Asia puzzle intensifies: ECR Q3 2013

Across the rest of Asia, Indonesia – one of the worst affected by the currency sell-off along with India – Thailand, Vietnam and one or two other sovereigns are languishing, highlighting the region’s financial imbalances, including its growth and banking-sector vulnerabilities.

ECR expert Ieisha Montgomery, associate international economist at Northern Trust Company, says: “A lot of the Asian emerging markets probably started to slip due to the impact that lacklustre demand for exports had on their economies.

“In the case of US tapering, most emerging markets will be affected, but the flight back towards safety will disproportionately impact countries with weaker fundamentals, especially those with the twin evils of current-account and fiscal deficits.”

Scores for Singapore, South Korea, Taiwan, Myanmar, the Philippines and Sri Lanka have increased since June, partly for these reasons and because of the brighter outlook for China and Japan, and the view that a repeat of the 1997 Asian currency crisis is unlikely.

As ABN Amro’s Cabezas says: “Asia has learned its lesson and has built strong cushions for rainy days. International reserves, a country’s foreign exchange buffer measured in months of imports, remain strong in practically all countries except for Indonesia and India.

“Furthermore, in the event of an abrupt outflow of short-term capital, most Asian countries can fully cover these liabilities with their FX reserves.”

However, this might prove to be a temporary lull as several countries – Malaysia included – have seen longer-term declines prompted by capital outflows weakening currencies, growth prospects and financing opportunities in a region still exhibiting a mixed picture of risk for investors to ponder.