Asian central banks need broader FX defence as reserves slide 

DECLINING foreign exchange (FX) reserves mean Asian central banks will probably start looking for alternative ways to support their currencies, according to Nomura Holdings.

Some of the potential methods they may choose to include mandating exporters to sell foreign-currency proceeds, placing restrictions on trade accounts, and introducing measures to boost capital inflows, Nomura analysts including Sonal Varma in Singapore and Ting Lu in Hong Kong wrote in a research note.

Asian policymakers have bolstered their FX war chests in recent years following previous crises such as the 2013 taper tantrum. Still, the rapid pace of Federal Reserve interest-rate hikes this year means they will be reluctant to rely solely on those funds to defend their currencies.

India is already estimated to have spent US$75.1 billion this year supporting the rupee in the spot and forward markets, while China has probably spent US$39.6 billion, Thailand US$26.9 billion and South Korea US$16.7 billion, according to Nomura’s estimates to the end of August. Both the Reserve Bank of India and Bank of Thailand have used up more than 10 per cent of their end-2021 headline reserve levels, the bank said.

“Asia still has FX reserves to prevent runaway depreciation, but amid the erosion of FX reserve buffers, we believe we are closer to a point where some Asia ex-Japan central banks may allow for greater FX flexibility,” the Nomura analysts wrote.

Asian currencies have tumbled this year as Fed rate hikes have bolstered the dollar. The yen has slumped more than 20 per cent to a 24-year low, the Korean won has fallen 17 per cent, and the Philippine peso and Taiwan dollar have both dropped more than 13 per cent.

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Here are some steps that Nomura suggests individual Asian central banks may take to support their currencies:

• Japan: Foreign asset liquidation by public pension funds and other financial institutions
• China: Repatriation from government-related corporates, closing undesired outflow channels, issuing offshore RMB bonds to reduce CNH liquidity
• India: FX swap window for oil marketing companies, measures to slow capital outflows, non-resident deposit programme
• Indonesia: Cut in FX reserve requirement ratio, tax amnesty programme, prohibition against using foreign currencies for domestic transaction
• South Korea: Repatriation from government-related corporates, introduce tax incentives for local residents’ financial assets held abroad, measures to encourage more capital inflows

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