Recap on what happen in ASIA

The reversal in fund flows out of Asia and emerging markets back to developed economies, triggered by the anticipation of QE tapering, rising US 10-year treasury yields and a rebound in the USD, Euro and GBP.

Indonesia’s current account deficit close to 1996’s level.  The Indonesian market suffered the worst fate as investors fled from the country’s latest 2Q13 current account deficit figure that read 4.4% of GDP (quarterly annualized).  This figure is similar to that seen back in 1996, not long before the 1997 Asian Financial Crisis. Indonesia’s 10-yr yields spiked to 8.5%, the Rupiah sold off to 11,000 against the USD and the Jakarta Composite Index tumbled as much as 11% in 3 trading sessions.

India spooked the markets. The India market was also sold off as investors ran scarce from the country’s current account deficit that ballooned to a record high, in excess of 5% of GDP in the FY that ended March.

The Thailand stock index was sold down after the country slipped into a technical recession in 2Q and the central bank cut its 2013 GDP growth forecast to 4.2% from 5.1%.

While Singapore has a current account surplus, equities were nevertheless rocked by the regional sell down that affected all ASEAN countries.

In the past 4 years since the launch of QE in March 09, the emerging economies of Thailand, Indonesia and Philippines have attracted US$24.5bil inflows before the May sell-off.  

Outflows since May 22 (beginning of “tapering” sell-off) was US$6.2bil. Volatility will continue should past QE liquidity continues to unwind. Singapore equities are holding out better than regional emerging markets as the country is one of the 11 ‘AAA’ rated countries.  But stocks here will be dragged down if the current rout in India and Indonesia spread to the rest of the ASEAN equity markets.

The situation is different today from back then during the 1990 cycle.  AFC started with the collapse of Baht, now it’s the Rupee.  Back in 1997 the AFC started after Thailand failed to defend its pegged exchange rate. This time, the suspect is the Indian rupee which has weakened 17% against the dollar since May.  The ‘twin’ deficits (government and external) have been festering for years, the economy needs to be opened up to more competition and the political leaders can’t seem to deliver. But elsewhere, the macro team hardly sees any crisis. The stress in India should be viewed as a country-specific problem, and not as a region-wide trend.

Fed shocked the market with rate hike in 1994. In the runup to the AFC, the FED also shocked with a rate hike cycle in 1994, Japan sought help to stop the yen’s appreciation in 1995 and the US returned to a strong USD policy that same year. Right now, the FED is not hiking rates but tapering asset purchases.

Interest rates probably will remain low, flows may eventually return to Asia where the growth is. Beyond the cyclical outflow out of Asia from the wind down in QE that resulted in volatility, interest rates may stay low for another year in the US, Europe and Japan.