Emerging Asia faces risk of capital flight as Fed announces rate hike

SINGAPORE – Capital has started to flow out of emerging Asian markets as coronavirus outbreaks slow the region’s economic recovery as investors consider the likelihood of an interest rate hike in the United States and Europe.

International investors sold $ 500 million more stocks and bonds than they bought in emerging Asian markets in May, according to the Institute of International Finance. This is the first net release since December of last year. When the data excludes China, whose economy quickly recovered from its first COVID-19 crisis, outflows jump to $ 10.8 billion.

Interest rate differentials could become a bigger factor in future capital flows, with the U.S. Federal Reserve reporting its first post-pandemic rate hike on Wednesday in 2023.

The stock markets of Thailand, Malaysia, the Philippines and South Korea suffered net capital outflows in May. Malaysia’s benchmark composite index in Kuala Lumpur and the PSE composite index in the Philippines are languishing below their level at the end of last year.

Part of the problem is the bleak outlook for economic growth. In Malaysia, a coronavirus lockdown has been extended until the end of the month, and most businesses have suspended operations. Thailand has restricted restaurant opening hours as well as entry to foreign tourists, though the prime minister now aims to reopen the country “within 120 days.” Last month, the government lowered its forecast for economic growth this year to between 1.5% and 2.5%, from its previous projection of 2.5% to 3.5%.

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Fed announces rate hikes for 2023 as inflation rises

Investors must also deal with the outlook for monetary policy.

If the Fed announces the start of talks on reducing its purchases of cash-generating assets by the end of this year, it could lead to more capital outflows from emerging Asian economies where interest rates are relatively low. . The currencies of these countries may also continue to depreciate.

This requires a delicate balance on the part of Asian central banks. They are inclined to ease monetary policy to stimulate lagging economies, but must also mitigate the risk of capital flight.

The most important challenges for central banks in emerging markets will be to maintain their credibility in the face of inflation problems, not to lag behind central banks in developed markets and “not to be surprised by an episode of crisis. of anger, ”said Jonathan Fortun, an economist at IIR.

In May, Ravi Menon, managing director of the Singapore Monetary Authority, the central bank, warned that emerging markets should keep a particularly vigilant eye on the impact of a strong dollar.

“A recent MAS study found that a 1% appreciation of the US dollar is associated with net capital outflows of 0.3% of the [emerging-market GDP] in the next quarter, ”Menon said.

Major Asian emerging currencies, such as the Indonesian rupiah and the Thai baht, have depreciated against the dollar from levels at the end of 2020. This depreciation is particularly noticeable as capital continues to flow into emerging markets outside of China. ‘Asia.

Rising consumer prices have become another source of concern. In the Philippines, the inflation rate this year has exceeded 4%, exceeding the government’s target. For Malaysia, inflation stood at 4.7% in April due to a jump in fuel prices and likely rose further in May.

Teppei Ino, senior global markets analyst at Mitsubishi UFJ Financial Group, noted that Indonesia saw the rupee depreciate after the rate cut in February.

“Asian central banks are struggling to pull the trigger on further rate cuts,” Ino said.


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