The critical question, then, is whether existing reserves are big enough to handle the struggling economies’ short-term obligations. Things are dicier than they could be. Mr Bussière et al note that not all emerging market economies rebuilt reserves after the crisis. India’s, for example, never recovered their pre-crisis peak. Meanwhile, short-term foreign-currency debt has grown sharply in many economies since 2008.
But on the whole, there is good reason to be optimistic. In 1997, Indonesia’s short-term debt was roughly 188% of its reserve holdings. As of last year, by contrast, the figure was around 40%. In India the number in 2012 was closer to 30%. Ratios are higher in South Africa and Turkey but remain well short of the Asian crisis danger zone, at least as of last year.
Balance-sheet effects aside, the biggest worry is that depreciation will disrupt monetary policy. A large depreciation raises import costs which can feed through to inflation. As financing grows tighter interest rates may rise; ominously, the yield on 10-year Turkish debt recently topped that on similar duration Greek bonds. Central banks may exacerbate the rises by raising short-term interest rates, either to encourage foreign capital to stay put or to head off looming inflation. After a hefty 50-basis-point rise today Indonesia has raised its policy rate 125 basis points since May, even as GDP growth has weakened.
via Emerging market currencies: Reserve judgment | The Economist.
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