Emerging financial fault lines in Asia Pacific may induce sovereigns, central banks and companies in the region to diversify the currencies in which they raise funds, invest their reserves or invoice merchandise trade, said Moody’s recently.
Still, the dollar is unlikely to be unseated as the primary currency for international trade and reserves in the very near future, the credit rating agency noted.
Financial fault lines in Asia Pacific would increase reliance on domestic or regional pools of capital, which would stimulate the growth of local currency bond markets and reduce exchange rate risks for issuers, said Michael Taylor, a Moody's Managing Director.
“However, financial fault lines may drive up financing costs across sectors with higher demand for scarce local liquidity,” he pointed out.
Sovereigns would reduce external risks but may face tighter liquidity and higher financing costs, in particular frontier markets with shallow domestic markets, Moody’s said.
Asia Pacific economies have generally reduced their reliance on dollar debt financing, but still depend highly on the dollar for trade invoicing and reserves management, the firm added.
The emerging geopolitical fault lines in Asia Pacific could impede the free movement of capital and banks' ability to secure reliable and stable dollar funding, according to Moody’s.
Meanwhile, financial institutions are exposed to the shifting strategies of their corporate customers, particularly in sensitive sectors that are central to geopolitical competition, such as semiconductors, the firm said.
In addition, fault lines will intensify competition over development and project finance, Moody’s warned.
Multilateral development banks (MDBs) will remain a core driver of long-term project finance, largely in US dollars, the firm said.
Nevertheless, the emergence of MDBs and bilateral lending initiatives that reflect the interests of emerging economies is likely to increase competition in development finance, particularly given the role of governments as shareholders in the major MDBs, the firm added.