Russia burnt through $7bn of its foreign exchange reserves last month as a plunge in oil prices caused by the coronavirus pandemic sent the rouble tumbling and emerging economies around the world sought to prop up their currencies during the sharp sell-off.
The fall in Moscow’s reserves was the first monthly decline since September 2018 and the largest for more than three years, according to data released on Friday.
It came as countries such as Brazil, Egypt and Mexico also tapped their savings during an unprecedented withdrawal of portfolio investment from emerging markets as investors fretted that they would be hit hard by the global slowdown caused by the containment measures implemented to stem the spread of the virus.
Data on foreign exchange interventions are notoriously patchy, but global foreign exchange reserves are largely held in the form of US government and agency debt. According to Federal Reserve filings, the quantity of such assets it holds in custody for foreign central banks has fallen by $124bn since the third week of February.
“Those countries with large foreign exchange reserves have probably been trying to resist local currency depreciation or smooth liquidity with foreign exchange intervention,” said Chris Turner, global head of markets at ING.
The rouble fell more than 30 per cent last month as oil prices more than halved, but Russia’s foreign exchange interventions, which kick in automatically when the price of global benchmark Brent crude oil falls below $42 a barrel, managed to keep the currency from hitting a record low.
Russia’s central bank governor last week insisted that the sales had “nothing to do with the exchange rate”.
A swath of other emerging market central banks have intervened in the markets in recent weeks.
Brazil’s central bank has sold $12.8bn in spot dollars and $8.5bn of foreign exchange swaps since the crisis unfolded, according to JPMorgan. The central bank’s reserves have fallen by 3.8 per cent to $343bn in the year to date, according to Bloomberg data.
Peru has sold $2.1bn of foreign exchange swaps, while Mexico and Colombia have intervened to the tune of $2bn and $1.5bn, respectively, JPMorgan said.
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Egypt’s central bank sold $5.4bn worth of foreign currency last month, roughly 12 per cent of its total, “to compensate for the decrease in foreign investment”, it said.
China recorded a $46.1bn fall in foreign reserves in March, the biggest monthly drop for four years, while South Korea recorded a $9bn fall and India $12bn. These figures do not necessarily equate directly to the volume of foreign exchange intervention, however, as the level of reserves can change for other reasons, such as exchange rate movements.
Emerging market currencies have been weighed down by a torrent of outflows from developing world equity and bond markets. About $83bn was withdrawn in March, the Institute of International Finance estimated, eclipsing the previous record of $60bn in October 2008 at the height of the global financial crisis.
“The speed of [investors’] departure from emerging markets has been staggering,” Mr Turner said. “Investors are aggressively shifting back along the credit curve, favouring core fixed income markets — Treasuries and Bunds — over, say, EM equities. That is quite understandable.”
The outflows are part of a broader retreat from risk assets as investors seek havens, fearing that many emerging markets will see their economies wrecked by plummeting revenues from commodities, tourism and goods exports, on top of the economic damage caused by domestic lockdowns.
Source: Economy - ft.com
