Asian central banks need broader forex defence

SINGAPORE: Declining foreign exchange (forex) reserves mean Asian central banks will probably start looking for alternative ways to support their currencies, says Nomura Holdings Inc.

Some of the potential methods they may choose include mandating exporters to sell foreign currency proceeds, placing restrictions on trade accounts and introducing measures to boost capital inflows, Nomura analysts, including Sonal Varma in Singapore and Ting Lu in Hong Kong, wrote in a research note.

Asian policymakers have bolstered their forex warchests in recent years following previous crises such as the 2013 taper tantrum.

Still, the rapid pace of the US Federal Reserve (Fed) interest rate hikes this year means they will be reluctant to rely solely on those funds to defend their currencies.

India is estimated to have spent US$75.1bil (RM346bil) this year supporting the rupee in the spot and forward markets, while China has probably spent US$39.6bil (RM182.5bil), Thailand US$26.9bil (RM124bil) and South Korea US$16.7bil (RM77bil), according to Nomura’s estimates to the end of August.

“The Reserve Bank of India and the Bank of Thailand have used up more than 10% of their end-2021 headline reserve levels.”

“Asia still has forex reserves to prevent runaway depreciation, but amid the erosion of forex reserve buffers, we believe we are closer to a point where some Asia ex-Japan central banks may allow for greater forex flexibility,” the Nomura analysts wrote.

Asian currencies have tumbled this year as Fed rate hikes have bolstered the US dollar. The yen has slumped more than 20% to a 24-year low, the Korean won has fallen 17%, and the Philippine peso and Taiwan dollar have both dropped more than 13%.

Nomura suggests several measures that the individual Asian central banks may take to support their currencies, inclduing foreign asset liquidation by public pension funds. —Bloomberg

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