TOPIC OF THE WEEK: Gold-rich, shock-proof? Testing external buffers across the Caucasus and Central Asia
CCA countries have been breaking records in accumulating FX reserves. While Uzbekistan has mostly been on the radar screen given its very large stock of reserves, the rest of the countries have also been setting new highs in building up FX buffers, albeit for different reasons, ranging from remittances (Kyrgyzstan, Tajikistan) to declining geopolitical risk premium (Armenia) and robust tourist- and IT-related inflows (Georgia). Very interestingly, however, five of these countries have gold in their FX reserves, and some of them have a lot of it.
So, the question I pose here is the following: Have stronger headline reserves translated into equally stronger protection against external shocks, in particular in a scenario in which gold loses its shine? The hypothesis is that the improvement differs substantially once gold valuation, physical accumulation and foreign-currency assets are separated. In essence, the narrative deliberately asks a reasonably narrow question: What happens if that adverse scenario is a fall in the gold price?
The main message is that CCA countries have meaningful financial cushions, but large reserves alone do not tell us how well they can handle a shortage of foreign currency. A fall in gold prices would hurt, but substantial reserves would remain under the conducted tests, albeit to a different degree for the individual economies. This is reassuring, especially in an environment characterized by a sustained period of restrictive US financial conditions.
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