Group Economics
Daily Insight
Macro & Financial Markets Research Peter de Bruin & Aline Schuiling +31 20
EM FX reserves under the microscope
343 5619
22 September 2015
EM FX reserves have continued to fall, led by China, though some EM’s are showing resilience France’s government bond ratings downgraded, outlook stable
EM markets’ FX reserves continue to slide,..
Emerging Markets’ FX reserves have started to slide US dollar, trillions
According to IMF International Financial Statistics Data, total Emerging Markets’ FX reserves fell from a peak of $8.21 trillion in June of last year to $7.61 trillion in June of this year. Although reserve levels for most emerging markets remain
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adequate, the slide in FX reserves is a clear sign of the stress
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emerging markets are currently experiencing. Central banks in
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emerging markets have been forced to sell FX reserves to
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defend their currencies, EM economies enjoy smaller inflows of foreign money due to lower commodity prices, and foreign investors are withdrawing their money in anticipation of the Fed’s tightening cycle.
0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 FX reserves total Emerging Markets FX reserves total Emering Markets ex. China Source: IMF, Thomson Reuters Datastream
… with China taking the lead,.. Around half of the $0.6 trillion drop in reserves can be explained by China’s FX interventions to keep the CNY from
France downgraded …. Rating agency Moody’s downgraded France’s sovereign
depreciating too much, though its reserve levels remain
rating from Aa1 to Aa2 last Friday. The outlook was changed
abundant in comparison to the country’s imports and foreign
to stable from negative. The agency referred to the continued
debt. However, other emerging economies such as Saudi
weakness in France’s medium-term growth outlook. Combined
Arabia, Turkey, and South Africa have also seen their reserves
with ‘institutional and political constraints this poses challenges
decline, albeit to a lesser extent. The IMF data only run until
for the material reduction in the government’s high debt burden
June, but judging from monthly central bank data, total
over the remainder of this decade’, according to Moody’s.
Emerging Markets FX reserves have continued to fall over
Indeed, France has fallen into the legion of eurozone countries
recent months, with China again taking the lead.
that grow below the average. This is largely because France’s competitive position has deteriorated in recent years, as unit
…though some EM’s show resilience In contrast, some Emerging Markets are managing to swim against the tide. For instance, India’s FX reserves are on a
labour costs rose more strongly than the eurozone total, while the country implemented limited economic reforms compared to countries such as Spain, Portugal and Greece.
modest upward trend, reflecting its improved external position. Brazil’s reserves are also showing resilience and are moving broadly sideways. This reflects a modest improvement in the country’s current account deficit and ongoing inflows related to foreign direct investment. Finally, in Russia, despite the renewed weakness in oil prices, the panic that we saw at the end of last year has clearly abated. This is leading to lower capital outflows and in conjunction with Russia’s current account surplus is helping the country’s FX reserves to stabilise.
… but recent reforms help to make the outlook stable That said, the government has recently pushed through a number of reforms that should improve the flexibility of the labour market and enhance efficiency in product markets. Moreover, labour costs for companies have been reduced by lowering the labour tax wedge. These measures should have a positive impact on economic growth in the longer-term, starting in 2016. In its decision to change the outlook for France to stable from negative, Moody’s took these factors into consideration as well. Financial markets did not react to Moody’s decision in a significant way.