India is but one of many emerging markets in Asia to have been sent reeling by the anticipated tapering of the US Federal Reserve’s quantitative-easing (QE) programme, which has hitherto provided a cheap source of financing for Asian growth to bump up the region’s prospects.
Among them are Malaysia, the largest faller this year – in terms of its score – and those with large financial exposures such as Hong Kong, Taiwan and Singapore.
Although foreign-exchange and equity markets have only just cottoned on to Asia’s rising risks in recent weeks, ECR’s experts have been drawing breath on the outlook since midway through last year, and not just because of anxiety about the financing constraints that can be expected when US liquidity eventually tightens – the elastic that has been dragging the scores downwards lately.
One of ECR’s experts, Ieisha Montgomery, associate international economist at Northern Trust Company, says: “A lot of the Asian emerging markets probably started to slip due to the impact that lacklustre demand for exports had on their economies.
“In addition, along with uncertainty around the end of quantitative easing in the US, concerns about China’s economy have loomed large for Asian economies over the past year.
“In the case of tapering, most emerging markets will be affected, but the flight back towards safety will disproportionately impact countries with weaker fundamentals, especially those with the twin evils of current-account and fiscal deficits.”
Several of the larger hotspots have fallen in the rankings – among them tier-two sovereign South Korea, on a reduced score of 65.4 out of a possible 100, having slipped seven places since mid-2012 to within two places and three points of tier-three status.
In spite of its solid growth prospects, a robust current-account surplus and market confidence in the won – notably faring better than most other currencies – ECR experts cite several political and economic factors for their score downgrades. These are corruption, transparency and doubts over economic policy since president Park Geun-hye took office in February, as well as fears that Basel III could impair Korean SME lending.
Tier-three Indonesia, now on 50.2 points, has also fallen out of favour, dropping six places in the rankings during the past 12 months on the back of downgraded scores for a raft of indicators, including monetary policy/currency stability, with the rupiah taking a tumble.
However, it is not the economic growth outlook that is causing anguish – most forecasters anticipate high and improving growth rates for Indonesia in the short term – but more the effects on inflation from rising import costs, along with background concerns about creeping regulations affecting foreign-owned companies that signify growing unease over the government’s investment policy.
Fellow tier-three sovereigns Thailand (on 56.3 points) and the Philippines (49.7), and the tier-four ‘great hope’ Vietnam (40.8) have all slipped two places to further illustrate Asia’s fading investor appeal.
Despite strong investment- and government spending-led economic growth of 7.5% year-on-year during the second quarter, and its strong balance of payments and low inflation, the Philippines has been affected by market confidence dragging down the currency, indeed to the extent that less than two points separate it from Namibia and tier-four status.
Thailand, a little higher up the scale, has had the added difficulties of farmers’ protests and preferential trade deals in other countries dimming its allure. The country slipped into a broad-based recession during the first half of this year, partly resulting from the termination of stimulus measures introduced to help cope with the effects of flooding in 2011.
Weakened factory output, a widening current-account deficit, fading exports and elevated household debt have all impaired the bank stability and monetary policy/currency stability indicators, with the Thai baht succumbing to these vulnerabilities in concert with the US-liquidity factor.
Malaysia, down only a point and one place since mid-2012, has seemingly weathered the currency rout comparatively well, which can be put down to its solid growth credentials and current-account surplus.
However, rising inflation, due to a sliding currency and fuel-subsidy cuts, will require a policy response, and with interest rates likely to rise to dampen growth, Malaysia’s risk outlook has increased the most since December, further stripping the gloss off Asia’s shiny investment appeal.
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