Capital Flight Drains Reserves as Rupee, Rupiah Fall:

Currencies
Asian nations are depleting foreign reserves as they seek to bolster their currencies while investors pull billions of
dollars from the region.
Of the 10 Asian central banks with the largest reserves, six have cut their holdings this year, led by a record 18
percent reduction by Indonesia, data compiled by Bloomberg show. Their reserves are rising at the slowest pace in
data going back to 2000. Holdings in Asia probably contracted once price moves are taken into account, Citigroup
Inc. estimates.
Asian nations are getting hit particularly hard from the rout in emerging markets, with the Bloomberg-JPMorgan
Asia Dollar Index poised for the biggest annual drop since 2008. Standard & Poors warned last week that the
flight of capital from Asia may trigger higher financing costs, especially for those nations with large deficits in
their current accounts.
Countries in the region will see a degree of reserves usage as they seek to stabilize their currencies during periods
of heightened financial market volatility, Sacha Tihanyi, a senior currency strategist at Scotiabank in Hong Kong,
said by e-mail Aug. 22. Indonesia and India are still highly likely to see further depletion in their reserves.
Indonesia, India
Bank Indonesia reduced its foreign-exchange reserves to an almost three-year low of $92.7 billion in July, while
Indian holdings fell 4 percent this year amid outflows from the region and as the two nations sold dollars to
support their currencies, data compiled by Bloomberg show.
The Asian central banks with the biggest reserves increased their holdings by 2.4 percent to $6.5 trillion this year,
the smallest increase since at least 2000. The Peoples Bank of China, which has 31 percent of the $11.2 trillion
held in global reserves, boosted its foreign-currency holdings by 5.6 percent.
The pullback threatens currencies that have received support from Asian central banks diversifying their foreign
holdings beyond U.S. dollars, such as the euro, the local dollars of Canada and Australia, Swedish krona,
Norwegian krone and South Koreas won, according to ING Groep NV.
Were seeing to some extent the reverse of diversification, whereby Group of 10 currencies that previously
benefited from central bank inflows are now, in a number of cases, seeing the opposite, Callum Henderson, the
global head of currencies research at Standard Chartered Plc in Singapore, said in an Aug. 22 interview.
Fed Concern
International investors are exiting Asian and other emerging markets on speculation that the U.S. Federal Reserve
By Candice Zachariahs and Lilian Karunungan - Aug 25, 2013
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will dial back its monetary stimulus programs this year, reducing the amount of capital circulating in the global
economy.
The Feds balance-sheet assets have grown to about $3.6 trillion, from less than $1 trillion in mid-2008 as it
printed dollars to inject money into the financial system by purchasing U.S. Treasuries and mortgage bonds.
The Bloomberg-JPMorgan Asia Dollar Index (ADXY), which tracks the regions 10 most-traded currencies
excluding the Japanese yen, has tumbled 3 percent this year. It touched a 14-month low of 114.11 on Aug. 22, down
from as high as 119 in May.
Indias rupee fell 13 percent this year and touched a record-low 65.56 per dollar on Aug. 22, while Indonesias
rupiah plunged 12 percent and reached 10,853 per dollar today, the weakest level in more than four years.
Aussie Losses
As reserves contract and theyre selling dollars, there probably is going to be some inclination to sell currencies
like Aussie as well to keep the portfolio weightings stable, Todd Elmer, a Singapore-based strategist at Citigroup,
the second-largest currency trader after Deutsche Bank AG, said in an Aug. 22 phone interview. Were
contracting at a pace that we havent seen in quite some time.
Australias dollar, or Aussie, is already suffering because of its domestic economy, weakening 10.3 percent this
year according to Bloomberg Correlation-Weighted Indexes, the biggest decline among the 10 developed-market
currencies tracked by the gauges. Canadas currency slipped 1.6 percent.
Investors will continue to favor diversifying their foreign reserves into currencies other than U.S. dollars,
according to Scott Mather, the head of global portfolio management at Pacific Investment Management Co. The
Newport Beach, California-based firm manages the $262 billion Total Return Fund (PTTRX), the worlds largest
bond fund.
Irreversible Trend
Diversification is probably an irreversible trend, Mather said in an Aug. 23 phone interview. It may slow down
short-term but its unlikely to reverse.
The euro grew to 23.7 percent of global central banks foreign holdings in the first quarter, from a low of about 17
percent in 2000, the International Monetary Fund said in June.
The Australian and Canadian dollars accounted for 1.6 percent each, according to the Washington-based fund,
which identified them separately for the first time to recognize their increasing role as reserve assets. The U.S.
dollars proportion of global reserves shrank to 62.2 percent this year from 71.5 percent in 2000, according to the
IMF.
The euro has strengthened 6.5 percent, the Bloomberg indexes show. The greenback was the third-biggest gainer
4.8 percent, following the krona, which advanced 5 percent.
A gauge of expected price swings in emerging-market currencies exceeded a global measure by the most since
June 2012, according to JPMorgan volatility indexes.
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2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Widening Spread
The spread between the two increased to as much as 1.07 percentage points last week, data compiled by
Bloomberg show. The relationship was reversed as recently as earlier this month.
The normalization of global monetary policy may lead to a sharp outflow of capital from the Asia-Pacific
region, triggering higher borrowing costs and exchange-rate volatility, S&P said last week in a report titled For
Asia-Pacific Sovereigns, Capital Outflows Are Likely To Be Disruptive But Not Destructive.
Most sovereigns are likely to see economic growth weighed down somewhat by modest-to-moderate increases in
funding costs, Kim Eng Tan, an S&P credit analyst, said in the report. The strain is likely to be greater in
economies that run sizable current-account deficits or have inflexible exchange rates.
A total $7.6 billion flowed out of emerging-market equity exchange-traded products in the first seven months of
this year, according to BlackRock Investment Institute, a unit of BlackRock Inc., the worlds largest investor.
Investment managers poured $155.6 billion into developed-market funds, with North America receiving $102.4
billion, or 65.8 percent, according to BlackRock. Japan attracted a record $28 billion, while European funds got
$4.3 billion.
The change in reserves that weve seen is part and parcel of the change in capital flows, Khoon Goh, a strategist
at Australia & New Zealand Banking Group Ltd. in Singapore, said in a phone interview on Aug. 22. Asian central
banks have been diversifying within the region and they have been buying into Europe as well, so all those things
will see a reduction.
To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Lilian
Karunungan in Singapore at lkarunungan@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
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