July 14, 2014 / 3:17 PM / 5 years ago

GRAPHIC-Emerging central banks rebuild hard currency reserves

LONDON, July 14 (Reuters) - Hard currency reserves across emerging markets excluding China have surged by around $100 billion from levels at the end of 2013 as central banks exploit this year’s buoyant investment inflows to refill their depleted coffers.

With an eye on the day when U.S. interest rates eventually start to rise, policymakers in emerging economies are actively buying dollars. They see them as a bulwark against the kind of selloff that ravaged their markets last year due to signs that the U.S. bond-buying programme could soon be wound down.

They have been helped by renewed interest from investors who have pumped more than $150 billion this year into emerging stocks and bonds, data from the Institute of International Finance shows.

As a result, reserves in India, Indonesia and Mexico have risen by about 8 percent this year, leading gains in big emerging economies, the following graphic shows:


For TABLE on central bank reserves

“We are seeing rebuilding of emerging market reserves thanks to the strong inflow and that’s allowing them to recover after the losses of last year,” said David Hauner, head of Emerging EMEA fixed income and economics at Bank of America Merrill Lynch.

Indian reserves for instance are at $315 billion, over $40 billion above a trough hit last year as the Reserve Bank of India has intervened to rebuild buffers and also stem gains in the rupee’s exchange rate.

South Korean authorities also have intervened to dampen the won which is near six-year highs

“As much as central banks didn’t like currency depreciation, they don’t like much appreciation either,” Hauner added.

India was one of the “Fragile Five” countries that suffered huge selloffs last year because of their reliance on external capital and a perception that their hard currency reserves were inadequate.

One RBI official said the bank had “learned its lesson”.

“In the current situation where there are so many uncertainties like elections, global spillover, Fed fund rate hike, no amount of reserves is high,” he said.

Overall reserves in emerging economies, not taking into account China, rose $100 billion in the January-July period to $4.08 trillion, according the following graphic based on data from consultancy CrossBorder Capital:


Chinese reserves alone are near the $4 trillion mark.

Not everyone is building reserves. Russia’s stash dwindled 6.6 percent from the end of 2013 to $475.8 billion while another Fragile Five state, South Africa, posted a 9.5 percent fall. Nigerian and Ukrainian reserves are down 13-14 percent.

Rising reserves are helping to allay fears of balance of payments crises in emerging markets though there are some exceptions, according to the following graphic, based on data from BofA/ML: link.reuters.com/san42w

One yardstick is the number of months of a country’s imports that its reserves will buy, with three months deemed to be the safe minimum. The second, based on the so-called Guidotti-Greenspan rule, requires reserves to be at least equal to external debt payments due in the coming year.

The rationale is that countries should have enough reserves to resist a sudden stop in foreign financing.

By the first measure, Egypt and Ukraine - each with two months’ of import cover - look vulnerable. Argentine, Turkish and Ukrainian reserves look inadequate to repay short-term debt.

editing by David Stamp

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