Liquidity as Infrastructure: Rethinking Currency Strength in Emerging Markets

To me there is a persistent tendency to analyse emerging market currencies through the wrong lens. The debate is usually framed around policy quality, fiscal discipline, or inflation management. Those things matter. But they are not the root constraint. The deeper constraint — and the one I keep circling back to — is structural liquidity certainty. Specifically, whether economic actors can feel confident that foreign currency will be available when they need it. Not just today, but in moments of stress. This is the ultimate goal of real fx liquidity. Many emerging economies have an issue with non-domestic currencies being used for trade and try to solve for it – however I’d argue that many are solving the wrong issue – it’s not that these other currencies might be dominant – it’s that there is limited and lacking certainty of availability.

In most developed markets, liquidity is assumed to be infinite. No one in London or New York lies awake worrying whether dollars will be available at settlement. The system just works. But in emerging markets, liquidity is episodic. It arrives in waves — export cycles, donor inflows, investment rounds, commodity booms — and then it disappears.

That rhythm creates behaviour long before it creates statistics. It means that importers are inclined to over-hedge. Banks hold asymmetric and, in some cases, irrational defensive dollar buffers. Corporates price risk into everything. Over time, this becomes self-reinforcing drag on the domestic economy. Local currency is used for daily activity, but hard currency becomes the mental unit of safety.

The result is not only volatility it is partial monetary outsourcing — an economy that functions domestically in one currency but thinks, plans, and prices risk in another.

What sits underneath this is not primarily a currency problem. I would argue that it is an infrastructure problem.

The Missing Layer

If we step back from traditional banking metrics, liquidity can be economically productive even when it is not deployed into credit or trading. Central banks understand this instinctively. Foreign exchange reserves often sit in low-yield assets — treasuries, sovereign bonds, things that would make a hedge fund manager wince — yet they are among the most economically powerful balance sheet positions in the entire system. They shape behaviour and reduce crisis probability.

The same logic can exist inside a commercial banking system if designed deliberately and whilst this is fuzzy logic thru a western lens, I tend to think that it makes huge sense in developing economies.

If a financial institution can maintain visible, persistent, multi-currency liquidity inside an economy — not as a speculative position, but as standing settlement infrastructure — the liquidity itself becomes economically active. It changes how other banks behave. It changes how corporates hedge. It changes how importers plan. It changes how quickly trade can settle. Ultimately it means that liquidity stops being an asset class and starts being economic plumbing.

This is where I think that the emerging market context diverges sharply from Western financial thinking. In New York or London, idle liquidity is seen as inefficient capital. Something to be deployed, leveraged, put to work. But in Kigali, Lagos, Nairobi, Dhaka, or Phnom Penh, permanent liquidity presence can be system-stabilising infrastructure — as essential as roads or telecoms, even if it never directly earns a return. I think a lot of the thinking around how to build banking infrastructure into these economies needs to be considered for the markets themselves and it not be assumed that what works in a multi hundred-year-old banking ecosystem in New York or London is exactly what an African or SE Asian economy needs – this thinking is outdated.

Why This Isn't About Any One Country

To me the interesting thought here is not about a single economy. It is about a pattern that recurs across every economic bloc in the Global South and increasingly in parts of the world that wouldn't traditionally consider themselves emerging.

In almost every regional economic community — East Africa, West Africa, Southeast Asia, South Asia, the Pacific Islands, parts of Latin America — there is a structural truth - most of these economies import more value than they export which in turn naturally creates persistent hard currency demand. In the current shift in the world the regional trade between neighbours is growing rapidly, but regional currency liquidity remains fragmented. 79% of cross-border flows still operationally (or at least psychologically) step through the dollar, even when there is no fundamental economic reason they should.

A Kenyan manufacturer buying raw materials from Tanzania. A Cambodian exporter settling with a Vietnamese buyer. A Ghanaian business importing components from Senegal. In each case, the underlying economic relationship is regional. The goods move between neighbours. The value stays in the region. But the money — the settlement layer — often routes through New York or London, picking up friction, cost, and delay at every step. Not because the dollar adds value to the transaction, but because there is no alternative plumbing.

This is where the idea of liquidity anchors becomes interesting.

The Liquidity Anchor

Within any economic bloc, there tend to be one or two countries with certain characteristics — relatively strong monetary discipline, comparatively high policy credibility, geographic centrality, and ambition to play a connecting role. These are not always the largest economies. Countries generally where the constraint is not trust in the state, but depth of market structure.

If one of these countries — or more precisely, if the banking system within one of these countries — can become a place where regional currency liquidity physically exists in meaningful size, something subtle but powerful happens.

The system has the potential to move from reactive foreign exchange sourcing to proactive liquidity certainty. And that shift, which sounds technical and dry, changes behaviour over time to genuinely empower a move into regional currency certainty which in turn has strong downstream economic and policy impacts. Which further means governments can spend less defending their currency and more on deploying it, and businesses are able to stop treating regional trade as a foreign exchange problem

Think of it this way. If you know — like actually really know, not hope — that the currency you need for settlement will be there when you need it, there is no need to sit on economically irrational sums of it. There is less need to pay a premium to lock it in early. There is less need to route your transaction through three intermediaries just to guarantee execution. Goods are priced more tightly, which over time can have inflationary benefits, when the risk premium drops away. Trade starts thinking in regional rather than dollar terms. You start treating your neighbour's currency as something usable rather than something to be avoided.

Multiply this across thousands of businesses in a regional economy and the effect is significant.

What This Actually Looks Like Inside a Bank

The core idea is simple but unconventional in Western banking terms.

If a bank within one of these anchor economies were to accept and hold significant multi-currency balances — from institutions, from high-net-worth individuals, from regional corporates — and maintain them primarily as standing liquidity buffers rather than yield-seeking assets, those balances would still be economically active. Not through lending. Not through trading. But through system assurance.

At the same time, if the domestic deposit base in local currency scales significantly through broader customer activity, the presence of multi-currency liquidity alongside it strengthens the entire balance sheet's functional resilience. Not because the currencies are directly deployed, but because they reduce emergency foreign exchange demand, reduce settlement uncertainty, and reduce defensive dollar hoarding across the system.

The economic activity is indirect, but it is very much real. The reduction of friction, the mitigation of panic behaviour and precautionary liquidity hoarding by everyone else.

This doesn’t make a great deal of intuitive sense if banking is viewed purely through net interest margin or capital efficiency — the metrics that dominate Western banking analysis. It makes complete sense if you view banking as national financial infrastructure, which in these economies is closer to what it actually is, or if not then what it needs to be.

Why This Matters at a System Level

If banks know regional currency liquidity exists locally and permanently, they hold less defensive hard currency inventory. If corporates trust cross-border settlement finality, they hedge less aggressively. If importers believe dollars or regional equivalents will always be available at settlement, they stop front-running demand.

The effect compounds and doesn’t mean that volatility disappears, but it becomes less erratic. Over time spreads could narrow, fx settlement speeds improve and as a result trade confidence increases, local currency becomes more usable for longer time horizons without any forced de-dollarisation policy — which, as a side point, almost never works when imposed from above.

Let me be clear I’m not a de-dollarization advocate but everyone needs to move away from polemic conversations and see that slight changes have huge impact. It’s not about replacing the dollar but it is about reducing unnecessary dependency on external currencies for regional economic activity. Two East African countries trading agricultural goods with each other would benefit from being able to do that cheaply, quickly and locally with certainty. That routing is not a feature of the global financial system. It is a legacy artefact of a time when no alternative infrastructure existed. The alternative infrastructure can now exist. The question is whether anyone builds it.

Why This Is Still Sound Banking

From a pure banking perspective, this approach only works if it is framed correctly. And I think the framing is where most people's thinking gets stuck.

This is not speculative currency positioning. It’s standing settlement liquidity, maintained for the sole purpose of enabling regional trade, cross-border settlement certainty, and systemic liquidity resilience.

If paired with real-time supervisory visibility, transparent reporting, and clear regulatory purpose, this type of balance sheet structure can sit comfortably inside any prudential framework and paradoxically assist governments in ensuring citizens are motivated to use their own domestic currency. In many ways, it aligns with how central banks already think about reserves — as insurance against system instability rather than yield assets.

I’d argue that real impact can be found in the private sector taking on some of that thinking in these economies. Unlike in the west where central banks are driven by prudence and institutions by profit – emerging economies can take a middle ground that uses foreign reserves not solely as a revenue stream but as an infrastructural maximiser. This isn't a concession — it's an advantage of building later. These banking systems are not yet locked into the orthodoxy that reserves must either sit idle on a sovereign balance sheet or be sweated for yield on a commercial one. There is space between those two positions, and it may be the most productive space in emerging market finance

The commercial banking benefit then emerges indirectly. Lower emergency liquidity costs. Lower crisis funding risk. Stronger counterparty confidence. More stable deposit behaviour. More predictable liquidity planning. These are not small advantages – its infrastructure thinking expressed through a bank balance sheet.

Behaviour Changes Before Policy Does

The real transformation — and this is the part I find most interesting — is behavioural. If liquidity presence becomes permanent and visible, business and individuals can stop operating in defensive mode which I’d imagine in turn would be a great driver to strengthen local currency relevance without legislating it. By making it safe, liquid and predictable enough that they naturally do these rather than due to policy or law changes.

In emerging markets, confidence is built through actions and lived experience. Once people see — not hear about but actually see — that currency is available when expected and needed these changes can be seismic.

If a country within any economic bloc can become a regional liquidity anchor — not just a policy success story, but a place where currency liquidity is always available — it does something much bigger than stabilise its own currency. It changes that country's role in regional economic architecture. It becomes a node other countries route through.

From Currency Competition to Liquidity Networks

The traditional global financial system is built around currency dominance. The dollar sits at the centre, and everything else orbits around it to varying degrees. That system has served a purpose and will continue to do so and play an important and necessary part. But the next phase of emerging market financial infrastructure may not be built around currency competition at all. It may be built around liquidity networks.

Systems where value can move across currencies with certainty, speed, and regulatory clarity — without always needing to route through legacy reserve currency pathways. As I say not because those pathways are bad, but because for a huge volume of regional economic activity, they are just unnecessary.

If designed correctly, this is not a challenge global financial stability it is creating an additive to it. Strengthening regional economic sovereignty while keeping global interoperability intact. The reserve currencies remain. But the plumbing underneath regional trade stops being borrowed infrastructure and starts being owned infrastructure.

That to me is the real opportunity. Not to replace existing systems, but to remove structural fragility where it does not need to exist. And to recognise that in the economies where this matters most, liquidity is not only a financial product and in fact is not best served being so, but if used properly can be a foundation that everything else benefits from; creating balance sheet substance and currency certainty whilst allowing for more tactical use of domestic currency balance sheets that are now shored up using multi-currency reserves.

I don’t think for a second that this is a fully formed and deliverable concept, it’s intended more as a thought provocation for discussion rather than a pitch for an idea. But at the root of the point is that as these economies adapt the way they think, and act do not necessarily need to be to mirror western economies systems – 2020’s Global South challenges require 2030’s solutions and not a reheating of 1990’s western ones. The economic future of the planet will be driven by these outcomes, it is exciting and thinking must rise to the opportunity.