggering US$741bn in Treasuries.
The bottom line
Over 2022, foreign demand for Treasuries sank 6% YoY as higher interest rates and a strong US dollar made owning these bonds less profitable. This drop in demand is a sharp reversal from 2018-2020, when demand jumped as interest rates hovered at historic lows. A similar trend occurred in the decade after the 2008-2009 global financial crisis when US debt holdings effectively tripled from US$2trn to US$6trn. Fast-forward to today, and global interest-rate uncertainty (which in turn can impact national currency valuations and, therefore, the demand for Treasuries) continues to be a factor impacting the future direction of foreign US debt holdings. Overall, US Treasuries are an important component of the global economy, providing a safe investment option for foreign investors, supporting the use of the US dollar as a reserve currency, influencing global interest rates, and contributing to the functioning of global financial markets.
No, Mr Trump- You’re fired
Last week’s drama at the Manhattan Criminal Court produced something truly unprecedented in the US – a former president being treated pretty much like any other criminal defendant in the first of many court cases related to his behaviour during and after his term of office. Ex-US president – the rather infamous Donald J. Trump- faces 34 felony charges of falsifying business records during the 2016 presidential campaign. All of these charges are focused on his involvement in paying hush money to the adult film star and director Stormy Daniels, who claims to have had an affair with Trump, which he denies. With his indictment last week, Trump has become the first former US president to be charged with a crime. The arraignment on 11 April was the culmination of a nearly five-year investigation by the Manhattan District Attorney’s Office, and it also set in motion a lengthy legal process. Any potential trial will likely be next year at the earliest.
Overall, convicting Trump or sending him to prison could be challenging. For one thing, Trump’s lawyers have already begun attacking Michael Cohen’s (Trump’s former lawyer, now the proverbial finger-pointer against Trump) credibility by citing his criminal record. Prosecutors may counter that the former fixer lied years ago on behalf of his boss at the time and is now in the best position to detail Trump’s conduct. Moreover, according to legal experts, New York prosecutors have never before combined the falsifying business records charge with violating state election law in a case involving a presidential election or any federal campaign. If the prosecutors choose to use a state election law as a secondary crime – a possibility that has since been flouted – it is possible that a judge could throw it out or reduce the felony charge to a misdemeanour. Even if the charge is allowed to stand, it amounts to a low-level felony.
If Trump were ultimately convicted, he would face a maximum sentence of four years, though prison time would not be mandatory. However, this is not the only dark cloud on Trump’s horizon. The New York indictment is not the only form of legal jeopardy Trump now faces. As well as state and federal investigations of his election subversion, a federal investigation of his retention of classified records and a civil lawsuit over his business practices, he also faces a civil defamation suit arising from an allegation of rape. Yes, in typical Trump style (and even as he was blasting his prosecutors across social media), his campaign used the criminal charges against him in a fundraising push by creating a US$36 T-shirt with an image mocked up to look like the former president’s mug shot – even though the authorities did not take a photo during Trump’s booking and arraignment.
The bottom line
Whilst actual jail time is unlikely, the indictment will likely have significant implications for American politics. First, as a historical event (as no former US president has ever been indicted for a crime committed during their presidency), it could have far-reaching consequences for the balance of power between the executive, legislative, and judicial branches of government, as well as for the norms and traditions of US democracy. Second, it could deepen the political divide in the country, particularly if Trump’s supporters perceive the indictment as politically motivated or unjust. This could further erode trust in democratic institutions and increase the risk of civil unrest or violence. Lastly, the outcome of any legal proceedings against Trump will depend on a complex array of legal, political, and social factors, which will be difficult to predict. While Trump is the first former US president to be charged with a criminal offence, elsewhere, many other ex-leaders have found themselves in the dock (think Brazil’s Luiz Inacio Lula da Silva, Italy’s Silvio Berlusconi, France’s Nicolas Sarkozy, Israel’s Ehud Olmert – the list goes on). As some of these cases show, prosecution for alleged crimes has not proven to be a barrier to getting back into power.
Not a light-bulb moment: Why lighting up SA’s old burnt-out coal-fired power stations is a bad idea
Instead of delivering a clear-cut, feasible plan to tackle the loadshedding crisis (and thus assure an extremely jittery and frustrated population), SA’s (newish) electricity minister, Dr Kgosientsho Ramokgopa, in a lengthy press conference on 6 April, made bold and (let us be honest, costly) statements about extending the life of SA’s existing fleet of ageing coal-fired power stations. Whilst he made it clear this was just an option and that Cabinet would make the final decision, it was clear from his tone and emphasis that his preference is to extend the life of the ageing fleet of coal-fired power stations. Ramokgopa has identified Hendrina, Tutuka, and Kusile power stations as the country’s best opportunity to eliminate loadshedding. The power stations have an installed capacity of 8,854 MW, equivalent to eight loadshedding stages.
Eskom’s new leadership has recently toured the power stations and engaged with their management to understand their issues better. Ramokgopa identified Tutuka as the second most problematic power station plagued with corruption and Kusile as the worst-performing power station due to technical and structural problems. Ramokgopa aims to have all three power stations running optimally, eliminating three loadshedding stages by the end of the year. At the same time, the minister assured SA citizens that we would not experience power cuts higher than stage 6. Ironically, at the time of writing, we had just shifted back into stage 6 after a brief hiatus.
Naturally, the idea of lighting up SA’s old burnt-out coal-fired power stations does not strike us as the most ingenious, light-bulb flickering moment on the minister’s part. However, if Cabinet agrees with his position, then this will mean contradicting the following policies:
- The Cabinet-approved Integrated Resource Plan (IRP) 2019 (which has clear target dates for closing power stations).
- The Cabinet-approved National Infrastructure Plan 2050 (NIP 2050) that he championed as head of infrastructure SA and which is fairly clear about the role of renewables.
- The core of the Energy Action Plan (EAP) includes approvals for 30 GW of renewables to reduce SA’s reliance on coal-fired power plants by retiring older plants and developing cleaner technologies for the remaining plants.
- The Cabinet-approved Nationally Determined Contribution to global climate agreements; and
- February 2023’s Budget Speech by the minister of finance envisages no future investments in generation and a shift towards investing in transmission.
In addition to the policies mentioned above, Ramokgopa’s clear preference for extending the life of the plants could jeopardise the US$130bn investment by international donors that was factored into the Cabinet-approved Just Energy Transition Investment Plan (JET-IP) that envisages an investment programme of R1.5trn over the next five years. Essentially, the plan envisages replacing costly coal-fired power plants with much cheaper renewable energy infrastructures. Furthermore, suppose Cabinet agrees with Ramokgopa’s conclusions. In that case, this will signal that SA plans to be excluded from international markets that are introducing carbon-border taxes aimed, in particular, at preventing the import of goods from carbon-intensive economies like SA.
Following the promulgation and then withdrawal of the reporting exemption for Eskom, and then lifting the State of Disaster (after a confusing review that revealed it was not even required in the first place), it is not surprising if the average South African is left wondering if the country’s often disjointed and incoherent policy would get any worse. Well, Ramokgopa’s preferred option means disregarding Cabinet-approved policies, which has, unsurprisingly, triggered intense consternation among local and international investors who take a long-term view based on the certainties provided by solid Cabinet-approved policy frameworks.
Furthermore, more funding will be required to fix SA’s much-abused and ageing coal-fired power plants. In fact, Ramokgopa recently told Reuters that SA should not shy away from spending to resolve the country’s power crisis. This contradicts the Budget Speech and the government’s current stance around Eskom funding. National Treasury has already committed R254bn to assist Eskom – it is difficult to see where additional funding would come from without blowing out the already high debt-to-GDP ratio. However, the most serious issue to consider is this: it is now a proven fact that the Levelised Cost of Energy (LCOE) supplied by newly built renewable energy plants is lower than the cost of keeping the older, inefficient coal-fired power plants running beyond their dead-stop dates (especially at low EAFs). A plethora of funding is available for renewables at a very low cost per kWh. On the other hand, there is very little (if any) funding available for investing in coal – the investor appetite is simply not there.
Moreover, according to the EAP, 30 GW of renewables are in the pipeline. If the rooftop solar strategy works, another 7.5 GW could be available to households and businesses that will not require this amount from the grid. Ten gigawatts would essentially end loadshedding, which is likely to happen in two years – particularly if rooftop solar continues to grow as fast as it currently is. It is important to note that the latest iteration of the EAP overall seeks to promote energy security, reduce greenhouse gas emissions, and support economic development in SA. It is a comprehensive plan that balances the country’s energy needs with its environmental and social priorities. Conversely, the investment required to fix the machines that Ramokgopa is touting will be massive and only yield real results optimistically in three to five years (even if the additional funds could be secured from Treasury). By then, the 30 GW will be well on the way to ensuring SA has energy security. As a decarbonising, green-focused economy, we would be far more welcomed in international markets, which are far more carbon sensitive than we currently are.
The bottom line
Unsurprisingly, these latest statements or ideas of intent on the part of the electricity minister have unsettled civil society, business and energy experts alike. Ironically (yet unsurprising), the move would garner some good PR for winning an election in a country desperate to end loadshedding, but the solution is technically and financially questionable. It is important to note that there is no single solution to SA’s electricity crisis, and a combination of approaches will likely be necessary to achieve sustainable energy access. However, with careful planning and investment, it is possible to progress towards a more reliable and sustainable electricity system in the country. Logically, the move to more renewable sources of energy can be achieved at a much lower cost (without increasing the burden on SA’s already strained fiscus) with higher economic benefits than what investments in ageing and a collapsing fleet of high-polluting coal-fired power stations could ever achieve. Whilst it is now up to Cabinet to review the options, we live in the hope that well-considered approved policies and financial realities will determine a final and realistic outcome. When all is said and done, a country’s economic prosperity is underpinned by firm confidence, rising levels of productivity and constructive physical and human capital investment. It is the foundation for SA to sustainably increase potential growth and narrow the income divide. However, this is an unachievable dream if we cannot keep the figurative (and literal) light bulbs burning.
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