MANILA: Asia’s emerging economies have accumulated their highest level of foreign-exchange reserves since 2014, offering a powerful buffer against market volatility if the United States Federal Reserve (Fed) changes course.
Central bank holdings of foreign currencies in the region’s fast-growing emerging economies hit US$5.82 trillion (RM23.96 trillion) as of May, their highest since August 2014.
When China’s cash pile is stripped out, emerging Asian central banks’ reserves stood at an all-time high of US$2.6 trillion (RM10.70 trillion).
While some of the gains reflect dollar weakness and bumper exports, policy makers are deliberately preparing their defenses, said Nicholas Mapa, an economist with ING Groep NV in Manila.
“Emerging economies are definitely learning from the past by war-chesting, ” Mapa said.
“They’re all the more aware of the eventual reversal in monetary policy stance of developed market central banks and the potential repercussions that may arise from a Fed taper or eventual rate hike.”
While the Fed is expected to maintain a dovish outlook when it meets this week, economists say the accelerating US recovery means the bank will need to signal a policy turn sooner than anticipated.
Central banks in South Korea and New Zealand have said their improving economies may eventually justify higher interest rates.
Hints of a Fed shift on tapering will test defences including current-account surpluses and foreign-exchange holdings, said Tuuli McCully, head of Asia-Pacific economics at Scotiabank. ― Bloomberg