Asia: Not Heading To Another 1997/98 Crisis

Transcription

1 Global Economics & Markets Research Company Reg No Z Jimmy Koh Friday, 4 September 2015 Jimmy.KohCT@UOBgroup.com Flash Notes Asia: Not Heading To Another 1997/98 Crisis Despite the market turbulence, we do not think that Asia is heading into a repeat of the 1997/98 Asian Financial Crisis (AFC). Based on 1) the movements in the currencies; 2) current account balances; 3) foreign reserves positions; 4) external debt amounts; and 5) corporate leverage, ASEAN (and also other key Asian countries) is much better positioned than they were then. Recent moves in regional currencies were much more gradual and less rapid that it was in 1997/98, thereby allowing more time for corporates and individuals to adjust and react. This is mainly due to the flexible exchange rate regime used in most regional countries, thus allowing exchange rate to play their shock absorber role and reducing transmissions of shocks to the domestic economy. One of the key developments after the AFC has been the recognition of the importance of maintaining discipline in both external and domestic balances. In general, the current account, foreign reserves and external debt positions in the Asian countries have strengthened since the AFC. In terms of domestic corporate leverage, the current situation in Asia has generally improved vastly over AFC, with China being the more notable exception due largely to the easy policy in the post-2008 RMB4tn stimulus program. The subsequent deleveraging and slowdown in China therefore has exerted significant downward pressures on companies, although we think the overall debt situation in China is still manageable at this point. Unlikely Repeat of 1997/98 AFC The significant fluctuations in prices in global and regional markets rekindle the fear that whether Asia, especially ASEAN, is again verging on a financial crisis similar to the 1997/98 Asian financial crisis (AFC) with massive capital outflows soon to follow. This concern is fanned further by the constant, 24/7 news media headlines on some regional currencies falling to lows the US dollar not seen since 1997/98, equity markets tumbling on a daily basis, the constant flux of expectations on US Federal Reserve s interest rate liftoff, the seemingly poor policy response in China dealing with its domestic market volatility and economic slowdown, as well as a variety of issues besetting regional governments (Malaysia s 1MDB, Thailand s slow growth and then the Bangkok bomb blast in Thailand, Indonesia s lethargic response to economic slowdown, among others).

2 Friday, 4 September 2015 Page 2 All these issues seem to suggest that developing Asia (particularly Malaysia, Indonesia, and Thailand) is stepping into the abyss of the 1997/98 AFC yet again and perhaps massive capital flight soon to follow. But is that the case? Our short answer is NO. There are no signs of such development looking at government bond holdings and the amount of external debt, and even if that was the case, foreign reserves positions are much higher compared to 1997/98. As a recap, the AFC was mostly due to the inability to repay and service foreign-currency debt once domestic currency weakened significantly, due to lack of foreign income to match the amount of foreign debt, and then as a fallback, insufficient foreign reserves. In general, in most developing Asia today, the situation has improved significantly that a repeat of the 1997/98 AFC is fairly unlikely. However, this does not preclude other types of crisis from hitting the region, the so called black swan event. For instance, while ASEAN countries are sufficiently fortified against a 1997/98 AFC type of financial crisis, in a case of a sharp loss of DOMESTIC investor confidence for whatever reason that leads to capital flights out of one country, could quickly spread through other neighboring countries as investors panic that could quickly turn into regional financial crisis. As such, it is still important to monitor closely not just the day-to-day financial market developments, but also other non-financial developments in these regional countries. Based on 1) the movements in the currencies; 2) current account balances; 3) foreign reserves positions; 4) external debt amounts; and 5) corporate leverage, ASEAN (and also other key Asian countries) is much better positioned than they were against the 1997/98 type of financial crisis. 1) Less drastic currency moves, and over a longer period Recent moves in regional currencies were much more gradual and less rapid that it was in 1997/98, thereby allowing more time for corporates and individuals to adjust and react. This is mainly due to the flexible exchange rate regime used in most regional countries, thus allowing exchange rate to play their shock absorber role and reducing transmissions of shocks to the domestic economy. Using the Bloomberg Asian Dollar Index (ADXY) as a broad representation, it should be noted that the current downward adjustment of about -8% from end-2013 as a result of USD strength since 2014, China s RMB central parity adjustment on 11 Aug, as well as various domestic issues is minuscule compared to even the 2008 global financial crisis (GFC), let alone the 26% correction in 1997/98, over a period of about a year. Exhibit 1: Asian Dollar Index ADXY % -12.1% -7.9%

3 Friday, 4 September 2015 Page 3 As shown in the charts below, even for individual currencies perhaps less so for Malaysian ringgit the current adjustment has been far less dramatic than during AFC and GFC. It should be noted that in Malaysia s case, the main driver of the currency s weakness is largely due to concerns over the government s handling of state-owned investment agency 1MDB, rather than any inherent weakness in its domestic fundamentals, as we had pointed out repeatedly elsewhere (see for instance Malaysia: Ringgit Slides Further Despite Reassurances of No Peg Or Capital Controls, dated 21 Aug 2015). Exhibit 2: Selected Asian Currencies While it is convenient to think that currency weakness and lack of investor confidence could be exacerbated further by capital flight which turns into a downward spiral, data so far indicate that that no such development is taking place as foreigners holdings of local currency bonds in various countries remain largely intact. This is despite the fact that expectations of US Federal Reserve interest rate liftoff have been swirling around since at least early 2014.

4 Friday, 4 September 2015 Page 4 Exhibit 3: Foreign Holdings of Govt Bonds as a % of Total Govt Bonds % Foreign Indonesia S. Korea Malaysia Thailand TOTAL 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: Asian Bonds Online 2) Current account balances largely positive One of the key developments after the AFC has been the recognition of the importance of maintaining discipline in both external and domestic balances. This is reflected in healthy and positive current account balances through most of Asian countries, allowing for a positive contribution to the buildup of foreign exchange reserves. Even with negative current account balances for both India and Indonesia, the extent is not fatal and within international norms at -3% of GDP or better. In fact, the resulting currency weakness could in fact help push these balances towards positive with exports becoming more competitive and imports more expensive. Exhibit 4: Current Account as % of Nominal GDP % of GDP Source: IMF

5 Friday, 4 September 2015 Page 5 3) Large foreign reserves positions Foreign reserves accumulation in Asia has largely improved from 1997/98 AFC era, as these governments understand the need to have large FX cushions to fend off speculators and to provide for repayments of foreign debt. Based on the latest statistics, Asia excluding Japan holds more than 50% share of world s foreign reserves of US11.4tn (as of Aug 2015). Exhibit 5: Foreign Reserves US$bn 4,500 4, ,500 3,000 2,500 2,000 1, , China Japan Taiwan Korea Hong Kong India Singapore Thailand Malaysia Indonesia Philiippines Exhibit 6: Foreign Reserves as % of GDP Reserves % GDP 100% % 82.7% 80% 70% 60% 56.9% 50% 40% 37.1% 34.2% 39.9% 30% 24.7% 25.1% 20% 15.5% 11.9% 10% 0% China India Indo Mal Thai Phil Sing Skorea Taiwan

6 Friday, 4 September 2015 Page 6 4) External debt position is manageable Based on data from BIS, cross-border claims against most developing Asian countries are relatively manageable, as around 10 to 26% of GDP (for Taiwan), which correspond with the foreign reserves data shown earlier. The exceptions are Hong Kong and Singapore, which are distorted due to their status as global financial centers, which mean that bulk of these claims are against financial institutions based there, including foreign institutions and branches of foreign banks. Exhibit 7: Cross-Border Claims as % of GDP % of GDP Dec-14 Dec-07 Dec-97 HK SG TW MY TH SK INDO PH CN IN Dec Dec Dec Source: BIS, IMF, UOB Global Economics & Markets Research 5) Domestic corporate leverage has improved significantly One key weakness in the AFC then was the overleveraged domestic corporates as relative cheap (dollar) funding with the false sense of currency stability encouraged further leverage and into increasingly low yielding and high risk projects. The current situation in Asia has generally improved vastly over AFC, with China being the more notable exception due largely to the easy policy in the post-2008 RMB4tn stimulus program. The subsequent deleveraging and slowdown in China therefore has exerted significant downward pressures on companies, although we think the overall debt situation in China is still manageable at this point.

7 Friday, 4 September 2015 Page 7 Exhibit 8: Total Debt-to-Equity Ratio Total Debt/Equity 250 Jun-98 Jun-15 Those with Higher Debt/Equity now Less of a 1997/98 situation and capital outflows should be manageable The declines in Asian currencies in recent months are generally less drastic than seen in AFC, even looking at the sharp drop for the ringgit. This means that companies and individuals have sufficient time to adjust for the weaker currencies and not as shock to the system. Government bond data show that foreigners continue to maintain or even raise their holdings, which should suggest that capital outflows or capital flight is not evident at this point. Even if that is the case, most of the Asian countries have built up sufficient foreign exchange reserves and current account balances to cushion any potential outflows from the relatively low levels of foreign debt. In addition, the much improved corporate leverage means that ASEAN (and also other key Asian countries) is much better positioned than they were against the 1997/98 type of financial crisis. As such, we see a low risk of Asia running into a 1997/98 type of financial crisis and capital flight out of Asia. However, this does not preclude other types of financial crisis from hitting the region, the so called black swan event.

8 Friday, 4 September 2015 Page 8 Recent FX Measures in Asia China PBoC changed the USD/CNY fixing mechanism, resulting in 4.4% drop in CNY central parity vs. USD in three days from August. Effective from 1 Sep 2015, onshore banks in China that enter into FX forwards, options, swaps on behalf of clients are required to make a 20% reserve requirement deposits for a 1 year tenor that earn zero interest income, regardless of the contract duration. Thailand Starting from 2016, BOT would allow Thai citizens having more than THB100mn to directly invest in securities overseas of up to US$5 million per year. From 2017, Thai citizens will not be required to hold any assets such as bonds, cash and stocks to be allowed to directly invest in such securities. Malaysia In January 2015, Malaysia's finance ministry has asked government-linked companies (GLCs) and statutory bodies to temporarily halt purchases of foreign assets, in response to falling commodity prices and in a bid to contain capital outflows. Indonesia From 1 January 2015, non-bank corporations holding external debt are required to hedge their foreign exchange against the rupiah with a ratio of 20%. This will increase to 25% in Companies are required to provide foreign currency assets totaling a minimum of 50% of the value of foreign currency liabilities with a maturity period of up to three months. The ratio will be increased to 70% in Non-bank corporations engaged in external debt activities shall be required to have a credit rating of no less than BB or equivalent as issued by an authorized Rating Agency. Further to its regulation in 2011, BI mandates that all cash and non-cash domestic transactions must be conducted in rupiah effective from 1 July On 31 August 2015, BI announced that it will lower the maximum FX purchase allowed without underlying transactions to $25,000 from $100,000 or equivalent. Vietnam The SBV has devalued the VND three times this year, by 1% vs, USD each time in January, May and August. The trading band was also widened to +/-3% from +/-1% in August 2015 in two moves. Source: Various central banks

9 Friday, 4 September 2015 Page 9 FX Outlook FX 04-Sep-15 End 3Q15F End 4Q15F End 1Q16F End 2Q16F USD/JPY EUR/USD GBP/USD AUD/USD NZD/USD USD/SGD USD/MYR USD/IDR 14,191 14,100 14,200 14,400 14,500 USD/THB USD/PHP USD/INR USD/TWD USD/KRW 1,192 1,190 1,200 1,200 1,200 USD/HKD USD/CNY Source: Reuters, UOB Global Economics & Markets Research Disclaimer: This analysis is based on information available to the public. Although the information contained herein is believed to be reliable, UOB Group makes no representation as to the accuracy or completeness. Also, opinions and predictions contained herein reflect our opinion as of date of the analysis and are subject to change without notice. UOB Group may have positions in, and may effect transactions in, currencies and financial products mentioned herein. Prior to entering into any proposed transaction, without reliance upon UOB Group or its affiliates, the reader should determine, the economic risks and merits, as well as the legal, tax and accounting characterizations and consequences, of the transaction and that the reader is able to assume these risks. This document and its contents are proprietary information and products of UOB Group and may not be reproduced or otherwise.