Thailand
Malaysia may face risk of contagion effect from EM crisis
PETALING JAYA: Countries like Malaysia could face the risk of a contagion effect from emerging market (EM) crisis due to the high level of debt despite not operating under the environment of “twin deficit”.
AmBank Group chief economist Dr Anthony Dass said on Monday the risk of a contagion effect was premised on the country’s Exchange Rate Market Pressure Index (ERMPI) sitting between 1 and 2 standard deviation (SD).
ERMPI was developed with the aim to examine if the EM countries could become vulnerable to are likely to potential currency crisis. Here, the readings from the ERMPI for each local currency vis-a-vis the US dollar is compared against a threshold which is two SDs.
“Should the reading of ERMPI breaches the second SD, that particular EM’s currency is on “high” risk of heading into a potential currency crisis. If the reading is between 1 and 2 of the SD, the particular EM country’s currency risk falls into a “moderate” category. And if the reading is less than 1 SD, that EM country’s risk for a currency crisis is low,” he said.
EM countries operating under the environment of fiscal and current account deficits as a percentage of gross domestic product (GDP) or commonly referred to as “twin deficits”.
Based on the index, those EM countries who have fallen into a “high” risk of potential currency crises are Argentina, Brazil, India, Mexico and the Philippines.
Meanwhile, for countries like Malaysia, Thailand and Turkey, they fell into the “medium” risk category. Indonesia, South Africa and Turkey are in the “low” currency risk category.
Dass noted that focus is also on EM countries maturities exposed to US dollar borrowings that need to be repaid or refinanced in 2019.
“There is a growing risk for countries like Argentina, Turkey, Brazil, India Indonesia, Malaysia and Mexico. Tightening global financing conditions raise the risk of debt servicing issues.
“Besides, tightening global financing conditions can impact countries exposed to high gross financing needs. They will be hurt from a reversal of capital flows. Countries like Argentina, Brazil, India, Malaysia and South Africa seek high gross financing due to elevated public debt are on the watch list radar screen,’’ he said.
Dass added that there are two pressing questions on EM countries, namely whether a crack in EM countries will trigger a contagion effect.
Much will depend on their ability to repay US dollar denominated debt, exposure to external financing requirements and the size of foreign investor
pool in domestic-denominated debts.
These issue will determine if the EMs’ assets are threatened by the confidence of investors who once felt the region to be comparatively safe.
Secondly, he said whether there will be possibilities for a widespread crisis to be contained from spreading across the EM countries.
A contagion can be avoided if we differentiate the vulnerabilities within EM countries with strong fundamentals and otherwise, Dass said.
Meanwhile, he said he expect the Federal reserve to embark on a total of four rate hikes in 2018, with the third hike in September and the fourth in December, each by 25 basis points (bps) to settle at 2.25%–2.50%.
“We believe the Fed will continue with another two rate hikes in 2019 to stabilise at 2.75%–3.00%,’’ he added.
AmBank Group is also reiterating its view that the ECB will halt its QE programme by end-2018, putting an end to the stimulative policy which went into effect early 2015. We expect the tapering from €30bil to €15bil in the fourth quarter of this year before it stops.
Potential repricing of the interest rates will start sometime in 2019.
On trade war, he said it is expected to have a bigger impact on the financial markets than the real economy. Arguably, our focus is on the US-China trade spat which is more sensitive for Asia than the trade war between US and the others.
“We found a 10% hike in import tariffs on China, Europe, and the US could lower global GDP by 0.8% and global trade by 4%. It will reverse the recent synchronized global growth,’’ Dass said.
Source: https://www.thestar.com.my/business/business-news/2018/07/02/malaysia-may-face-risk-of-contagion-effect/