The end of the boom in emerging markets reserves

February 10, 2014

One bit of collateral damage from the recent emerging markets mess:  the area’s strong foreign currency reserve growth is slowing, or even dropping off, Reuters reports.

Central  banks can use foreign reserves can be used to stabilize their local currency, an increasingly important function as emerging market currency volatility increases.There’s a real debate about just how big these “war chest” reserves should be for emerging market countries, John Plender writes in the FT. 

While emerging market reserves increased 5% last year, that’s actually a small rise “compared to the 20-30% annual increases seen between 2003-2007 or even the 10-20% year-on-year rises between 2009-2011,” Reuters writes.

Reuters’ Vincent Flasseur has the chart:

Flassuer also breaks down central bank reserves by country, showing that “reserve accumulation is starting to stall or at best, become less broad-based”:

CrossBorder Capital’s Michael Howell, who helped Reuters compile the data, thinks “the peak of reserve accumulation in emerging markets has already been seen. There is not a great likelihood of big capital inflows for some time”.

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