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Emerging Markets capital flows

The Emerging View

07 October 2015

Emerging Markets (EM) foreign exchange reserves have dropped about USD 650bn (7% of total reserves) since reaching a peak of USD 9.4trn in June 2014. The decline in reserves is a concern, because reserves matter to investor confidence, while EM policy-makers regard reserves as pivotal in ameliorating currency volatility. On the other hand, EM controls nearly 80% of the world’s FX reserves as insurance, which is meant to be used precisely at times such as these. This report seeks to determine whether there are valid grounds for worrying about the recent decline in EM reserves by establishing why they are declining.

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