Citi cites strong forex reserves in emerging markets

MANILA, Philippines – US-based investment bank Citigroup believes emerging market economies, including the Philippines, have strong foreign exchange reserve coverage to survive renewed risk aversion that could lead to sharp reversals in capital flows.

Johanna Chua, head of Citigroup’s Asia Economics & Market Analysis, said the Philippines together with China, Taiwan, Malaysia, and Thailand have strong reserve coverage metrics relative to the rest of emerging market economies.

“These countries have historically been strong in foreign exchange reserve coverage metrics relative to the rest of emerging markets – especially China and Malaysia, but in recent years, Taiwan and the Philippines show notable improvements,” Chua stated in Citi’s Asia Market Flash.

She pointed out that concerns about recession, fiscal concerns and early signs of tension in funding markets have sparked renewed risk aversion which could lead to sharp reversals in capital flows.

She explained that Citi used the latest figures on foreign exchange reserves, debt maturities, and mobile forms of portfolio flows via foreign holdings of stocks and bonds in reassessing the region’s foreign exchange reserve adequacy to withstand capital outflows.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed that the country’s gross international reserves (GIR) jumped close to 45 percent to a new record level of $70.997 billion as of end-July from $49.049 billion as of end-July last year due to the central bank’s strong earnings from its investments abroad as well as the revaluation gains of its gold holdings amid surging gold prices in the world market.

The GIR is the sum of all foreign exchange flowing into the country. The end-July GIR level could cover 10.6 months worth of imports of goods and payments of services and income as well as 10.5 times the country’s short-term external debt based on original maturity and 6.1 times based on residual maturity.

The BSP sees the GIR hitting a new record level of $70 billion this year and $75 billion next year. The country’s foreign exchange reserves surged 41 percent to a record $62.37 billion last year from $44.24 billion in 2009.

The foreign exchange reserves of China stood at $3.2 trillion followed by Taiwan with $400.8 billion, India with $317.2 billion, Myanmar with $135.4 billion, Thailand with $122.7 billion, Pakistan with $18.2 billion, and Vietnam with $14 billion.

Chua said Korea and India look more externally vulnerable as they have the weakest foreign exchange coverage ratios after giving more weight to their foreign holdings of equity than bonds while the external vulnerability ranking of Indonesia has improved.

“Asia’s foreign exchange reserves have been in a gradually rising trend in the run-up to the recent financial market volatility, with official gross FX reserves climbing to new highs across all major Asian countries in recent months,” Chua explained.

She added that China, Taiwan, Malaysia, the Philippines and Thailand have foreign exchange reserve coverage remaining consistently strong, not only within Asia but globally.

The Philippines received a credit rating and rating outlook upgrade from Fitch Ratings, Moody’s Investors Service as well as Standard and Poors due to its strong external payments position.

Fitch upgraded the country’s sovereign credit rating to one notch from two notches below investment grade while Moody’s and S&P raised the rating of Philipine debt to two notches from three notches below investment grade with a stable outlook. –Lawrence Agcaoili (The Philippine Star)