Rising US interest rates threaten to spark upheaval in Southeast Asian financial markets if investors pull out of the fast-growing region, cutting off fuel to a critical engine of global economic development.
On April 24, yields on 10-year US Treasurys hit 3% for the first time since the beginning of 2014. If the US Federal Reserve raises interest rates at its two-day meeting that kicked off Tuesday, as some anticipate, yields could climb even higher, Nikkei reported.
This has market players in Hong Kong, Asia’s premier financial center, on the lookout for ripples across the region—specifically, for a repeat of 2013. When then-Fed Chair Ben Bernanke hinted in that year that the central bank would begin drawing down its monetary easing program, investors around the world, particularly those in emerging nations, yanked their investments out of the bond market, causing yields to skyrocket and Asian currencies to plummet in value.
If a second such “taper tantrum” were in the offing, Indonesia could be hit particularly hard. The country runs a steep current-account deficit, and roughly 40% of its government debt sits in foreign hands, making it less resilient than other Asian nations in the face of capital outflows, hedge funds say.
Morgan Stanley’s Hong Kong office attempted to allay those concerns in a report released Sunday. The chance that a US rate hike would cause a significant disruption of Indonesia’s economy is slight, the investment bank said, citing the country’s ample foreign currency reserves.
Yet speculators are already moving in. The Jakarta Composite Index, the benchmark for Indonesian stocks, has performed worse than many of its peers in the Association of Southeast Asian Nations in 2018, tumbling roughly 6% since the beginning of the year.
The Philippines is in a similarly tough position. The benchmark Philippine Stock Exchange Index has shed around 9% this year, and the current-account deficit is growing.
Capital outflows are not an idle threat. From April 16 to April 23, as US Treasury yields charged toward 3%, $5.6 billion moved out of emerging-market stocks and bonds, according to the Institute of International Finance.
Investment inflows to emerging nations could decline by $40 billion in both 2018 and 2019, Takahide Kiuchi, an economist at the Nomura Research Institute, said in a report Friday, citing the International Monetary Fund. If financial market players grow more concerned about risk, that figure could swell to $60 billion, he wrote. As rising US interest rates make shifts in global markets tougher to predict, central banks in the US and elsewhere will in turn have a tougher time carrying out monetary policy, Kiuchi said.
At the end of 2017, emerging-market companies had $2.83 trillion in dollar debts outstanding from a combination of bank loans and bond issuance. This is roughly eight times these firms’ dollar debt load during the Asian currency crisis of 1997, and more than double that at the time of the 2008 crisis.
