Foreign Reserves

Foreign reserves are not all alike.

Each country’s central bank differs in the purpose, maintenance, management and planning of their respective reserves. Internal and external factors combine to influence decisions made by the central banks. (De)globalisation, monetary policy and the strength of the American dollar make the stories behind foreign reserves even more interesting.

The most watched reserves currently is China. Since May last year, Beijing’s foreign-exchange reserves have experienced a fall in every month, with December 2015 registering a drop of $107.9 billion. The reserves now stand at $3.345 trillion and on a standby alert for more capital outflows. The task of watching over Yuan is challenging when the local investors have an unabatable interest in ‘investing overseas’. Many are also asking about the burn rate, thus,  is $3 trillion enough?

From the Economist,

Yet China is not normal. It is caught in a dangerous no-man’s-land between the market and state control…

In the last six months of 2015 capital left China at an annualised rate of about $1 trillion. The persistent gap between the official value of the yuan and its price in offshore markets suggests investors expect the government to allow the currency to fall even further in future. And, despite a record trade surplus of $595 billion in 2015, there are good reasons for it to do so, at least against the dollar, which is still being propelled upwards by tighter monetary policy in America.

The problem is that the expectation of depreciation risks becoming a self-fulfilling loss of confidence. That is a risk even for a country with foreign-exchange reserves of more than $3 trillion. A sharply weaker currency is also a threat to China’s companies, which have taken on $10 trillion of debt in the past eight years, roughly a tenth of it in dollars. Either those companies will fail, or China’s state-owned banks will allow them to limp on. Neither is good for growth.

The government has reacted by trying to rig markets. The PBOC has squeezed the fledgling offshore market in Hong Kong by buying up yuan so zealously that the overnight interest rate spiked on January 12th at 67%. Likewise, in the stockmarket it has instructed the “national team” of state funds to stick to the policy of buying and holding shares.

Many countries suffer from speculative attacks, round-tripping and front-loading activities. Countries such as Nigeria, which saw its reserves fall by $288 million in 11 days. According to the Central Bank of Nigeria, the reserves declined from $37.3 billion in June 2014 to $28 billion currently.

Some countries depend on loans to support their foreign reserves. According to an Egyptian local newspaper on January 10th,

The Central Bank of Egypt (CBE) is awaiting the first segment of the World Bank’s loan, valued at $1 billion. The loan aims to support foreign reserves at the CBE.

The CBE received the first segment of $500 million from the African Development Bank (AfDB) loan Thursday.

Over December 2015, Egypt acquired the approval of the World Bank and the AfDB on two loans, at a total of $4.5 billion, $3 billion from World Bank and $1.5 billion from AfDB. The two loans are expected to be received over three years.

Earlier in January, CBE Governor Tarek Amer explained that the transfer of the first segment of the World Bank loan may take some time.

Egyptian foreign reserves require dollarised liquidity as an urgent support for the reserves with the beginning of a new year. The reserves are facing major challenges during 2016 particularly in January including repaying installments of foreign debts and covering the local demand for dollars.

Over January, the CBE is repaying 2016’s first installment of the Paris Club debts, amounting to approximately $700 million. It also decided to repay the dues of dollar bonds, which were issued earlier by Qatar, a total of $1 billion.

The CBE offers approximately $475 million monthly for banks to cover their customers’ dollar needs through FX-Auctions. CBE launched these auctions to sell dollars three times per week, as well as pumping dollars through exceptional auctions.

Egypt’s foreign reserves witnessed severe turbulences during 2015. This year will nonetheless test the ingenuity of Egypt’s central bank.

Iraq plans to finance its balance of payments deficit by drawing its foreign exchange reserves down to $43 billion in 2016 from $59 billion at the end of October. Needless to say, how well the plan goes will be closely related to its oil production.

Plenty of exchange rate pegs have now been been called into question and many crises in the past were preceded by news about current account deficits and shrinking reserves. It is worth watching the smaller countries in particular as they may trigger larger panic and self-fulfilling prophecies. In all this worry it is very good to find unexpected pockets of strength, such as Israel and the Dominican Republic.

Israel’s foreign currency reserves on the other hand, exceeded $90 billion for the first time at the end of December 2015. This was helped by the foreign currency buying by the Bank of Israel to combat the shekel from strengthening. Israel also runs a long-term program to neutralise the effect of its natural gas reserves on the exchange rate. According to haaretz, domestic natural gas has reduced energy imports and the need to spend foreign currency to pay for it, reducing the demand for dollars.

As for the Dominican Republic, according to the Dominican Today, its central banker Hector Valdez Albizu on Wednesday said the Central Bank´s foreign currency reserves have reached a record $5.27 billion and would cushion any impact from an unexpected flight of funds or adverse balance of payments.

He said the amount also helps maintain and promote confidence in the economy and on the local currency’s value, allowing it to deal with possible unwanted fluctuations in the exchange rate and help ensure the economy´s price stability.

As an aside, the Dominican Republic is the fastest-growing economy in the Americas, with 7% growth in the GDP for 2015. This can be attributed to increase in tourist arrivals, rising foreign remittances, and low oil prices fuelling the economy. Note also that nearly one million Dominicans live in the United States, contributing to the growth in remittances.

The level and sustainability of reserves afford the degree of freedom by which the central bank can act. This will be one of the key things to watch this year.

From the Economist, below is a sample of the most recent foreign reserves:


For the full list, here is the ranking of foreign reserves from the CIA.


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