May 11, 2020 / 1:11 PM / 15 days ago

Emerging economies burn through $240 billion in reserves, drain seen continuing: Bank of America

FILE PHOTO: A Bank of America building is seen in Los Angeles, California, U.S., May 6, 2019. REUTERS/Lucy Nicholson

LONDON (Reuters) - Leading emerging countries have burned through $240 billion in foreign exchange reserves over the past two months, Bank of America said on Monday, as central banks look to prop up their currencies and economies in the face of COVID-19.

The drain was likely to continue albeit at a slower pace, Bank of America added in a note citing reserves data for 31 states.

China, Hong Kong, Saudi Arabia, Brazil and Turkey had all seen the biggest total drop in reserves, the bank said.

Turkey and Egypt had seen particularly large percentage declines, it added. Turkey and Romania also stood out as their official reserves did not fully cover short-term external debt over 12 months, the note said.

“The drain of [EM] reserves is likely to continue, though more slowly, during what looks to be a disappointing recovery in global and EM growth,” David Hauner at BofA wrote in the note.

“After an initial bounce in activity after the opening of lockdowns, several factors are likely to restrain the recovery: high debt, corporate defaults, inefficient labour markets, de-globalisation and China-U.S. tensions.”

The bank said that it was remarkable how little some other emerging market countries, including Russia, had spent of their reserves in percentage terms.

Instead, it added, they had built up credibility by allowing their currencies to adjust without much intervention, and had instead focused on cutting interest rates and in many cases buying government bonds.

Russia’s central bank governor Elvira Nabiullina said on Friday the bank will consider cutting its key rate by 100 basis points in June, opening the door for a bigger cut than the market had expected.

Reporting by Tom Arnold; Editing by Andrew Heavens

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