Central banks in the developing world have lost $81bn of emergency reserves through capital outflows and currency market interventions since early May, even before renewed turmoil in emerging markets

Last updated: August 22, 2013 8:06 pm

Emerging markets central banks’ emergency reserves drop by $81bn

By Robin Wigglesworth in London

Central banks in the developing world have lost $81bn of emergency reserves through capital outflows and currency market interventions since early May, even before renewed turmoil in emerging markets. The figure, which excludes China, is equal to roughly 2 per cent of all developing country central bank reserves, according to Morgan Stanley analysts, who compiled the data from central bank filings for May, June and July. However, some countries have suffered more precipitous drops. Indonesia has lost 13.6 per cent of its central bank reserves from the end of April until the end of July, Turkey spent 12.7 per cent and Ukraine burnt through almost 10 per cent. India, another country that has seen its currency pummelled in recent months, has shed almost 5.5 per cent of its reserves.Central bank reserves are held to act as a safety buffer against turmoil, and are on average still far larger than during past emerging market crises. But the pace of the drops have spooked some investors and analysts.

Many central banks are likely to have suffered further reserve depletion in August, as the turbulence caused by the US Federal Reserve’s plans to end its monetary stimulus has resumed, and compounded concerns over slowing economic growth in emerging markets.

Palaniappan Chidambaram, India’s finance minister, said on Thursday that India’s reserves were currently $277bn, compared with $280bn at the end of July, according to Morgan Stanley’s figures.

Asset managers and analysts forecast that central banks would soon give up supporting their currencies directly and take more decisive steps to stanch the money flowing out of their economies.

Some central banks have already begun to raise interest rates to buttress their currencies, most recently Turkey this week. But more rate rises are expected, despite the sluggish growth environment.

Citigroup downgraded its growth forecasts for emerging markets again this week, to 4.6 per cent this year and 5 per cent in 2014. The US bank’s economists pointed out that excluding China and the oil-rich Gulf states, the current account balance of emerging markets as a whole has deteriorated from a 2.3 per cent surplus in 2006 to a 0.8 per cent deficit this year – the biggest shortfall since 1998, the last time the developing world was gripped by crisis.

“Ultimately most of the countries with large current account deficits will have to hike rates by more if they want to better protect their currencies,” said James Lord, a Morgan Stanley strategist.