Carlos Casanova and Pauline Weil
Hong Kong, December 28, 2018
Asia has been under pressure following tighter global liquidity in 2018.
Standfirst: The Coface index for measuring relative vulnerability to outflows points to increasing divergence in Asia. A few markets will benefit from strong fundamentals, proactive monetary policies and ample buffers to resist outflows, but others will be under pressure. Above all, the relative sustainability of the real external position is the most significant factor. Lastly, countries that do not possess flexible exchange rate regimes may struggle to smooth out currency fluctuations.
Monetary Policy drains Liquidity
As central banks globally resume monetary policy normalisation, there come the risks of liquidity outflows. To limit its associated risks, central banks in the region have been forced to follow the tightening stance of monetary policy set by the US, despite being in very different stages of their respective business cycles.
Asian emerging markets have also experienced depreciatory pressure during most of 2018. As a result, Philippines, Indonesia and India intervened on currency markets to smooth out exchange rate fluctuations.
Indonesia and Pakistan took measures to limit imports in order to counter the pressures induced by widening trade deficits resulting from weaker currencies.
These have brought memories of past instances when the region struggled with portfolio outflows, namely the Asian Financial crisis of 1997 and the “Taper Tantrum” of 2013.
FDIs help in rising FX
The region is in a better position to resist outflows as a result of many factors including floating exchange rates, current account surpluses, an increase in Foreign Direct Investment (FDI) inflows and expatriate remittances.
FX reserves have also increased and remain at adequate levels in most cases.
However, the relative sustainability of the real external position remains a concern in some cases.
FX reserves can be used to finance this external position, but this is not a sustainable solution and Coface expects that some Asian emerging markets will struggle going forward as a result of such imbalances.
The Coface index for measuring relative vulnerability to outflows points to a divergence in the exposure to external pressures amongst Asian emerging markets.
Managing Risks
The level of exposure varies depending on existing vulnerabilities, as well as the degree to which buffers are able to fend off those risks.
It is likely that investors may have gotten ahead of themselves in some cases.
Current valuations may not be justified in the context of strong fundamentals, proactive monetary policies and the fact that some of these markets have plenty of ammunition, especially on the FX reserves front, to resist outflows in the foreseeable future.
That said, some Asian emerging markets will feel the squeeze more than others, as the region remains subject to some pressures.
Markets have been grappling with risk-on modes once again, a consequence of escalating trade war threats between the US and China.
This explains outflows from countries that have otherwise been doing well.
Moreover, higher oil prices in 2018 contributed to slower growth, a scenario that cannot be discounted in 2019.
Coface expects that Brent prices will remain close to US$75 per barrel on average in 2019. Capital outflow dynamics will also remain conditioned by the pace of monetary policy tightening in the US.
Our baseline scenario implies a slowdown in the pace of Fed hikes (two hikes in 2019 compared to four in 2018), as inflation has already slowed below the Fed’s 2% target.
About Coface
With 70 years of experience and finely meshed network, Coface is considered as a good reference in Credit Insurance, Risk Management and Global Economy.
With the objective of becoming the most agile Global Trade Credit Insurance Partner in the industry, its experts work to the beat of the world economy, supporting 50,000 clients in building successful, growing and dynamic businesses. The Group’s services and solutions protect and help companies take credit decisions to improve their ability to sell on both their domestic and export markets. In 2017, Coface employed 4100 people in 100 countries and registered turnover of €1.4 billion. The Company is registered on Euronext Paris as a Compartment A Company.
Website: www.coface.com.au
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