Headline EM FX reserves distort the real story

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The headline fall in Emerging Market (EM) central bank FX reserves in recent months is causing much consternation and talk of EM demise. But dig below the raw numbers and a more benign picture emerges, as I argued in Embrace, don’t fear, slowing accumulation of EM FX reserves (7 April 2015).

First, the sharp fall in the USD-value of emerging market (EM) central bank FX reserves in Q1 2015 was due to FX valuation effects, namely the slump in EUR-USD. 

Second, the fall in the headline figure was largely due to a contraction in the USD-value of FX reserves in China (-113bn), Saudi Arabia (-34bn), Russia (-29bn) and Malaysia (-11bn). FX reserves in other EM countries, which amounted to over $2 trn, were up 2% in Q1 adjusting for valuation effect so arguably the reserve story is one about China and weak commodity prices rather than an EM-wide theme.

Third, data for the majority of EM countries point to a rebound in FX reserves in April 2015.

The underlying pace of overall EM reserve accumulation has admittedly slowed in the past year and will likely slow further, and reverse, in the long-run as EM economies focus on consumption and global (im)balances of payments narrow. That’s not necessarily a bad thing.

 

Those FX valuation effects again

The USD-value of emerging markets’ central bank FX reserves fell about $196bn in Q1 2015 (see Figure 1)[1].

[1] Emerging markets included are Argentina, Armenia, Belarus, Brazil, Bulgaria, Chile, China, Colombia, Croatia, El Salvador, Georgia, Hungary, India, Indonesia, Jordan, Kazakhstan, Kyrgyz Republic, Lithuania, Malaysia, Mexico, Moldova, Morocco, Peru, Philippines, Poland, Romania, Russia, Saudi Arabia, South Africa, Thailand, Tunisia, Turkey, Ukraine, and Uruguay.

Olivier Desbarres FX reserves fig1

But the entirety of this fall was due to currency-valuation effects, according to my calculations – i.e. the appreciation of the US dollar against other reserve currencies, namely the euro (see Figure 2).  If we strip out these currency effects, EM FX reserves rose about $25bn in Q1 2015 (see Figure 3). Admittedly this can only be an estimate as we do not know the exact currency composition of individual central banks’ FX reserves and whether active currency re-balancing took place.

Olivier Desbarres FX reserves fig2

Olivier Desbarres FX reserves fig3

 

A china and commodity story, not an EM-wide theme

Furthermore, the fall in the USD-value of EM central bank FX reserves year-to-date has largely been due to a contraction in the USD-value of FX reserves in China (-113bn), Saudi Arabia (-34bn), Russia (-29bn) and Malaysia (-11bn), as seen in Figure 4. Saudi Arabia and Russia are the world’s two largest hydrocarbon exporters while Malaysia is a significant exporter of gas and palm oil.

FX reserves in other EM countries, which amounted to over $2 trn, were up $43bn or 2% in Q1 2015 adjusting for valuation effect (see Figure 5). This represents an acceleration in the annualised pace of reserve accumulation in these countries. India’s FX reserves rose $41bn between end-2014 and end-April 2015 or about $52bn adjusting for valuation effects.

So arguably the headline story about falling reserves is about capital outflows from China and weak commodity prices rather than an EM-wide theme.

Olivier Desbarres FX reserves fig4

Olivier Desbarres FX reserves fig5

 

 

 

 

 

 

 

 

 

 

 

 

 

Data point to a rebound in FX reserves in April 2015

Finally, data – available for all EM countries bar China, Jordan, Morocco, and Tunisia – point to a $14bn rise in FX reserves in April 2015 (see Figure 6). Currency valuation effects were negligible that month as the US dollar was broadly stable versus other reserve currencies (see Figure 1).  Note that the USD weakened versus other reserve currencies bar the yen in May which will overstate the actual rise in EM FX reserves that month by about $61bn according to my calculations.

Olivier Desbarres FX reserves fig6

Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He has over 15 years’ experience with two of the world’s largest investment banks as an emerging markets economist, rates and currency strategist.


[1] Emerging markets included are Argentina, Armenia, Belarus, Brazil, Bulgaria, Chile, China, Colombia, Croatia, El Salvador, Georgia, Hungary, India, Indonesia, Jordan, Kazakhstan, Kyrgyz Republic, Lithuania, Malaysia, Mexico, Moldova, Morocco, Peru, Philippines, Poland, Romania, Russia, Saudi Arabia, South Africa, Thailand, Tunisia, Turkey, Ukraine, and Uruguay.

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