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Analysis

World foreign exchange reserves expected to resume growth

OMFIF Report – Press Release

14 June 2016

London

Smith Nugee Cover 294 (1)

Central bank foreign exchange reserves around the world are likely to start growing again as emerging market economies rebuild currency ammunition to counter economic shocks and capital outflows, according to an OMFIF report on reserves holdings published today.

Despite the decline in global foreign exchange reserves over the last 18 months, from $12tn to just under $11tn at end-2015, the trend of reserves accumulation by central banks over the preceding 15 years is unlikely to go into full reverse, a report by Gary Smith and John Nugée states.

The report – ‘Foreign exchange reserves in a volatile world’ – says, ‘It seems that the absolute level of reserves is now less important than their rate of change as an indicator of the health of the central bank and underlying economy.’ When macroeconomic pressures change and circumstances allow, reserves are likely to resume growing.

The recent experience of reserves shrinkage, moreover, will raise the perception of what counts as adequate, both for those managing reserves and those commentating on their actions, leading to higher overall holdings in the future.

The OMFIF study highlights examples of reserves fluctuations in emerging markets ranging from China, Russia and Saudi Arabia to Malaysia, Indonesia and Thailand.

Concerning China’s vulnerability to possible further capital outflows, the report points out how, after the end-November 2015 decision by the International Monetary Fund to bring the renminbi into the special drawing right, the Chinese currency has been both weak and fluctuating on the international currency stage.

The report argues that, for all the inconveniences and costs of building large official foreign exchange holdings, these negative factors are outweighed by the still greater drawbacks of not holding sufficient reserves when they are needed in a financial or political crisis. 

Gary Smith is the Head of Sovereign Wealth Funds and Official Institutions at Barings Asset Management.

John Nugée was formerly a Senior Managing Director at State Street Global Advisors and Chief Manager of Reserves at the Bank of England.

To request a complimentary copy of this report email editorial@omfif.org stating your name, company, address, and if you would like a PDF or hardcopy.

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