Emerging Markets Snap Up Cheap Dollars to Build Reserves

Nations from Colombia to Indonesia are taking advantage of the longest emerging-market-currencies rally since 2009 to pile up record reserves, bolstering their ability to fend off the next foreign-exchange market crisis.

The 12 developing nations with the biggest foreign reserves outside of China added $34 billion in the past three months, lifting their combined holdings to $2.98 trillion on April 30, the most since Bloomberg began compiling the data in 2008. A gauge of 20 major emerging-market currencies is recovering after a 12-month plunge of 11 percent sent it to a four-year low in February.

Emerging-market reserves were depleted by $22 billion in January alone as nations fended off currency speculators to tackle the fallout from the Federal Reserve cutting bond-buying and global political and financial instability. Since then, the currencies gauge has rallied 5 percent from the February low, with policy makers now buying dollars to temper the gains, which make exports more expensive, while giving themselves more resources to help curb selloffs in the future.

Of the dozen biggest reserve holders among developing economies, India, Indonesia and Turkey boosted their holdings the most as government efforts to tame volatility and narrow current-account deficits succeeded in luring back overseas investors.

India’s coffers expanded 7.6 percent since the end of January through 12 May to $285 billion after touching a three-year low of $247 billion in September. Indonesia’s reserves gained 4.9 percent and Turkey’s rose 4.1 percent.

The reserve pools have expanded as global investors returned to buying the nations’ assets. Foreigners hold record amount of Indonesian local-currency bonds, while they increased their Indian holdings by 21 percent this year, spurring a 5.5 percent surge in the rupiah versus the U.S. currency and a 3.6 percent rise in the rupee.

Net overseas purchases of Turkish debt were $697 million this quarter, trimming the net selling this year to $2.9 billion. The lira has rallied 3.9 percent in 2014.

China, not included in the reserve index because its size would skew results, boosted its foreign reserves by $126.8 billion in the first quarter to a record $3.95 trillion.

Russia Risk

Russia has been an exception among developing economies, depleting its reserves to stem losses in the ruble triggered by the country’s escalating conflict with neighboring Ukraine.

Bank Rossii sold $24.7 billion and 2.5 billion euros ($3.44 billion) in the past two months as the growing international sanctions against President Vladimir Putin prompted investors to pull money from Russia.

The ruble has dropped 5.7 percent this year against the dollar.

For countries that rely on exports for economic growth, building reserves helps temper currency gains to maintain competitiveness in global markets. Colombia saw reserves rise 0.7 percent in March to $41.8 billion, the biggest increase since September, as the peso’s 6.3 percent advance from its four-year low on Feb. 20 allowed it to buy the U.S. currency cheaply.

Buying Time

The finance ministry of the Andean nation, which exports coal, oil, and coffee, will restart dollar purchases as a competitive exchange rate is “for the benefit of the country,” minister Mauricio Cardenas commented.

In South Korea, where exports account for about half of the $1 trillion economy, foreign-currency reserves climbed to a record $354 billion at the end of March as the central bank said it would move to stabilize the currency if necessary. The won has strengthened 2.7 this year.