Global US Dollar Shortage Rises As Emerging Markets Lose Reserves

Global US Dollar Shortage Rises As Emerging Markets Lose Reserves

Daniel Lacalle 04/05/2020 5
Global US Dollar Shortage Rises As Emerging Markets Lose Reserves

The pace at which emerging market economies are losing FX reserves is staggering.

In March, emerging economies lost around $1.5 billion in foreign exchange reserves per day, according to Bloomberg.

Saudi Arabia alone lost $27 billion in reserves in March, according to Goldman Sachs, and it is one of the countries with the best capacity to endure the current crisis.

China, that still hods $3 trillion in FX reserves despite the crisis, is also among the strongest countries in FX reserves, but the apparently large level is offset by a large US-dollar denominated debt liability. As such, China’s 60% of China’s reserves are there to cover existing liabilities.

India is also one of the strong countries. As a large importer of commodities, the current slump in activity and lower commodity prices has allowed India to maintain a very healthy level of reserves.

Which countries are suffering the most? Argentina, Brazil, Mexico, South Africa, Turkey rank among the most impacted.

What is causing this collapse in reserves and rising dollar shortage?

  1. The decline in global trade and economic activities due to the forced lockdown weaken export revenues. The outlook for 2020 is bleak with trade possibly declining by between 13% and 32%, according to the World Trade Organization. Some recovery is expected in 2021, but the likelihood of recovering 2019 global trade activity before 2023 is small.

  2. The collapse in commodity prices destroys the trade balance of producer nations. Not only demand is falling to unprecedented levels, but storage is also filling up rapidly and overcapacity at producer nations is building to decade-highs. This problem is not happening just in oil and natural gas, but also in coal, aluminum, soja and, to a lesser extent, in copper.

  3. Local currency collapse leads to central bank intervention. Central banks in emerging economies were smart in 2008-2011 and kept their reserves at very good levels, significantly above foreign currency liabilities. However, the recent slump in many currencies relative to the dollar has caught many emerging market central banks unprepared. Despite the massive increase in the balance sheet of the Federal Reserve and almost unlimited quantitative easing, many emerging currencies have collapsed and led to their central banks to sell dollars to defend the currency, a big mistake. reserves fall, and the currency remains weak.

  4. Since 2009, many emerging markets have ignored the risk of building imbalances and have entered into large twin deficits (fiscal and trade), as well as issued record-level of US-dollar denominated debt because domestic and international investors did not want local currency risk. This means that emerging markets face a massive wall of US-dollar denominated maturities of more than $2 trillion in the next two years while refinancing and new debt requirements soar.

  5. The Federal Reserve will continue to increase money supply… But investors have abandoned the risky “carry-trade” of suing cheap dollars to buy high risk emerging market exposure. Understandably, investors have pulled more than $120 billion in emerging market financial assets in March.

The “Sudden Stop” in emerging economies that I warned of in my book Escape from the Central Bank Trap (BEP 2017) is happening in front of us. It means that even with massive easing from the Fed, many economies will not see a large flow of funds into local investments, and the countries with the largest fiscal and monetary imbalances simply stop receiving foreign funding.

Some readers may see this as a great opportunity for China to extend massive loans in Yuan to address the rising shortage of dollars. There is only one problem. The economies that face the sudden stop will sell those Yuan to buy US dollars and repay loan commitments which could create a risk of capital flights in China that the country cannot afford, especially when it is managing its reserve base as well as it can.

The only thing that can reverse the sudden stop or mitigate it is a return to normal economic activity. Even so, the likelihood of investors jumping on the “negative dollar carry trade” of the past is very low.

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  • Adele Thompson

    We should go back to gold, or start accumulating bearer bonds.

  • Nick Mitchell

    The USA has two weapons to dominate the world: dollar and military

  • Joanna Wonham

    US dollar is now like a lot of big companies “too big to fail”

  • Mark Fletcher

    Through bullying and war, of course. What goes up will come down.

  • Jay Keenan

    Dollar is powerful : corona I see

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Daniel Lacalle

Global Economy Expert

Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of EconomicsFunds Society Forum in Miami, World Economic ForumForecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBCWorld Economic ForumEpoch TimesMises InstituteHedgeyeZero HedgeFocus Economics, Seeking Alpha, El EspañolThe Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).


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