from Follow the Money

Isn’t the surprise here that Venezuela still has 80% of its reserves in dollars?

December 17, 2006

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Venezuela has, according to Bloomberg, reduced the dollar share of its reserves from 95% to 80%, and increased the euro share from 5 to 15%.  Bloomberg:

``The U.S. dollar has suffered a long process of deterioration,'' Domingo Maza Zavala, one of seven board members at the central bank of Venezuela, said in a Dec. 14 interview. ``The diversification strategy started this year.''

Banco Central de Venezuela has slashed the percentage of its $35.9 billion worth of reserves invested in dollars and gold to 80 percent from 95 percent a year ago, said Maza Zavala. The country, the world's fifth-largest oil supplier, has boosted its euro holdings to 15 percent, from less than 5 percent in the same period.

The US banking data has shown a consistent reduction in short-term Venezuelan claims on US banks over the course of 2006, so this isn't a total surprise.   The data on Venezuela includes some private deposits in US banks.   But there are a couple of lines -- notably the fall in US bank obligations to banks and official institutions in Venezuela -- that likely reflect not just a shift out of dollars, but also a shift out of dollars held on deposit in US financial institutions.

However, 80% is still a pretty high dollar share.   It isn't quite as high as the UAE's 98% dollar share -- assuming that the UAE is still studying how to bring that share down to 90%.   But up it is up there.   

Of the big Asian central banks I would bet that only Taiwan -- and perhaps Japan -- has a substantially higher dollar share.   Even Hong Kong -- if memory serves -- doesn't have more than 80% of its reserves in dollars.  I suspect that both Korea and China are under 80%.  Singapore, Malaysia and Thailand are well under. 

Indeed, when hard information about the dollar share of oil exporters reserves has come out, I generally have been surprised by how high it is.   98% for the UAE is the best case in point.  A big part of me still wonders if the real secret that the Saudis are trying to hide is how high the dollar fraction of their reserves really is.  

And the Saudis count for far more than Venezuela.  The 2006 increase in Saudi reserves (counting all of SAMA's foreign assets) far exceeds Venezuela's total reserves.

Russia also matters.  And Russia is the exception to the "oil exporter still have with a higher dollar share than many Asian central banks" story. 

Russia clearly increased its euro share during the course of 2006.   Valuation gains are one reason why Russia's reserves went up by about $4b in the first week of December.  Still, 50% of almost $300b is more than 60-70% of $182b.  Russia almost certainly increased its absolute dollar holdings over the course of 2006 even as it reduced the dollar's share of its portfolio.

One thing though is clear.  There are a lot more countries that want to reduce the dollar share of their reserves than want to add to the dollar share of the reserves.   My friends over at Danske bank got that right in their big report on reserves.  

I do have some quibbles with their argument though.  I suspect Danske's estimate for 2006 dollar reserve growth ($375b) is a little on the low side -- personally, I think the total probably closer to $475b.   I think a lot of central banks had to buy a lot of dollars in late November and early December.   And it isn't obvious to me that every central bank that wants to reduce the dollar share of their reserves in 2007 will be able to do so -- not unless the US passes another Homeland investment act or something else triggers a huge surge in private demand for dollars.  

The current equilibrium in the global economy only works if central banks provide a large share of the ongoing financing needed to cover the US current account deficit.   The US current account deficit could approach $1 trillion in 2007 on the back of rising interest payments on US external debt.   And I am pretty sure that there won't be sufficient private demand for dollars to cover a close to $1 trillion deficit and allow the world's central banks to reduce their dollar holdings.  Or for that matter, to let the world's central banks go from adding $475b to their dollar portfolio in 2006 (my estimate) to $340b in 2007 (Danske's estimate).

Historically, when the dollar is weak, central bank dollar reserve accumulation has gone up, not down.   If that changes, a lot of other things would need to change as well.

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