Asia looks more resilient to capital flight than during last year’s taper tantrum, as the US Federal Reserve prepares to depart from its easy-money strategy. It is also better placed to weather the coming storm than other emerging markets.
The looming end of the Fed’s quantative easing expected late October has investors on edge. Most pundits expect the Fed will start to hike rates mid 2015.
As a result, a great sucking sound could be heard throughout Asia in recent weeks. Strong fund flows into Asia reversed as investors bought Treasuries and the US dollar. Protests in Hong Kong and China’s weakening property market sped up the rush to exit.
Last year, when the Fed first hinted it would reduce its bond-buying programme, foreigners fled Asian debt and offshore bond issuance dried up. About $19.5 billion flowed out of the top 20 emerging-market debt funds in the 12 months ending in May.
This time around foreign investors hold less Asian debt and the US yield curve is steeper than a year ago. Moreover, new governments in India and Indonesia have embarked upon meaningful structural reform.
Other Asian countries have also been fortifying themselves against another taper tantrum. The Philippines raised rates twice this year and Malaysia hiked in July.
Indonesia, one of the most vulnerable to capital flight, has been bulking up its balance sheet by issuing a $4 billion sovereign bond and a $1.5 billion sukuk this year. To be sure, Indonesia is grappling with weaker commodity prices, which are weighing on the economy.
Asia does have an advantage over other emerging markets in Latin America and EMEA: the anchor of fast-growing China, the government is still aiming to expand GDP by 7.5% this year.
Sturdy economic growth will give Asia’s policy-makers room to raise interest rates further, limiting any downside currency pressure, while last year’s turbulence also moderated a build up of credit excess.
Offshore debt issuance will likely continue, driven by governments looking to fund ambitious infrastructure plans and banks issuing Basel III compliant debt.
Issuers will need to be nimble and seize openings in choppy markets . Countries governed by quality policy management have a chance to shine.