MUMBAI/JAKARTA (Reuters) - As the U.S. Federal Reserve winds down an era of easy money, Asia has built up record-high currency reserves, as countries especially those most dependent on foreign capital inflows amass dollars in case investors cut and run.
Foreign exchange reserves in 13 Asian countries excluding Japan tracked by Thomson Reuters are expected to have risen 3.2 percent to a record high $6 trillion in the October-December quarter, marking a near 12 percent increase for the whole year.
The estimate includes an expected 3.8 percent rise in China's FX reserves to an all-time high of $3.8 trillion, or a whopping 19.5 percent surge for the year. The country will report numbers in coming days.
The rise in reserves in the last quarter was led by India and Indonesia, according to data this week, providing comfort about two countries dependant on foreign money to help narrow their traditionally hefty current account deficits.
Both took further steps this week to bolster their defences, with Indonesia raising $4 billion via a bond sale, and India expanding a currency swap agreement with Japan to potentially as much as $50 billion from $15 billion after going on a massive drive late last year to raise money from abroad.
Yet analysts say both may need to do more to avoid the type of painful measures, including interest rate hikes, they undertook last year when foreign investors raced to the exits amid fears the Fed was about to start winding down its money-printing stimulus programme.
That is especially true for Indonesia, given its current-account deficit hit a record 4.4 percent of gross domestic product in the second quarter of 2013.
"Recent global bond issuance should help to shore up market confidence, but Indonesia still needs more funds either from sovereign or domestic bonds to cover its current account deficit," said Rangga Cipta, an economist for Samuel Sekuritas in Jakarta.
"And as risks from global trends and inflation continue to be seen ahead, BI (Bank Indonesia) still needs to increase the benchmark rate in the first half."
Although Indonesia's reserves rose by 3.9 percent in the October-December quarter to $99.4 billion, the biggest rise since the first three months of 2011, it still saw reserves fall 12 percent for 2013, after hitting a more than 2-1/2 year low in July.
Indonesia's reserves cover only around five months of imports and around 1.6 times short-term debt, among the lowest in the region, according to J.P.Morgan estimates last month.
Jakarta has also sought additional cover through currency swaps with other Southeast Asian countries as well as Japan.
India is also seen as vulnerable, although confidence is improving after FX reserves surged 7 percent in the October-December quarter to $295.71 billion, the biggest quarterly increase since January-March 2008.
India on Friday said FX reserves in the week ended on January 3 fell to $293.11 billion.
The big improvement came after lenders took advantage of central bank subsidies to raise $34 billion from deposits and capital abroad. Worries about its current-account deficit and foreign outflows drove the rupee currency down by as much as 20 percent to record lows last year.
Policymakers in India and Indonesia have pledged renewed vigilance after the Fed said in December it would start to reduce monthly bond purchases by $10 billion a month.
Both countries were forced to take strong measures last year after their currencies tumbled, with Bank Indonesia raising interest rates by a total of 175 basis points since June, although it held policy steady on Thursday.
Despite the hikes, foreign investors still ended selling $1.8 billion worth of shares in Indonesia, according to Credit Suisse estimates, and 53.31 trillion rupiah in government bonds, according to the finance ministry.
Meanwhile, the Reserve Bank of India raised short-term rates in June. Although a rebound in the rupee has allowed it to wind down those emergency steps, it had to raise interest rates by 50 bps to deal with surging inflation.
RBI officials say continuing to build their FX reserves will be a priority, especially by buying dollars at advantageous rates.
"There is a change in strategy now. The current strategy is to build reserves whenever there is an opportunity so that whenever required we can protect the currency," said an Indian policymaker who declined to be identified talking about the country's FX strategy.
Malaysia remains another source of concerns for analysts.
Foreign investors have big holdings in its markets, while the central bank has traditionally been reluctant to intervene even as currency reserves fell 3.4 percent to $134.9 billion last year, near their lowest in 1-1/2 years.
These worries contrast with the rest of the region, where reserves in South Korea and Taiwan hit record highs, and where the prospect of currency appreciation against the slumping Japanese yen had been a stronger concern.
Although South Korea has been suspected of intervening in recent months to prevent the won from appreciating too much against the yen, analysts say that could change now that the dollar has strengthened after the start of the Fed taper.
"It's hard to expect the won to keep rising against the dollar given the external uncertainties about the pace of the U.S. tapering and how that affects the U.S. economy," said Son Eun-jung, a currency analysts at Woori Futures in Seoul.
Writing by Rafael Nam; Additional reporting by Se Young Lee in SEOUL, Faith Hung in TAIPEI, Karen Lema in MANILA, Saikat Chatterjee in HONG KONG and Jongwoo Cheon in SINGAPORE; Editing by Kim Coghill