Emerging Asia’s $5trn reserves tested in currency war

Bloomberg

It used to be that a buildup in foreign reserves was seen as a bulwark against currency shocks and swift turns in investor sentiment.
Those days seem far away — and that defense less robust — as the trade conflict between the US and China evolves into a full-blown currency war that’s threatening emerging markets globally. Reserves of central banks in developing Asian nations, which have risen to almost $5 trillion this year, will now be put to the test as currencies slide.
“The key lesson from 2008 is that you can never have too much reserves,” said TaimurBaig, chief economist at DBS Group Holdings Ltd. in Singapore, referring to the global financial crisis more than a decade ago.
Central banks in Thailand, India, Indonesia and South Korea boosted their reserves this year as global policy easing fuelled foreign inflows and pushed their currencies higher. Now, worsening trade tensions and fears of a currency war are increasing the threat of outflows as investors turn risk-averse.

Outflows
For countries like Indonesia and India, which run current-account deficits and are prone to sell-offs, central banks may need to dip into reserves to support their currencies. In Thailand, where the baht has been gaining, officials will be under pressure to intervene on the opposite side.
The upshot is that healthy reserves that normally act as a stabilizer for emerging markets may lack potency under current conditions.
“A better FX reserve buffer does, in theory, provide a stronger base from which Asian central banks can deal with pressures on their local currencies,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore.
Here’s a look at how economies across emerging Asia may use their reserves to help weather the turmoil.

India
India’s reserves are holding near a record $430 billion. The central bank doesn’t target any level for the rupee but intervenes to curb volatility. Of late, that’s meant bolstering the currency as it remains down against the greenback in 2019. Bloomberg Economics estimates the central bank may have sold $1.27 billion from its reserves in the week ended July 26, after having bought $430 million a week earlier.
The rupee has fallen almost 3% against the dollar this month, the biggest drop in Asia. India runs a perennial current-account deficit and is dependent on foreign investments to plug a hole in domestic savings. Those inflows usually dry up during times of volatility in global financial markets.

Indonesia
Officials in Southeast Asia’s biggest economy have made it clear they intend to take swift action to support the rupiah amid the latest bout of volatility. Bank Indonesia Deputy Governor Dody Budi Waluyo said Monday the bank “will be in the market to ensure the value of the rupiah stays in line with its fundamentals.”
Indonesia has been rebuilding its reserves this year, which climbed in July to $126 billion — their highest level in 16 months — after the central bank drained billions last year to counter the rupiah’s slump.

South Korea
After nearly going bankrupt in Asian financial crisis, South Korea became one of the more diligent countries in stacking foreign reserves, which stand now at more than $400 billion. The reserves’ role as a backstop to fluctuations in the won is being tested on multiple fronts.

Thailand
As a safe-haven currency in the region, the baht has surged this year on the back of foreign inflows, a trend that authorities are trying to curb to avoid further damage to the export and tourism industries.
The central bank’s intervention pushed reserves to a record high of more than $218 billion, and officials are calling on them to do more. The healthy reserves are equivalent to more than 40% of country’s GDP. There’s no sign that the baht — up almost 6% against the dollar this year — will lose its haven status anytime soon.
, given Thailand’s history of current-account surpluses and recent moves by Moody’s Investors Service and Fitch Ratings to raise the nation’s credit-rating outlook to positive.