Global Reserves’ Restocked Shelf Space
Global foreign exchange reserves, after slumping $1 trillion from mid-2014 through the end of last year mainly due to dollar fluctuations, have stabilized in recent months with restored emerging market capital inflows, according to IMF and central bank figures. The global total is now almost $11 trillion and $8.5 trillion for developing economies after a double-digit annual fall from China and Gulf country drawdowns in particular. Fund tracking data shows $50 billion in foreign investor debt and equity allocation in the first quarter, with leaps in IIF monthly high-frequency numbers. Currency manipulation through deliberate depreciation is no longer the case, although many countries have excess reserves as defined by international yardsticks of four months import and short-term debt coverage, with Hungary and Turkey exceptions with shortfalls on the respective measures. The emerging market 15 percent savings rate now tops the developed nation one, and the spurt outstrips the reserve accumulation pace. The US and UK on the flip side run the highest current account deficits as a portion of world output, although the dollar accounts for two-thirds of foreign exchange holdings, with the euro a distant second at 20 percent, and the RMB only 1 percent. In fixed income both external sovereign and corporate issuance at $75 billion and $170 billion through April are at records. In the former half the supply has been from the Middle East, with Argentina also contributing $7.5 billion. These new entrants have spurred the asset class, along with a $100 billion annual refinancing hump toward end-decade. Big houses like JP Morgan predict $50 billion in retail and institutional inflows this year, and 5 percent cash positions built up during the initial Trump confrontation scare can help accommodate heavy hard currency-denominated pipelines.
The CEMBI spread at 250 basis points over US Treasuries is at an unprecedented low with a 4 percent index return so far, and projected high-yield defaults have halved to 2 percent with commodity price recovery. Final issuance in 2017 should approach $400 billion, with one-quarter from Asia, almost all China. One third of advanced economy bonds still carry negative yields, and Latin America has been the best performing region, as Brazil and Russia bounced off bottoms. The difference between speculative and investment-grade paper has narrowed to 300 basis points and scarcer euro-denominated have returned more than dollar bonds through April. Commodities remain mixed, and dollar strength has faded, but the main risk is with unhedged domestic-oriented consumer and utility names. Daily trading volume by the US TRACE system is $3.5 billion, half in quasi-sovereigns. Dedicated assets under management are $80 billion, and so-called crossover investor interest has increased although US high-yield exposure is still below 3 percent. Recovery values were dismal last year at 35 cents, and 20 instruments in Brazil and Venezuela currently trade at 50 percent of par or under in deep distress. Net debt and ratings downgrade ratios have improved with better earnings estimates. Of the $2 trillion tracked half is quasi-sovereign with Asia and the Gulf having majorities in the category, and leverage indicators have stabilized although state support is the credit bulwark increasingly offset by policy wobbles, analysts caution.
