More Signs the Peak Is In

Don't worry, there won't be a repeat of 1997 because central banks learned from their mistakes and built up forex reserves.

FT: Forex reserves in emerging markets begin to shrink

Nine out of 10 emerging market economists polled by the Financial Times said emerging markets had passed a period of “peak reserves” and might continue to see their stashes of foreign currency shrink for months.
That decline could hamper emerging economies’ ability to carry on buying US and European debt, a trend that has been an engine of growth in the west over the past decade.

“We are past the peak forex reserves in emerging markets,” said Maarten-Jan Bakkum, senior emerging market strategist at ING Investment Management. “The peak was in June last year. Since then we have seen declines in all major EM countries apart from Mexico, India and Indonesia.”

The International Monetary Fund said on Tuesday that total foreign currency reserves in emerging and developing economies fell $114.5bn year on year in 2014 to $7.74tn — the first annual decline since the IMF data series began in 1995. At their peak, emerging market reserves reached $8.06tn at the end of the second quarter last year.

What's really scary is there was no correction in 2008, only a blip.

A big reason for that lack of a reversal was China.

Mr Neumann and other economists pointed to China’s influence in the declining reserve trend. The unwinding of the “China carry trade” — in which Chinese speculators slashed their foreign borrowing as the renminbi weakened this year — propelled net outflows from the country’s capital account of a record $91bn in the fourth quarter of last year.

But such capital outflows are by no means confined to China. Fears of Washington tightening monetary policy in a strong dollar environment has also prompted emerging market borrowers to reduce their exposure to loans denominated in the greenback. In addition, developed market investors have cut their risks in some emerging markets.