The accumulation of foreign exchange reserves

Transcription

1 The accumulation of foreign exchange reserves Ettore Dorrucci Deputy Head, International Policy Analysis and Emerging Economies Division European Central Bank Meeting of the Foreign Exchange Contact Group ECB, Frankfurt am Main, 31 May 2006

2 Outline of the presentation 1 - Evidence on the accumulation of cross-border official financial assets: 2 - Drivers 3 - Impact on U.S. yields 4 - Risks and costs 5 - Conclusions (a) fx reserves (b) alternative uses

3 Part 1 (a) Evidence on the accumulation of foreign reserves

4 The rapid increase in foreign exchange reserves of Asian and oil-exporting countries since 2002 Foreign exchange reserve assets holdings (USD billions) Japan China Oil Exporting Countries Other emerging Asia (excluding China and India) Source: IMF, World Economic Outlook Part 1 (a) 1

5 8 Asian countries currently rank among the 10 largest reserve holders Foreign exchange reserves of countries with the largest holdings ( ) (USD bln) 900 Dec-01 Dec-02 Dec-03 Dec-04 Dec Japan China, P.R. Mainland Taiwan Korea Russia Euro Area India China, P.R. Hong Kong Singapore Mexico Malaysia Algeria Brazil Thailand Turkey Norway Australia United Kingdom Poland Libya Source: IMF, The Central Bank of China and Bank Negara Malaysia. Part 1 (a) 2

6 The degree of concentration in reserve accumulation increased in 2005 China Russia Turkey Korea Taiwan Mexico Malaysia Poland Venezuela Argentina Singapore Norway Hungary Philippines Thailand Chile Brazil Japan reserve accumulation in bn USD 54% of total reserve accumulation in Top-five share in total reserve accumulation: 57% in % in % in 2005 Part 1 (a) 3

7 The emergence of oil exporters in 2005 as the main region with current account surpluses bn USD P Latin Western America Hemisphere Other industrialized Other Asia China Japan 200 Oil exporters United States Euro Area Central and Eastern Europe Source: IMF WEO Current account imbalances: overview Part 1 (a) 4

8 is not clearly reflected in the statistical evidence on reserve accumulation Major accumulators are not central banks, but special investment agencies (e.g. Norway s Petroleum Fund, Abu Dhabi Investment Authority, Kuwait Investment Authority) Other Portfolio Reserves 100 FDI Financial outflow Source: IMF WEO and ECB staff calculations Oil exporters. Net financial outflows (+) (USD billion) Part 1 (a) 5

9 but may be indirectly detected in the evidence on US portfolio inflows bn USD Net purchases UK and Caribbean (lhs) WTI oil price (rhs) USD/bbl Q1 1991Q11992Q1 1993Q1 1994Q1 1995Q11996Q1 1997Q1 1998Q1 1999Q1 2000Q12001Q1 2002Q1 2003Q1 2004Q12005Q1 2006Q1 0 Net purchases of US long-term securities by UK and Caribbean offshore centres (in USD billion) and oil price (in USD/bbl) Part 1 (a) 6

10 Part 1 (b) Alternative uses of accumulated cross-border official foreign assets

11 Main alternative uses Oil funds: stabilising volatile oil revenues through time (Russia, Norway, Venezuela, Kuwait, Oman, etc.) Heritage funds: preserving the value of foreign assets for future generations (Singapore, Abu Dhabi, Kuwait) Recapitalising state-owned banks (China) Repaying external debt (Russia, Argentina, Brazil) or domestic debt (Saudi Arabia) Financing major investment projects (Taiwan) Part 1 (b) 7

12 The Russian Oil Stabilisation Fund: How does it work now? USD Oil Exporters 40 RUB (taxes) Central Bank Ministry of Finance USD EUR GBP FX RESERVE OIL STABILISATION ASSETS FUND (*) USD RUB USD 100 RUB 100 EUR 40 (base money) Fx market 40 RUB GBP (*) Invested by the central bank on behalf of MoF (45% USD, 45% EUR, 10% GBP) Part 1 (b) 8

13 Part 2 What are the main drivers of reserve accumulation?

14 The accumulation of foreign reserves: macroeconomic preconditions Current account, savings and investment China Other Asia Savings (left) Investment (left) CA (right) Savings (left) Investment (left) CA (right) %GDP %GDP %GDP %GDP Oil exporters Savings (left) Investment (left) CA (right) Moreover: %GDP %GDP S > I Exchange rate pressure also from net portfolio and banking inflows in certain countries (China, Korea, India, Taiwan) Part 2 9

15 Three fundamental drivers of reserve accumulation Given savings glut/investment drought: 1. Unilateral self-insurance against future financial crises 2. Export-led growth (post-crisis recoveries) supported by exchange rates anchored to the US dollar 3. The underdeveloped financial structure underdeveloped financial structure of several emerging countries, including (i) difficulties to channel private S to I, (ii), dollarization of foreign assets, and (iii) costly hedging if one-way bet Part 2 10

16 The renminbi REER depreciated by 15% between 2002 and the exchange rate reform of 21 July 2005 Index Jan-94= Appreciation 21/7/06 reform 90 Jan-94 Sep-95 May-97 Jan-99 Sep-00 May-02 Jan-04 Sep-05 Source: JP Morgan Real exchange rate of the renminbi Part 2 11

17 but the export-led growth argument should not be overemphasised for China Investment Net trade GDP Consumption Inventories per cent Source: IMF World Economic Outlook. Contribution by expenditure component, annual growth rates. China: Contributions to real GDP growth Part 2 12

18 Part 3 Measuring the impact on U.S. yields

19 Impacts on U.S. government bond yields of reserve accumulation: Some estimates Estimates of the effect of reserve accumulation on US Treasury yields (basis points) Source Estimated reduction of yields Merrill Lynch 30 JP Morgan Goldman Sachs 40 Eurosystem 65 Edwin Truman 75 Patrick Arthus 75 Ben Bernanke et al Bill Gross 100 Banque de France 125 Stephen Roach Nouriel Roubini et al. 200 Robert McCauley Vanguard Group Significant, but unstable and short lived relation No long term effect Source: Eurosystem. Part 3 13

20 Do the traditional U.S. TIC data underestimate the relative importance of official portfolio flows to the United States? USD bn Data provided by U.S. custodians Survey data: Foreign official inflows TICS data: foreign official inflows U.S. Treasury International Capital Flow reports Jul Jun 2003 Jul Jun 2004 Jul Jun 2005 Foreign official purchases of US long-term securities: Total inflows Part 3 14

21 Part 4 Risks and costs of reserve accumulation

22 The accumulation of foreign reserves: potential risks and costs (see ECB Occasional Paper No. 43) Potential risks or costs Underlying factors Risks Conflict between exchange rate stability and easing of monetary conditions if interventions not fully sterilised inflation and/or asset price bubbles Underdeveloped financial markets; shortage of sterilisation instruments; snowball effects: sterilisation coupled with expected exchange rate appreciation capital inflows more sterilisation and expected appreciation Segmentation in the public debt market Potential deterioration of central bank balance sheet Excessive sterilisation through issuance of central bank liabilities instead of government securities Domestic currency appreciation (currency risk) Opportunity costs Yields paid on domestic sterilisation instruments exceed those on foreign assets Costs Concerns about bank profitability Because of controls on bank lending, the banking sector might not have alternatives to buying low-yield sterilisation instruments Source: Eurosystem. Part 4 15

23 Conclusions Reserve accumulation and global imbalances: Short-term effects Financing US CA deficit Low yield environment Longer-term effects Insufficient fx flexibility in CA surplus countries Less policy discipline in deficit countries but: Multi-pronged approach to global imbalances (G7 statements): Exchange rate flexibility alone does not work There are deep reasons for reserve accumulation which call for some gradualism in its discontinuation Part 5 22

24 Thank you