The IMF’s data for global reserve growth in q3
I would caution against reading too much into the fall in the dollar's share of global reserves in the latest IMF COFER data release for two reasons:
First, most of the fall in q3 is explained by the rise in the dollar value of the world's existing holdings of euros and pounds. The euro rose from around 1.35 to a bit over 1.42 in the third quarter. The rise in the dollar value of the world's existing holdings of euros from currency moves explains at least $50b of the overall increase in euro holdings.
Second, the diversification that is taking place is coming from the world's advanced economies, not the world's emerging economies. After stripping out valuation gains, the advanced economies added $10.7b euros to their stockpile — a far larger sum than the $3.1 billion increase in their dollar holdings. Either Japan diversified at the margin or a host of European countries continued to shift away from dollars. Those emerging economies that report data to the IMF, by contrast, bought three times as many dollars ($61.4b) as euros ($21.2b).
If emerging economies that do not report detailed data on the currency composition of their reserves acted like other emerging economies, dollar reserve growth remained very strong — though not quite as strong as in q1 or q2. Central bank financing of the US hasn't ended. (UPDATE: supporting data has been added below)
The reserves of reporting emerging economies rose by $132.7b, with a $61.4b increase in dollar reserves and a $53.8b headline increase in euro holdings. But valuation changes explain over $30b of the increase in euros. I have yet to break out the impact of valuation gains on the remaining $17b of the $132b overall increase — but valuation changes undoubtedly were a factor there as well.
Consequently, to me the big story remains the ongoing increase in overall reserve holdings. Valuation gains explain a big chunk — probably around $100b, but I need a bit more time to do the analysis (update: valuation changes look to have added more like $80b)– of the $317b headline increase in q3. But around two thirds of the increase comes from ongoing intervention in the foreign exchange market. Valuation gains also explain a portion of the $1287.2b increase in global reserves over the last four quarters. But the core story remains the enormous — indeed, unprecedented — overall growth in global reserves and the enormous growth in central bank holdings of dollars.
A lot of that growth — $146-147b in q3 comes from countries that do not report data to the IMF. On the assumption that countries that do not report hold about 1/3 of their reserves in euros and similar currencies and the remainder in dollars, valuation gains account for maybe $35b of the total increase. That leaves $110b in real growth (v around $90b from the emerging economies that do report).
If 75% of that increase was held in dollars and 25% in euros (a breakdown that resembles the breakdown from those countries that do report), countries that do not report added $83.4b to their dollar holdings. That would bring the global total up to around $150b in q3.
That is down from q1 and q2. But it isn't small.
And that total doesn't include the increase in the non-reserve foreign assets of the Saudi Monetary Authority, the CIC, other sovereign funds or the large increase in the dollar holdings of Chinese banks (remember, Chinese reserve growth was unusually low in q3).
More later!
UPDATE: Nothing like a lengthy weather-related delay to provide time for a bit of number crunching. Best that I can tell, funds shifted to the Chinese banks and Saudi non-reserve foreign assets added about $37b to the global total for q3 (The Saudi adjustment is straightforward, the Chinese adjustment hinges on the considated foreign exchange balance sheet of the Chinese banking system), bringing headline reserve growth up to around $354b in q3.
Valuation changes explain about $80b of the overall increase. Total valuation adjusted reserve growth was in the $275b range. The size of the euro's move in q3 though means that this estimate is depends more than usual on getting the estimated euro holdings of countries that do not report data to the IMF (notably China and Saudi Arabia right).
The total increase in dollar reserves is around $175b. That estimate assumes that emerging economies that do not report data to the IMF reduced the dollar share of their reserves by about 0.8% — i.e. they acted more or less like the emerging economies that did report detailed data to the IMF. If the non-reporting emerging economies held their dollar share constant, the total increase in dollars could have been as high as $200b. That growth is why articles indicating that central banks "lost" appetite for dollars are misleading — the quarterly increase in dollar holdings was only higher in five quarters: q1 2004, q4 2004, q4 2006, q1 2007 and q2 2007.
This estimate is subject to a large margin of error — i estimate, using a data series that Christian Menegatti and I developed — that after adjusting for valuation effects, industrial countries added $3b to their dollar portfolio and $16b to their non-dollar portfolio (i.e. they actively lowered the dollar share of their portfolio), that reporting emerging economies added $61b to their dollar portfolio and $38b to their non-dollar portfolio and emerging economies that do not report added $113b to their dollar portfolio and $44b to their non-dollar portfolios.
Christian and I have stress-tested our estimate of the currency composition of countries that do not report in a lot of different ways. It is reasonably robust — at least so long as my estimates for the dollar share of China's portfolio are robust. But with so much of the estimated increase in dollar holdings coming from countries that do not report detailed data to the IMF, there is a higher than usual margin of error.
Taking a slightly longer perspective, over the last four quarters, the "headline" increase in global reserves — counting reserves managed by Chinese state banks and the non-reserve assets of the Saudi Monetary Authority but not the growth of the assets managed by the Gulf sovereign wealth funds, Norway's government fund, Singapore's GIC and Temasek and the CIC — over the last four quarters was $1394b. The valuation-adjusted increase was only $1212b, with an estimated $182b of the increase coming from valuation changes.
These are absolutely huge numbers. If they are right - and the main source of potential error would be a higher than estimated euro share in China and Saudi Arabia, and thus larger valuation gains — total "official asset" growth, counting oil revenue transfered to sovereign wealth funds, is in the $1.3 trillion range. Trillion.
Dollar holdings are likely up by between $800 and $900b — and inflows to the eurozone are likely in the $300-400b range. Those are also enormous sums.
Words can only convey so much — pictures often work better. The following chart shows quarterly valuation-adjusted global reserve growth, with dollar and non-dollar reserve growth broken out.
The next chart shows the rolling four quarter sum for total reserve growth, the US current account deficit and my estimate of dollar reserve growth.
It sure doesn't seem like dollar reserve growth has stopped to me — on a rolling four quarter basis, it never has been higher.
One last point. If the world's central banks has done absolutely nothing other than hold on to their existing portfolio, the dollar's share of global reserves (among reporting countries) would have fallen by 0.9% (almost a full percentage point) simply from the rise in euro relative to the dollar. That explains the majority of the 1.2% overall fall in the dollar's share of global reserves. Valuation changes alone explain almost all of the fall in the dollar's share of those emerging economies that report — the only real diversification came from industrial economies.
That is why I am not a fan of the current convention of looking at the dollar's share of reported reserves in the COFER data to assess whether the dollar is losing its status as a reserve currency.
Right now, the small fall in the dollar's global share — a fall that is most likely due to a small shift in the portfolios of some European central banks along with moves in the euro/ dollar, not from a major shift in the activity of reporting emerging economies — isn't the real story. The real story is the huge growth in central bank reserves, euros and dollars alike, over the past year.
Bloomberg’s very different view on IMF Data release
Dollar’s Share of Currency Reserves Falls, IMF Says
http://www.bloomberg.com/apps/news?pid=20601103&sid=aU8cbIuuEr38&refer=us
Dec. 28 (Bloomberg) — The dollar’s share of global foreign-exchange reserves fell to a record low in the third quarter as demand for U.S. assets waned after the subprime- mortgage market collapsed.
The figures suggest central banks diversified out of the dollar as it fell to the lowest level in a decade. Investors sold a record amount of U.S. securities in August when defaults on subprime mortgages rippled through financial markets and the Federal Reserve signaled it would cut interest rates.
“The dollar seems to be losing, at least to some small extent, its favored status,” said David Powell, a currency strategist at IDEAglobal in New York. “Foreign central banks aren’t necessarily shunning dollar assets, but they were more attracted to other currencies.”
The Washington Consensus propensity to declare a “foreign enemy nation of the month” or “axis of evil state” alienates most of the rest of the world. - DC
Sudan’s Central Bank Opts for Euro
http://biz.yahoo.com/ap/071228/sudan_banking.html?.v=1
KHARTOUM, Sudan (AP) — The Central Bank of Sudan will deal only in the euro beginning in 2008 and advised local commercial banks to opt for convertible currencies other than the U.S. dollar.
Banks should advise account holders to commute U.S. dollar assets to other currencies and “enlighten them on the risks associated with maintaining balances in the American dollar,” it said, without elaborating.
The advisory also said banks using the dollar would “bear the risks resulting from those dealings,” but a shift to other currencies was optional.
Nearly 75 percent of Sudan’s trade is with Arab and Asian nations and Sudanese firms are already using the euro extensively.
Last year, Sudan’s economy grew by 12 percent, according to the International Monetary Fund. That growth was propelled by the estimated 500,000 barrels of oil produced each day — two-thirds of it bought by China.
DC — Bloomberg also quoted yours truly to the effect that small changes in the $ share of reserves aren’t all that important when the overall total is increasing. I stand by my analysis. EM central banks are still adding to the dollar reserves at a very rapid pace. There isn’t much evidence of diversification by EM central banks, at least not in aggregate. The fall in the $ share of (rapidly increasing) EM reserves comes mostly from the big rise in the euro over the past quarter — tho EMs didn’t fully offset the impact of the rise in value of their euro holdings by buying more dollars.
By contrast, there is growing evidence suggesting that some european central banks are reducing the dollar share of their reserves.
Brad,
You are exactly right but inspite of such great accumulation dollar fell to new lows every time. Does it mean dollar is an
extremely weak currency.
dollar weakness against the euro is in my view a manifestation of the same forces that prompted record central bank intervention — namely an absence of private demand for US assets on a scale needed to finance the us deficit. that manifests itself in different ways in different places in the world — in $ weakness v floating currencies and in record reserve growth in those regions where central bank intervention is the norm.
In short, governments are investing in $ assets for political reasons while private investors following only their economic interests decline to do so. If so, then dollar asset accumulation will slow down or end only when international political forces bring that about.
In other words, the declining dollar share of reserves is a misleading metric for several reasons:
a) Most of the share decline is due to valuation rather than flows
b) The share decline is a relatively small percentage, particularly when adjusted for valuation
c) The more telling metric is an underlying trend increase in dollar reserve growth (at least on a rolling 4Q basis), particularly as compared to the size of the US current account deficit, which has stopped growing. This disproportionate dollar reserve growth increase has occurred along side an even greater increase in total reserve growth due to expanding currency diversification. Currency diversification has thus come at the expense of, or has been leveraged to, a propensity for central banks to continue to accumulate dollar reserves at an increasing pace (rolling 4Q) even as the US current account deficit has stopped growing. (Although the latest quarterly data could be an inflection point to this countertrend).
Look out below for the US Dollar in 2008. Whatever private demand there is for the US Dollar will collapse when the US consumer hits the financial brick wall. With a record 70% of US GDP consisting of consumer spending, there is no mathematical way for the US manufacturing sector to compensate for a major hit to the US consumer. - DC
U.S. Consumers soon to hit financial brick wall
http://www.prudentbear.com/index.php/GuestCommentaryHome
The latest economic statistics show that consumers have depended on new debt for 83% of their cash flow during 2007. For 2007, we estimate that U.S. households will borrow about $240 billion just to pay scheduled principal payments on current debt. For many of you, this is a Minsky Financial Instability theory situation known as “Ponzi finance.” It is more correctly described as “speculative finance”, but it may be appropriately described as “hedge finance.” In 2007, we now expect a 10% decline in cash flow.
Quote of the 2007 Year:
http://www.washingtontimes.com/apps/pbcs.dll/article?AID=/20071228/FOREIGN/110571739/1001&template=nextpage
Influential Financial Times columnist Martin Wolf recently wrote that the global credit crunch “is a huge blow to the credibility of the Anglo-Saxon model of transaction-oriented finance capitalism.”
“A mixture of crony capitalism and gross incompetence has been on display in the core financial markets of New York and London. … Not for a long time will people listen to U.S. officials lecture on the virtues of free financial markets with a straight face.”
Anonymous1 — yes, exactly right.
Guest — I broadly agree with your point if a desire to support export growth by maintaining an undervalued currency is considered a political factor. To me there is little doubt that the dollar’s value v. most emerging currencies has been set by governments, not by markets — and, more importantly, the gap between the politically set rate and the market rate is growing for some key currencies (notably those that followed the $ down v the floating currencies despite better economic circumstances).
Dave,
You seem to be more anti-american(anglo-saxon). I don’t think
the situation is as dire as you portray. I think chinese are more vulnerable as an investment led economy and there is going to be severe wage inflation in china in the coming years. Inflation and wage inflation is a vicious circle and this will force china to abandon its peg over next 5 to 10 years
Yipes! The graph indicating how reserve accumulation continues apace despite a falling US CAD is mind-boggling.
That 36.5% of the reserves reported are now unallocated is also worrying for those concerned with the titular purpose of COFER. My question is, how does the IMF collect this data from non-reporting LDCs? The IMF blurb says this:
COFER data are submitted to the IMF on a voluntary and confidential basis by 114 member countries, comprising all 24 industrial countries and 90 out of the 160 developing countries.
Therefore, (a) do GCCs, China etc. report increases in their reserve holdings but neglect to report their composition or (b) does the IMF simply estimate increases in the reserve holdings of these LDCs which do not report their reserve holdings?
This question is important for while currency composition is likely up in the air with well over a third going unreported, the overall tally might be more useful.
Brad,
A few clarifying questions about COFER, if I may:
(1) Although it is described as “currency composition of foreign exchange reserves”, is COFER also the best/standard source of information on the total size of global foreign currency reserves, or are there some countries which do not appear in COFER at all (I assume that when you say above “that do not report data to the IMF”, you really mean currency composition only, and their reserves are included in the total), but are included in some other survey?
(2) COFER does not seem to include gold reserves. These amount to the best part of another trillion dollars or so, and have been subject to an even greater valuation increase than the euro lately. Do you consider that gold should be included?
(3) Judging by the trends, I am guessing that Russia is not classified as an industrial country. Is it possible to find out which countries are in which category without a subscription to IFS?
Thanks.
All members of the IMF, I think, are required to report data on their total reserve holdings. That is how the IMF gets its global data — it matches the data on fx reserves (ex gold) reported in the IFS, more or less. For the global total, the IMF adds in the reserves of at least one non-member country/ economy — Taiwan.
Remember the IMF is fundamentally an organization for pooling reserves/ lending spare reserves to those temporarily short on reserves, so data on the reserves of its members is in some sense fundamental to the IMF’s purpose.
The reporting of the currency composition of reserves is by contrast voluntary — it isn’t a requirement of membership. But most countries do. The US and others also made subscribing to a higher standard of reserve disclosure (the SDDS, which includes some reporting on currency composition) a requirement for borrowing from the IMF in the 1990s. The concern at that time tho was that countries were hiding how few reserves they really had by not reporting things like forward sales (thailand) and reserves on deposit in their own banking system (korea)and thus effectively committed to backstop the banks.
The set of industrial countries isn’t disclosed formally (to my knowledge) but it certainly includes all of the G-10 and I think all members of the Eurozone as well as Denmark and Norway and Swtizerland. Slovenia was shifted to the industrial country category when it joined the eurozone. It doesn’t take much work to figure out who is included — (look for example at who appears in a similar category in the WEO …)
Russia is not included. Russia is I think among those countries that do report data on the currency composition of their reserves to the IMF (russia discloses this publicly, so why not to the imf?). Indeed, the fall in russian reserve growth in q3 likely explains the fall in reserve growth among reporting emerging economies.
Rebel — re: your first question, the cofer data is the most complete data set for total reserve holdings as well as the best data set on currency composition of those countries that report data to the imf. there are some countries that report the currency composition of their reserves to the imf but do not publicly disclose the data. but the cofer data on currency composition is also capturing the currency composition of a declining share of fx reserves b/c the fastest reserve growth has come from countries that do not report.
the absence of data on gold holdings doesn’t bother me — most countries are not buying huge amounts of gold, so most changes come just from valuation.
what does bother me more is that a lot of governments are accumualting fx and fx exposure in ways that are not showing up in the reserves data in any form — whether b/c they are adding to their non-reserve foreign assets (Saudi aRabia), they are creating a SWF/ adding to their existing fund (China, Norway, Singapore the Gulf), they are taking big derivatives positions (Thailand) or they are shifting reserves to the banking system/ forcing the banks to buy more fx (China).
the total here could be quite large — it is at least $200b, and likely $300b for 07 (and possibly more depending on when China shifts the last $100b to the CIC). And most of this fx accumulation is serving an exchange rate management function — whether b/c of intervention to keep the currency from rising (China) or b/c of the need to avoid increasing domestic spending to avoid fueling inflation with a dollar peg even as commodity revenue surges (the gulf, norway). As a result, the reserves data no longer perfectly tracks the increase in total fx exposure of emerging market governments.
Dr. Setser, thanks for the detailed reply.
You may also be interested in UNCTAD’s Trade and Development Report 2007. Aside from South-South FTAs which I’m interested in, there is good stuff on various arrangements for regional BOP financing (pp.121-5). You might find something worth reading about the Latin American Reserve Fund, Chiang Mai Initiative, etc. Though it may be overkill, some Latin American and East Asian member states with skimpier reserves may benefit.
It’s more proof that the IMF has a harder time justifying its existence as a lender of last resort nowadays, methinks, with so many regional facilities offering credit on more conciliatory terms. That and whopping reserves, of course.
Thanks for the interesting information Brad.
I wonder whether gold will become more prominent in 2008. Will industrial countries which apparently regard gold as a barbarous relic have the courage of their convictions to take advantage of its increased value to resume the gold sales of the 1990s? Or will (downwardly massaged) inflation increase interest in gold as a reserve asset?
And no, I don’t work for the World Gold Council!
RE-
With increasing gold production, gold is also commoditized.There are lots new gold mine opening up and production will start from start of 2009 and that should depress the gold prices then. Gold as a reserve is just a history
Guest on 2007-12-30 08:34:08
As I say, I have no opinion either way. But I note that some of the largest holders of gold, both in absolute terms and as a proportion of their reserves, are countries which are supposed to be economically and financially sophisticated (US, Germany, France, Italy, Switzerland etc), and yet they are not selling!
RE-
I neither have any idea of why they are not selling. In my opinion gold is going to be more like industrial metal in future and with no major use of gold except in jewellery and with no depreciation there will be a glut in that commodity.
Pardon, but in one of David Chiang’s anti-American econoporn responses he links a Bloomberg article that claims the USD proportion of global reserves fell to a “record low,” just under 64%. I’m used to media sources getting these things wrong, but I seem to recall figures in the 50 to 59% range in the 90s before climbing to ludicrously unbalanced and unhealthy levels in the early 2000s. What am I misreading here? Does Bloomberg consider history to start when the Euro launched?
I suspect bloomberg starts its calculations with the first date in the imf’s COFER data series — which is in the mid 1990s. the older historical data comes from the imf’s annual report …