Asia's external accounts solid despite capital outflows: AB

SINGAPORE - Asian currencies have come under pressure in recent months as risk aversion has prevailed in global markets. Consequently, foreign reserve levels have been closely scrutinised, as central banks have intervened in the foreign exchange market to defend their currencies, according to a report by AllianceBernstein (AB).

“But over the past month, we have seen a change in Asian central banks’ behaviour,” AB says. “They have been reducing intervention, preserving their external buffer.

“In addition, external accounts for most Asian economies remain healthy on a net basis, despite the capital outflows, and this justifies the relative resilience of late in Asian sovereign-bond spreads and currencies against their peers in other emerging-market countries.”

AB says changes in foreign reserve levels over the past few years, which reflect central banks’ presence in the currency market, imply the pressure that has mounted on the region’s external accounts.

“Since 2014, when the US dollar’s strength started gathering steam and global risk appetite started to deteriorate, Malaysia has seen the most staggering losses in foreign reserves.

“This does not come as a surprise, as the country is one of the few commodity exporters in Asia, and domestic political issues have exacerbated the negative bias on the currency.

“China and Singapore have also seen losses in their respective reserves, as the central banks of those countries have been active in currency management. In Thailand, the reserve losses were incurred mainly during the political crisis that culminated in a military coup in May 2014.

“All said, however, about half of the region still achieved a modest gain in the level of reserves since 2014.

“Some countries—including the Philippines, Taiwan and Korea—have strong external positions and sizable current account surpluses. The Indonesian and Indian central banks have started to tolerate more currency volatility lately, with a greater focus on replenishing their foreign reserves after facing strong external account pressures in 2013.

“In fact, as global risk aversion has persisted, more Asian central banks have reduced intervention to avoid draining reserves.

“In the third quarter of 2015, when a surprise weakening of the Chinese renminbi triggered a sharp depreciation in Asian currencies, foreign reserves in most of the region saw a significant decline, as policymakers attempted to defend their currencies.

“But in the fourth quarter, even though Asian currencies remained under pressure ahead of December’s US Federal Reserve rate hike, reserves stayed largely flat in most countries. In fact, Malaysia and Indonesia, which saw the greatest reserve depletion in the previous quarter, even started to rebuild their reserves.

“The only exceptions were China and Singapore, where the authorities maintained their active currency-management policies.”  www.abglobal.com (ATI).