As the US Federal Reserve winds down an era of easy money, Asia has built up record-high currency reserves, as countries especially those most dependent on foreign capital inflows amass dollars in case investors cut and run.
Foreign exchange reserves in 13 Asian countries excluding Japan tracked by Thomson Reuters are expected to have risen 3.2 per cent to a record high $6 trillion in the October-December quarter, marking a near 12 per cent increase for the whole year. The estimate includes an expected 3.8 per cent rise in China’s forex reserves to an all-time high of $3.8 trillion, or a whopping 19.5 per cent surge for the year. The country will report numbers in coming days.
The rise in reserves in the last quarter was led by India and Indonesia, according to data this week, providing comfort about two countries dependant on foreign money to help narrow their traditionally hefty current account deficits.
Both took further steps this week to bolster their defences, with Indonesia raising $4 billion via a bond sale, and India expanding a currency swap agreement with Japan to potentially as much as $50 billion from $15 billion after going on a massive drive late last year to raise money from abroad.
Yet analysts say both may need to do more to avoid the type of painful measures, including interest rate hikes, they undertook last year when foreign investors raced to the exits amid fears the Fed was about to start winding down its money-printing stimulus programme. That is especially true for Indonesia, given its current-account deficit hit a record 4.4 per cent of gross domestic product in the second quarter of 2013. “Recent global bond issuance should help to shore up market confidence, but Indonesia still needs more funds either from sovereign or domestic bonds to cover its current account deficit,” said Rangga Cipta, an economist for Samuel Sekuritas in Jakarta.
Indonesia’s reserves cover only around five months of imports and around 1.6 times short-term debt, among the lowest in the region, according to JPMorgan estimates last month. Jakarta has also sought additional cover through currency swaps with other Southeast Asian countries as well as Japan. India is also seen as vulnerable, although confidence is improving after forex reserves surged 7 per cent in the October-December quarter to $295.71 billion, the biggest quarterly increase since January-March 2008.
India on Friday said reserves in the week ended on January 3 fell to $293.11 billion. The big improvement came after lenders took advantage of central bank subsidies to raise $34 billion from deposits and capital abroad. Worries about its current account deficit and foreign outflows drove the rupee to record lows last year. Policymakers in India and Indonesia have pledged renewed vigilance after the Fed said in December it would start to reduce monthly bond purchases by $10 billion a month.