Dwindling foreign exchange reserves spells risk for EM currencies

Emerging Asian central banks have seen a sharp depletion in their foreign-exchange reserves, stoking concerns it may crimp market interventions to curb currency losses in the face of the mighty dollar.

A closely-watched measure of reserves cover — the number of months of imports a country can finance with its foreign-exchange holdings — has dropped to about seven for EM Asia ex-China, the lowest since the global financial crisis in 2008, according to Standard Chartered. It was about 10 months at the beginning of the year and as high as 16 in August 2020, pointing to an erosion of developing nation firepower to defend currencies. 

“The deterioration indicates that central bank intervention to support local currencies might be much more limited going forward,” Divya Devesh, head of Asean and South Asia FX research at Standard Chartered in Singapore said last week. “Overall, we expect central banks’ FX policy to turn less supportive.”

Thailand saw the biggest drop in reserves as a percentage of the gross domestic product, followed by Malaysia and India, according to data compiled by Bloomberg. Reserves cover about nine months of imports for India, six for Indonesia, around eight for Philippines and seven for South Korea, Standard Chartered said.

Central bankers across emerging Asia have relied on reserves to protect their currencies against a resurgent dollar as aggressive Federal Reserve policy tightening spurred flows back to the US. Any indication of a slowdown in market interventions may exacerbate losses for Asian currencies, many of which hit record or multi-year lows recently.

Central bank interventions may also see a change — from dollar sales to purchases — as their focus is likely to shift from containing imported inflation to boosting export competitiveness if Asia’s exports come under pressure, said Devesh. 

Using the drop in reserves as a proxy for FX intervention, India and Thailand have been among the most aggressive, with reserves declining by about $81 billion and $32 billion, respectively, this year. Reserves dropped by $27 billion in South Korea, $13 billion in Indonesia and $9 billion in Malaysia.

Bangladesh caps forex rates for export inflows

Bloomberg

• Bangladesh capped exchange rates for remittances and export proceeds to curb volatility in the foreign-exchange market.
• Banks will offer a maximum rate of 108 taka against the dollar for remittances and 99 taka for export proceeds, the central bank said.
• “The new uniform rates will bring discipline to the foreign exchange market,” spokesman Serajul Islam said by phone Monday.  “Now we’ll monitor if the foreign-exchange dealers and banks are following the new rates.” 
• Bangladesh is stepping up measures to protect its currency after a shortage of dollars pushed the taka to a record low of 97.45 to the greenback last month. 
• This prompted traders to turn to the so-called kerb, or underground, market where the taka dropped past 100 per dollar. For importers, the exchange rate will be the weighted average of the maximum rates, plus 1 taka.