Reserves drop of US$110bil signals emerging currency risk

  • Banking
  • Friday, 10 Apr 2020

Indonesia, India and Philippines are most at risk in Asia.

HONG KONG: The decade-long surge in foreign exchange reserves among emerging markets is coming to an end, highlighting the danger posed by future currency depreciation.

China’s holdings fell by US$46.1bil in March, the most since late 2016, official data showed on late Tuesday. The drawdown accounted for the largest share of the US$110bil that 11 emerging market central banks, including those in Turkey, India, Brazil and Egypt, yanked from their reserves last month to stem currency losses.

The declines underscore the clamour for dollars that rocked foreign exchange markets around the world during March, driving the MSCI Emerging Markets Currency Index to its biggest retreat since May 2012.

With commodity prices and export earnings in the doldrums as the coronavirus crisis deepens, the outlook for many emerging market currencies isn’t much better.

“I expect another leg of strong downward pressure on emerging currencies as the magnitude of global recession becomes clear, ” said Dariusz Kowalczyk, a senior emerging market strategist at Credit Agricole CIB in Hong Kong.

“Countries with external deficits and high external debt compared to foreign exchange reserves are the most vulnerable.”

Indonesia, India and Philippines are most at risk in Asia, he said.

The Markit CDX Emerging Markets Index of credit-default-swap spreads blew out to record highs last month as traders factored in a higher probability of missed payments amid the collapse in oil prices, and concern China will be rocked by a slump in demand from Europe and the Americas.

Emerging markets suffered about US$83bil of outflows in March, a figure that may grow to between US$500bil and US$750bil if the exodus is anything like 2008 and 2015, according to Bank of New York Mellon Corp.

The prospect of a global recession may keep the US dollar in demand over the next few months, raising the risk of intensifying capital flight and a further decline in reserves.— Bloomberg

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