Emerging Nations Save $2.9 Trillion Reserves in Rout
Developing nations from Brazil to India are preserving a record $2.9 trillion of foreign reserves and opting instead to raise interest rates and restrict imports to stem the worst rout in their currencies in five years.
Foreign reserves of the 12 biggest emerging markets, excluding China and countries with pegged currencies, fell 1.6 percent this year compared with an 11 percent slump after the collapse of Lehman Brothers Holdings Inc. in 2008, data compiled by Bloomberg show. The 20 most-traded emerging-market currencies have weakened 8 percent in 2013 as the Federal Reserve’s potential paring of stimulus lures away capital.
After quadrupling reserves over the past decade, developing nations are protecting their stockpiles as trade and budget deficits heighten their vulnerability to credit-rating cuts. Brazil and Indonesia boosted key interest rates last month to buoy the real and rupiah, while India is increasing money-market rates to try to support the rupee as growth slows. Central banks should draw on stockpiles only once currencies have depreciated enough to adjust for the trade and budget gaps, according to Canadian Imperial Bank of Commerce.
“If fundamentals are going against you, it’s not credible to defend a currency level -- investors would rush for the exit when they see the reserves depleting,” said Claire Dissaux, managing director of global economics and strategy at Millennium Global Investment in London. “The central banks are taking the right measures, allowing the currencies to adjust.”
The South African rand, real, rupee, rupiah and lira, dubbed the “fragile five” by Morgan Stanley strategists last month because of their reliance on foreign capital for financing needs, fell the most among peers this year, losing as much as 19 percent.
Foreign reserves in the 12 developing nations including Russia, Taiwan, South Korea, Brazil and India, declined to $2.9 trillion as of Aug. 28, from $2.95 trillion on Dec. 31 and an all-time high of $2.97 trillion in May, data compiled by Bloomberg show. The holdings increased from $722 billion in 2002.
The figures don’t reflect the valuation change of the securities held in the reserves. China, which holds $3.5 trillion as the world’s largest reserve holder, is excluded to limit its outsized impact.
In the three months starting September 2008, reserves dropped 11 percent as Lehman’s collapse sent the real down 29 percent and the rupee 12 percent. India’s stockpile declined 16 percent during the period, while Brazil spent more than $14 billion in reserves in six months starting October, central bank data show.
“Often, on the day of the intervention or its announcement, a currency will get a small bounce upward,” Bluford Putnam, chief economist at CME Group Inc., wrote in an Aug. 28 research report. “For the longer-term, however, market participants often return to a focus on the basic issues of rising risks and contagion potential.”
Putnam said “aggressive” short-term interest-rate increases that “dramatically” raise the costs of going short a currency can work to stem an exchange-rate slide.
The Turkish and Indian central banks have developed tools to fend off market volatility while keeping their benchmark rates unchanged. Turkey adjusts rates daily and Governor Erdem Basci promised more “surprise” tools to defend the lira while vowing to keep rates unchanged this year. Since July, India has curbed currency-derivatives trading, restricted cash supply, limited outflows from locals and asked foreign investors to prove they aren’t speculating on the rupee.
India’s steps failed to prevent its currency from touching a record low of 68.845 per dollar on Aug. 28. The lira tumbled to an unprecedented 2.0730 the same day.
The rupee plummeted 8.1 percent in August, the biggest loss since 1992 and the steepest among 78 global currencies, according to data compiled by Bloomberg. The lira plunged 5.1 percent, the rand dropped 4.1 percent, the real fell 4.6 percent and the rupiah sank 5.9 percent, the data show.
The Indian currency rose 0.9 percent 67.0900 per dollar as of 12:36 p.m. in New York today, while its Indonesian counterpart gained 0.5 percent to 11,125 versus the greenback. South Africa’s rand appreciated 1.1 percent to 10.2211 per dollar, while the Turkish lira strengthened 0.2 percent to 2.0546.
Interest-rate swaps show investors expect South Africa and India’s benchmark rate will increase by at least 0.25 percentage point, or 25 basis points, by year-end, according to data compiled by HSBC Holdings Plc. In Brazil, policy makers are forecast to raise the key rate by 100 basis points to 10 percent, and Turkey will lift the benchmark one-week repurchase rate by 200 basis points to 6.5 percent, the data show.
Policy makers are deploying reserves through targeted measures, according to ING Groep NV. Between January 2009 and June 2013, Brazil, Indonesia and South Africa recorded a net $50 billion of portfolio inflows while Turkey received about $30 billion, the Dutch bank estimates. Foreign-currency stockpiles help protect the countries from a sudden exit of funds, according to Nomura Holdings Inc.
Brazil’s monetary authority announced a $60 billion program on Aug. 22, using currency swaps and loan facilities to alleviate the dollar shortage in the futures market, where Nomura says most of the trading is done. Turkey’s central bank has sold $8.75 billion at foreign-currency auctions since starting the sales on June 11. Indonesia extended a bilateral swap deal on Aug. 29 with the Bank of Japan valued at $12 billion that will allow the two nations to borrow from each other’s foreign-exchange reserves.
India’s central bank said on Aug. 28 it will sell dollars to state-run oil importers through swap agreements. Refiners are the largest buyers of foreign-exchange in the nation, which depends on imports for 80 percent of its oil needs.
“Reserve adequacy is a hot topic for the market right now,” Chris Turner, the head of currency strategy at ING in London, wrote in an Aug. 30 report. Relative to portfolio inflows, “Brazil stands out with 800 percent coverage by foreign-exchange reserves, while Turkey, Indonesia and South Africa’s reserve coverage looks low by international standards.”
Foreign reserves in emerging markets swelled as policy makers bought the greenback to limit appreciation of their currencies and shield exporters as the Fed bought $2.3 trillion of debt from December 2008 to June 2011 and is currently purchasing $85 billion worth of bonds a month.
Central banks can change tack once exchange rates have adjusted for their nations’ deficits, according to Toronto-based CIBC. The rupee has probably weakened as much as it should, while the rupiah needs to fall further after intervention earlier this year limited the drop, said Patrick Bennett, a strategist at CIBC, said in an Aug. 30 telephone interview from Hong Kong.
Indonesia’s failure to bolster the rupiah after burning through 19 percent of its holdings this year underscores the limitation of central bank intervention in the $4 trillion foreign-exchange market.
“Policy makers are doing the right thing by staying away from intervention as the depreciating currencies are those that are facing current-account or budget deficits,” Bennett said. “Allowing currency depreciation is like lifting a pressure valve, which allows required adjustment.”