 | Get all the essential market news and expert opinions in one place with our daily newsletter. Receive a comprehensive recap of the day's top stories directly to your inbox. Sign up here! |
(Kitco News) Global central banks saw losses in managing their reserves in 2022 amidst an aggressive monetary policy tightening cycle, according to a closely watched central bank survey run by a think tank group. Following the losses, there is now a renewed demand for traditional reserve assets.
Eighty percent of reserve managers posted losses last year, and nearly 40% expect it will take one to two years to recoup those losses, said the Official Monetary and Financial Institutions Forum (OMFIF) in its Global Public Investor 2023 survey released Tuesday. "Almost 40% expect it will take one to two years to recoup their losses, while nearly a quarter think it will take two to five years," OMFIF said.
Total international reserves stood at $15 trillion, down from their peak of $15.8 trillion in late 2021, the latest data showed. "This is mainly due to valuation effects and, in some cases, foreign exchange intervention," the survey said. "International reserves fell across almost all regions last year, the main exception being the Middle East and North Africa, which benefitted from the windfall of higher commodity prices."
Thirty-nine percent said they would deploy less than 5% of reserves due to expected additional market volatility, which signals an emphasis on rebuilding rather than deploying reserves. And challenging market conditions led 10% of central bank respondents to report insufficient reserves. All of them were in Asia Pacific and sub-Saharan Africa.
Inflation — the number one reason for all of the hiking the world saw over the past year — is not even close to getting under control, according to the survey. "Inflation is one of the three biggest near-term economic concerns for 85% of respondents – broadly unchanged from a year ago," they survey said. "And not a single respondent expects inflation to fall to target in major economies in the next 12-24 months."
Stagflation is now the biggest concern for 2023, with almost 70% of respondents identifying a global economic slowdown as one of their top three concerns. And another 38% estimate a worldwide economic recession to hit in the next 12 months. "Reserve managers are pessimistic about the prospects for a soft landing," the survey noted.
Capital preservation is now the primary investment objective for 69% of the respondents, up from 61% reported last year.
Given the current market environment, demand is the strongest for traditional reserve assets. "A net 32% of reserve managers will increase their allocation to conventional government bonds and 20% to quasi-government bonds in the next two years as they seek higher yields and safer assets," the survey said.
Fourteen percent of respondents said they would increase their allocation to gold. "This is mostly for diversification purposes, while over a third will invest in gold to protect against geopolitical risk," the survey said.
Meanwhile, the appetite for riskier assets is declining. "The share that expects to add to equity or corporate bond allocations has halved to less than 10% this year. And there is little interest in alternative or digital assets," the survey stated.
Geopolitics remained the most significant concern over the next five to ten years, with 83% listing it as among their top three concerns. The US-China tensions are one of them, including the potential fragmentation of trade and capital flows. "These will probably have a major bearing on their dollar and renminbi holdings in the years to come," OMFIF pointed out.
Sentiment towards the U.S. dollar remained positive, but its dominance is seen as slightly waning in the long term. Central banks said they anticipate a decrease in the dollar's share of total reserves to 54% in the next decade from the current levels of just under 60%.
"Central banks expect the dollar to continue dominating global reserves in the next decade, though its influence will wane slightly," according to respondents. "A net 6% of respondents expect to reduce their dollar holdings over the next ten years. But this shift will be in line with the slow, decades-long trend of de-dollarization."
One of the top beneficiaries of the de-dollarization trend will be China's renminbi, with nearly 40% of surveyed central banks planning to boost their holdings over the next ten years. Respondents also estimated that the renminbi would reach 6% of global reserves within the next decade, up from the current levels of just under 3%.
The euro also stands to benefit, with 14% of central banks planning to increase their euro holdings over the next two years, up from zero reported in 2021 and 2022.
"It seems that rising interest rates in Europe are making fixed income assets there more attractive … suggesting the currency may play a key role in diversification strategies away from the dollar in the medium to long run," the survey noted.
The OMFIF's 2023 survey edition polled 75 central banks with international reserves of close to $5 trillion.
