US dollar war chests swell in Asia as central banks ‘learn from the past’
- Central bank holdings of foreign currencies in Asia’s fast-growing emerging economies hit US$5.82 trillion last month
- China’s foreign-currency holdings rose to their highest level in five years in May on the back of a weaker US dollar and increased portfolio inflows
Asia’s emerging economies have accumulated their highest level of foreign-exchange reserves in seven years, offering a powerful buffer against market volatility if the US Federal Reserve changes course.
Central bank holdings of foreign currencies in the region’s fast-growing emerging economies hit US$5.82 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.
“Emerging economies are definitely learning from the past by war-chesting,” Mapa said. “They’re all the more aware of the eventual reversal in the 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 recovery in the United States means the central bank will need to signal a policy turn sooner than anticipated. Central banks in South Korea and New Zealand have already said that their improving economies may eventually justify higher interest rates.
Any hint of a Fed shift on tapering will quickly test defences, including current-account surpluses and foreign-exchange holdings, said Tuuli McCully, head of Asia-Pacific economics at Scotiabank.
“There are significant differences between regional countries, and some will be more vulnerable than others to any financial market volatility and capital outflows,” she said, citing Malaysia and Indonesia as countries with lower reserve coverage ratios than their peers.
Still, this time around, Asian central banks can meet any shift from US Fed chairman Jerome Powell with a wall of currency firepower.
Last month, China’s foreign-currency holdings rose to their highest level in five years, at US$3.22 trillion, on the back of a weaker US dollar and increased portfolio inflows.
India’s authorities, still scarred by the taper tantrum, have built up record foreign-exchange reserves worth more than US$600 billion. Earlier this year, the country’s reserves briefly surpassed Russia’s to become the world’s fourth-largest, as the central bank hoarded US dollars to cushion the economy against any sudden outflows. Reserve Bank of India chief Shaktikanta Das has said the buffer will help insulate Asia’s third-largest economy from global spillovers.
In the Philippines, central bank reserves are forecast to reach a record US$114 billion this year, while Taiwan’s holdings rose to US$542.98 billion in May, just short of February’s record. South Korea’s rose to a record US$456.46 billion in May.
Indonesia’s reserves fell from a record-high to US$136.4 billion in May, the lowest level in five months, as the government paid off external debt. The central bank, which will decide on its policy rate after the Fed meeting, is expected to leave rates unchanged to shield the battered rupiah from further foreign outflows.
“Compared with 2013, regional countries, particularly the most affected, are in a less vulnerable position,” said Radhika Rao, an economist at DBS Bank in Singapore.
