Weekend Comment Aug 23: Who's next to be hit in emerging Asia?
WRITTEN BY FRANKIE HO
SATURDAY, 24 AUGUST 2013 10:07
AS INDONESIA AND India struggle to stem massive capital outflows that have left their currencies battered and bruised, the thought of Asia sinking into another financial crisis is inevitably on the minds of investors.
Both countries are finding it harder to use US dollars to fund their huge current account deficits – where imports exceed exports – as money flows out and the greenback strengthens in anticipation of higher US interest rates.
“We are in the midst of seeing the unwinding of a massive US dollar-financed carry trade,” say Daiwa analysts Kevin Lai and Christie Chien in a note to clients. “Once the Fed’s tapering plan becomes reality, we expect outflows to accelerate.”
Already, some analysts have identified other Asian currencies that could potentially be next in line for a drubbing as funds get pulled out of emerging markets and make their way back to the West.
Malaysia and Thailand are the two “most obvious potential candidates” in Asia to face capital outflows and a weaker currency, according to Credit Suisse analyst Santitarn Sathirathai.
While Malaysia has a current account surplus and Thailand’s current account deficit is small, the former faces greater risks, Sathirathai says in a report.
“Firstly, Thailand’s export composition makes it less exposed to weak commodity prices and more leveraged to the world trade cycle as compared to Malaysia,” he says.
“Secondly, weak domestic demand growth in Thailand will continue to put a lid on import growth in the second half of the year.”
Malaysia’s imports, on the other hand, are expected to pick up “meaningfully” as investment growth rebounds following the country’s May 2013 general elections and on the back of the government’s blueprint to turn Malaysia into a developed economy by 2020, Sathirathai adds.
Among emerging-market currencies, the Malaysian ringgit is “the obvious outlier”, Bank of Singapore analysts Richard Jerram and Sim Moh Siong point out in a report.
The ringgit has fallen almost as much as the Indonesian rupiah against the US dollar since May, when Fed chairman Ben Bernanke first made mention of winding down monetary stimulus, note Jerram and Sim.
“This largely reflects a reversal of the temporary post-election strength, although there are some concerns related to high foreign ownership of the bond market,” they say.
Foreign investors hold close to 50% of outstanding Malaysian government debt, the largest share among all countries in the region, according to Jerram and Sim.
With such sizable foreign holdings, the ringgit could be hit hard if Fitch Ratings proceeds to downgrade Malaysia’s sovereign credit rating.
Citing deteriorating public finances, Fitch cut its outlook for Malaysia to negative from stable last month, but kept the country’s “A-” investment-grade rating on long-term foreign debt and “A” rating on long-term local debt.
Beyond India and Southeast Asia, Daiwa expects investors to eventually turn their attention to mainland China and Hong Kong.
“We continue to think the money link between China and Hong Kong is highly precarious. We see evidence of a credit bubble for both,” say Daiwa’s Lai and Chien. “While India represents a major destination for USD-financed carry trades, the scale of China-Hong Kong’s problems is by no means smaller.”
While investors are naturally worried that the damage to the rupiah and rupee could spill over to other currencies in the region, Standard Chartered Bank analysts Callum Henderson and Thomas Harr believe a repeat of the Asian financial crisis is unlikely.
“We see talk of a possible re-run of the Asian crisis of 1997-98 as entirely spurious. This is a cyclical decline, not a crisis,” say Henderson and Harr.
“By the time of the FOMC meeting [on Sep 17-18], we expect markets to have priced in Fed tapering. Moreover, better economic data out of the US and Europe should have a positive reaction in emerging markets.”