Foreign currency reserves in emerging markets fell last year for the first time in two decades, as developing economies found themselves beset by waning competitiveness, capital outflows and concerns over US monetary policy.
Nine out of 10 emerging market economists polled by the Financial Times said emerging markets had passed a period of “peak reserves” and might continue to see their stashes of foreign currency shrink for months.
That decline could hamper emerging economies’ ability to carry on buying US and European debt, a trend that has been an engine of growth in the west over the past decade.
“We are past the peak forex reserves in emerging markets,” said Maarten-Jan Bakkum, senior emerging market strategist at ING Investment Management. “The peak was in June last year. Since then we have seen declines in all major EM countries apart from Mexico, India and Indonesia.”
The International Monetary Fund said on Tuesday that total foreign currency reserves in emerging and developing economies fell $114.5bn year on year in 2014 to $7.74tn — the first annual decline since the IMF data series began in 1995. At their peak, emerging market reserves reached $8.06tn at the end of the second quarter last year.
Data collected by ING for the leading 15 emerging economies indicate that the decline accelerated in January and February this year, when reserves contracted by a total of $299.7bn. The ING data also showed that reserves shrank year on year for an unprecedented three months in December, January and February.
“The first quarter of this year is also likely to show a decline in emerging market reserves year on year,” said Mr Bakkum. “This is a really significant change.”
This all points to something more worrying. If emerging markets are no longer accumulating forex reserves, the world’s savings glut may be more apparent than real
– Frederic Neumann, HSBC economist
The rise in emerging market reserves from $1.7tn at the end of 2004 has been a foundation stone in the global economy for a decade. Much of the capital that emerging markets absorbed from trade surpluses, portfolio inflows and direct investments was recycled into US and European debt markets, helping to finance debt-fuelled growth in developed economies.
This dynamic may now be going into reverse, economists said. “This all points to something more worrying. If emerging markets are no longer accumulating forex reserves, the world’s savings glut may be more apparent than real,” said Frederic Neumann, economist at HSBC. The world will “sorely miss” the recycling of emerging market reserves when the west’s easy monetary policy turns tighter, he added.
Mr Neumann and other economists pointed to China’s influence in the declining reserve trend. The unwinding of the “China carry trade” — in which Chinese speculators slashed their foreign borrowing as the renminbi weakened this year — propelled net outflows from the country’s capital account of a record $91bn in the fourth quarter of last year.
But such capital outflows are by no means confined to China. Fears of Washington tightening monetary policy in a strong dollar environment has also prompted emerging market borrowers to reduce their exposure to loans denominated in the greenback. In addition, developed market investors have cut their risks in some emerging markets.