Reserves Break $3 Trillion Mark in Emerging MarketsYe Xie and Andrea Jaramillo
Developing nations from Colombia to South Korea have accumulated so many dollars through intervening to curb currency gains that their foreign reserves now exceed $3 trillion for the first time.
The 12 emerging nations with the biggest holdings outside of China added $49 billion in April, May and June, more than any quarter since September 2012, data compiled by Bloomberg show. Of 23 major developing-nation currencies, 18 are forecast by analysts to drop by year-end, suggesting the strategy is proving effective in keeping exchange rates competitive.
Bigger reserves also help governments defend their currencies from an emerging-market rout of the sort they suffered in mid-2013, when their coffers were depleted by $57 billion in just two months. Nations are filling up with dollars while they can, before a boost in U.S. interest rates reduces the yield advantage their assets enjoy.
“It’s a window of opportunity for them,” Nicolas Jaquier, an economist in London at Standard Life Investments Ltd., which oversees about $425 billion, said by phone on July 14. “The central banks have to defend the stability of their markets and they’re happy to mop up the inflows.”
The opportunity may soon run out as developing nations look toward an eventual increase in global interest rates and an end to the monetary stimulus that has supported their assets. While a Bloomberg survey suggests the first increase in U.S. rates will come in the second quarter of 2015, Federal Reserve Chair Janet Yellen said this week that borrowing costs may rise faster than investors expect.
Developing nations are able to build their reserves because investors are flocking to their financial assets after governments cleaned up their finances. China isn’t included in Bloomberg’s aggregate figures because its $3.99 trillion of reserves are larger than all its peers combined. The People’s Bank of China says its coffers swelled by $42 billion in the second quarter to a record.
Indonesia’s rupiah is the second-best performer among emerging-market currencies in 2014 after its current-account deficit shrank to a two-year low in the first quarter, while India’s rupee is ranked fifth as its shortfall fell to the lowest since at least 2010.
South Korea’s won posted the biggest second-quarter gain versus the dollar, climbing 5.2 percent, as the central bank raised its estimate for the current-account surplus to a record.
Such currency gains are a problem for nations recovering from the financial crisis because they can weigh on growth by making exports less competitive. Hence the sale of local currencies, and the purchase of dollars, that have pushed developing nations’ reserves to a record.
“Authorities are saying, we’re going to buy dollars and basically lean into the wind to prevent further appreciation,” Benoit Anne, the head of emerging-market strategy at Societe Generale SA in London, said by phone on July 14.
South Korea’s reserves rose to an all-time high of $367 billion last month amid speculation authorities stepped up intervention to limit the won’s advance. India’s stockpile climbed to an almost three-year high of $316 billion as of July 4, while Indonesia’s rose to $108 billion in June, more than double the level at the end of 2008.
Colombian reserves reached a record, while Russia’s rose in June for the first time in eight months as declining tensions in Ukraine encouraged investors to return to its assets.
“Some of them are rebuilding the reserves they lost” in last year’s selloff, Viktor Szabo, a London-based money manager at Aberdeen Asset Management Plc, which oversees more than $13 billion of emerging-market debt, said by phone on July 14. “Some of them don’t want to allow too much currency appreciation. There’s an opportunity, and a willingness, to pile up reserves.”
The bond purchases the U.S. uses to pump money around the world are due to end this year. When the Fed first signaled a reduction in stimulus in May 2013, it sent an index of 20 developing currencies down 3.8 percent, the most in a year.
Strategists are forecasting declines this year of 11 percent for Argentina’s peso, 6.7 percent for Brazil’s real and 3.6 percent for Colombia’s peso. Bank of America Corp. recommends clients sell the Colombian currency, while Citigroup Inc., the world’s biggest foreign-exchange trader, says India’s rupee will struggle to appreciate.
Morgan Stanley said last week that valuations of emerging-market currencies are becoming less attractive, and Goldman Sachs Group Inc. warned July 10 that foreign exchange is the developing world’s “weakest link” because of the prospect of higher U.S. rates and bond yields.
“They know what happened last year and that the next move in U.S. Treasury yields is more likely to be up than down,” Steffen Reichold, a New York-based economist at Stone Harbor Investment Partners LP, which manages $63 billion, said in a July 14 phone interview. “That’s on their minds, so they’re trying to use inflows to build up their reserves.”