Finger-pointing follows Aussie covered bond price falls
5 January, 2012AFR: Making money out of food
14 January, 2012Euromoney op-ed, January 2012
One of the many tests 2012 will administer is the resilience of Asian countries to capital outflows. There’s no question Asian countries are in better shape to deal with capital flight now than they were in the Asian financial crisis, or even 2008; but they might need to be a whole lot better.
Asia’s economies represent strong and sustainable GDP growth, low levels of sovereign debt, high foreign currency reserves and in many cases stout budget surpluses. That’s all well and good, but the fact remains that capital continues to flee these markets when things get bad in the US and Europe. With every passing period of global uncertainty, the rallying cry goes up that it’s different this time, and that Asia is decoupled; it’s never, remotely, different this time, and it won’t be next time either.
Asian stock market investors see this as a crushing injustice, but there it is. Across the problem nations in 2011 the Dow gained 5.6%, the S&P 500 was flat, the FTSE 100 lost 5.6% and Germany’s DAX lost 14.7%. Yet emerging markets were down 20%, as was Hong Kong’s Hang Seng index; of the mighty Asian BRICs, the supposed engines of global growth, China lost 18.2% in US dollar terms – worse in RMB – and India a dreadful 37.1%.
So long as Asian markets remain risk-on bets to global portfolio managers, this is going to keep happening, both in equities and debt, and it’s more important than ever for the Asian nations with free market access to be ready for it. That’s because foreigners have built up unprecedented positions in Asian government debt in particular: by August, foreigners accounted for 36% of all Indonesian government debt in rupiah, for example, and there are very high levels of foreign engagement in other markets such as Malaysia and Thailand. The fear has long been: what if it all goes away again? And, if the European situation turns for the worse, there’s every chance that will happen.
The question then is how sturdy Asian nations are to deal with it. We had something of a test case in September, when a period of dollar strength related to fears about Greece led to a decline in most Asian currencies and a correction in bond yields. Capital started to leave. In Indonesia, the most closely watched, the foreign ownership level fell from 36% to under 30% in a matter of weeks – but then it stopped, and has since stabilised at around 31%. The long-dated money in particular stayed put. There are similar patterns in other markets too.
One of the big differences is the financial strength of the countries themselves. In 2011 Indonesia topped US$100 billion in foreign exchange reserves for the first time; that hardly holds comparison with China’s multi-trillion dollar backing, but it’s more than enough to deal with a bit of volatility. Indonesia spent about $10 billion of its reserves to defend its currency, and brought to bear an elaborate set of initiatives to keep support in government bonds; not only did it succeed in stabilising the markets, it also sent an important message that it was going to back its assets. The absence of such a message in 1997-8 saw a sevenfold collapse of the currency in a matter of weeks; those days, it appears, are gone.
Elsewhere, Malaysia’s central bank argues that the biggest difference between the Asian crisis and today is the maturity of the financial system, from the banks and asset managers to the local capital markets themselves. This means the system is much more able to intermediate flows, whether in or out, without broader damage to the marketplace or a sense of panic. Similar arguments are made, with varying degrees of plausibility, in Thailand and the Philippines.
But as with everywhere else in the world, it’s all a question of degree. Asian nations today can handle volatility; they can handle shocks, even distant crises. But something as systemically vast as the collapse of the euro? Nobody’s safe from that, no matter how big their population, how vast their stocks of coal, and how muscular their forex reserves.
