Developing countries preserving their reservesDeveloping nations from Brazil to India are preserving a record $2.9 trillion of foreign reserves and opting instead to raise interest rates and restrict imports to stem the worst rout in their currencies in five years.
Foreign reserves of the 12 biggest emerging markets, excluding China and countries with pegged currencies, fell 1.6 percent this year compared with an 11 percent slump after the collapse of Lehman Brothers Holdings in 2008.
The 20 most-traded emerging-market currencies have weakened 8 percent in 2013 as the Federal Reserve’s potential paring of stimulus lures capital away.
After quadrupling reserves over the past decade, developing nations are protecting their stockpiles as trade and budget deficits heighten their vulnerability to credit-rating cuts. Brazil and Indonesia boosted key interest rates last month to buoy the real and rupiah, while India is increasing money-market rates to try to support the rupee as growth slows. Central banks should draw on stockpiles only once currencies have depreciated enough to adjust for the trade and budget gaps, according to Canadian Imperial Bank of Commerce.
“If fundamentals are going against you, it’s not credible to defend a currency level - investors would rush for the exit when they see the reserves depleting,” said Claire Dissaux, managing director of global economics and strategy at Millennium Global Investment in London. “The central banks are taking the right measures, allowing the currencies to adjust.”
The South African rand, real, rupee, rupiah and lira, dubbed the “fragile five” by Morgan Stanley strategists last month because of their reliance on foreign capital for financing needs, fell the most among peers this year, losing as much as 19 percent.
Foreign reserves in the 12 developing nations, including Russia, Taiwan, Korea, Brazil and India, declined to $2.9 trillion as of Aug. 28, from $2.95 trillion on Dec. 31 and an all-time high of $2.97 trillion in May. The holdings increased from $722 billion in 2002.
The figures don’t reflect the valuation change of the securities held in the reserves. China, which holds $3.5 trillion as the world’s largest reserve holder, is excluded to limit its outsized impact.
In the three months starting September 2008, reserves dropped 11 percent as Lehman’s collapse sent the real down 29 percent and the rupee 12 percent. India’s stockpile declined 16 percent during the period, while Brazil spent more than $14 billion in reserves in six months starting October, central bank data show.
“Often, on the day of the intervention or its announcement, a currency will get a small bounce upward,” Bluford Putnam, chief economist at CME Group, wrote in an Aug. 28 research report. “For the longer-term, however, market participants often return to a focus on the basic issues of rising risks and contagion potential.”
The Turkish and Indian central banks have developed tools to fend off market volatility while keeping their benchmark rates unchanged. Turkey adjusts rates daily and Gov. Erdem Basci promised more “surprise” tools to defend the lira while vowing to keep rates unchanged this year. Since July, India has curbed currency-derivatives trading, restricted cash supply, limited outflows from locals and asked foreign investors to prove they aren’t speculating on the rupee.
India’s steps failed to prevent its currency from touching a record low of 68.845 per dollar on Aug. 28. The lira tumbled to an unprecedented 2.0730 the same day.
The rupee plummeted 8.1 percent in August, the biggest loss since 1992 and the steepest among 78 global currencies. The lira plunged 5.1 percent, the rand dropped 4.1 percent, the real fell 4.6 percent and the rupiah sank 5.9 percent, the data show.
Interest-rate swaps show investors expect South Africa and India’s benchmark rate will increase by at least 0.25 percentage point, or 25 basis points, by year-end, according to data compiled by HSBC Holdings. In Brazil, policy makers are forecast to raise the key rate by 100 basis points to 10 percent, and Turkey will lift the benchmark one-week repurchase rate by 200 basis points to 6.5 percent, the data show.
“Policy makers are doing the right thing by staying away from intervention as the depreciating currencies are those that are facing current-account or budget deficits,” said Patrick Bennett, a strategist at CIBC. “Allowing currency depreciation is like lifting a pressure valve, which allows required adjustment.” Bloomberg
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