(Repeats item first published on Tuesday with no changes to
By Stuart Grudgings
KUALA LUMPUR Aug 21 Indebted,
commodity-dependent Malaysia will be in investors' crosshairs on
Wednesday as heavy selling of Indonesia and India's currencies
threatens to spread to other Asian economies seen as most
vulnerable to a withdrawal of U.S. monetary stimulus.
After Indonesia, where concerns over a gaping current
account deficit sparked a stock market and currency rout this
week, Malaysia and neighbouring Thailand are seen as the most
vulnerable Southeast Asian markets to contagion effects.
"There is a lot of resemblance to prior crises like 1997-98.
We have had two countries going down, India and Indonesia, and
now you have got to start thinking about the third and fourth
countries," said Pradeep Mohinani, a Nomura credit analyst in
"The likely candidates would be those with high fiscal
deficits, slowing economies and high foreign ownership of
government bonds. Thailand and Malaysia tick most of the boxes
in that regard."
Economists say that both those countries, as well as the
fast-growing Philippines, are to some extent protected from
major turmoil by their much stronger external balances compared
with Indonesia and India.
Regional economies have built up hefty foreign reserves and
sharply reduced foreign currency debt since they were devastated
by the Asian financial crisis in 1997.
But their currencies have already been pushed to multi-month
lows and could face further pressure from panicky investors who
have taken fright at signals the U.S. Federal Reserve will start
winding down its $85 billion-a-month support programme soon.
Malaysia releases data on Wednesday afternoon that is
expected to show a pick-up in second-quarter growth, but could
also reveal the kind of deteriorating current account position
that has sparked market sell-offs from India to
Export plunges in recent months could push the current
account into a quarterly deficit for the first time in 16 years.
"People weren't expecting the deficit to get anywhere close
to zero six months ago," said Edward Teather, regional economist
at UBS in Singapore.
He said a worsening deficit would add pressure on Malaysian
policymakers to tighten monetary policy and tackle fiscal
reforms, but saw it as much less vulnerable than Indonesia's.
"There were big capital outflows during 2008 and Malaysia's
authorities handled them pretty well. Malaysia's financial
system is quite sophisticated."
Southeast Asia's third-largest economy, whose trade surplus
fell in April to its lowest level since the 1997 financial
crisis, is seen as particularly vulnerable because foreigners
hold nearly half of its bonds.
It has run up high levels of both household and government
debt in recent years, and efforts at fiscal reform are being
held up by a weakened prime minister following a close-run
election in May.
The ringgit currency has already been driven to
three-year lows around 3.3 to the dollar, down more than 7
percent this year. Traders estimate the central bank has spent
close to $1.3 billion to defend the currency in recent days.
Selling spread on Tuesday to the Kuala Lumpur's stock market
- usually seen as a regional safe haven - dragging the main
index down 1.85 percent.
Fitch ratings agency cut its outlook on Malaysia's sovereign
debt last month, citing worsening prospects for fiscal reforms
such as proposed cuts in the country's steep subsidy bill and a
new consumption tax to reduce its reliance on oil revenues.
Prime Minister Najib Razak faces a possible leadership
challenge from within his ruling party in October, raising
uncertainty over his pledge to cut one of emerging Asia's
highest budget deficits of 4.5 percent of GDP.
While most economists expect the current account to remain
in surplus, its sharp fall to 8.7 billion ringgit in the first
quarter from 22.8 billion in the previous period removed much of
Malaysia's perceived protection from heavy fund outflows.
Foreigners have been selling Malaysian bonds, reducing their
holdings to 138 billion ringgit in June from 145 billion in May,
according to the latest data.
"Any period when you have a lot of redemptions, then the
fundamentals have changed. There's a risk that not everything
will be rolled over and there will be further pressure," said
Daniel Wilson, an economist at ANZ in Singapore.
Thailand has also begun to look vulnerable due to slumping
exports that were partly to blame for a surprise contraction in
second-quarter growth on Monday. Its current account slipped to
a deficit of $5.1 billion in the second quarter from a $1.3
billion surplus in the first three months.
"Given Thailand's deteriorating trade and current account
balances, we see some risks that similar concerns will also
surface regarding the economy," said Gundy Cahyadi, economist at
OCBC Bank in Singapore.
"But at this juncture, we think that risks are fairly
Thailand's central bank chief Prasarn Trairatvorakul said on
Tuesday that the baht's sharp fall was not a worry yet
and that the currency's level was in line with fundamentals.
"We have no such factors as in the case of Indonesia. Our
macroeconomic policy is quite well regarded by markets," Prasarn
Just months ago, Southeast Asia was a darling of foreign
investors attracted by strong growth rates, a rising middle
class and mostly improved fiscal positions. Economists say most
of those factors are still in place and should protect most
countries from sustained heavy outflows.
"Asia's foreign reserves and current account levels are
strong and will help mitigate the impact of any liquidity
outflows," UOB's head of research Jimmy Koh said in a note.
"Similarly, Asian companies and financial institutions have
built stronger balance sheets and healthier gearing levels,
which will make them more resilient against market volatility."
The Philippines appears less vulnerable than its neighbours
to any market attack, thanks to rapid annual growth of 7.8
percent in the first quarter and a current account surplus
supported by remittances from its army of overseas workers.
Manila's benchmark stock index has climbed more than
12 percent this year, and is Southeast Asia's second
best-performing market after Vietnam. Foreign investors have
been net buyers of $1.3 billion worth of Philippine shares
"In terms of the business cycle, Philippines is still very
much in the early stages of the upturn," said Michael Wan, an
economist at Credit Suisse in Singapore.
"The country joined the party late compared to its peers
such as Indonesia and Thailand."
(Additional reporting by Jongwoo Cheon in Singapore, Orathai
Sriring in Bangkok, Anuradha Raghu in Kuala Lumpur and Karen
Lima in Manila; Editing by Alex Richardson)