Are EM forex reserves strong enough?

November 23, 2012

One of the big stories of the past decade has been the massive jump in central bank reserves, with total reserves having quintupled from a decade ago to around $10.6 trillion.

But the growth has not been uniform. And over the past 18 months slowing world growth and trade has stalled reserve accummulation across the developing world, making some countries increasingly vulnerable to financial shocks, according to analysts at Capital Economics.

They point out for instance that, although most emerging economies are less vulnerable than in the past, Ukrainian reserves have fallen by a quarter in the past year while in Venezuela they declined by 40 percent. Egyptian reserves halved since end-2011, forcing it to agree to an IMF aid deal. Foreign exchange reserves in these countries may not be sufficient to protect against balance of payment crises should trade flows and investments slow further, they reckon.

Venezuela is viewed as the biggest concern, with import cover of just two months. A fall in commodity prices could worsen its position further. The import cover picture was similar in Egypt before the IMF deal.  What of emerging Europe? Given the large current account deficits and hefty external debt repayment schedules, this region is especially exposed to a slowdown in capital flows.

Capital Economics says:

The risks for emerging Europe would be magnified by further disruption to the euro zone banking system which would curtail their access to foreign capital.

Venezuela’s position looks especially precarious on this front. But the likes of Turkey and Ukraine may also face difficulties soon.

Turkey has $100 billion in reserves amounting to five months of import cover – one month more than what is considered the minimum cover to insure against any balance of payment shocks. But debt falling due over the next 12 months amounts to $140 billion.

(Reporting by Alice Baghdjian)

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