Asia’s Hot-Money Meltdown; Receding capital flows suggest deeper structural flaws in emerging economies.

August 28, 2013, 12:23 p.m. ET

Asia’s Hot-Money Meltdown

Receding capital flows suggest deeper structural flaws in emerging economies.


Investors are starting to whisper what was unthinkable just a few months ago, that emerging Asia faces another financial crisis. While this remains unlikely, stocks in China, Indonesia, Philippines, and Thailand are already in a bear market that will likely broaden and intensify. The problems are both cyclical and structural, and policy options are limited. The recent stock-market falls and currency routs suggest the coming months will be rough. Singapore’s Straits Times index, Taiwan’s Taiex, Korea’s KOSPI, India’s Sensex and Malaysia’s KLCI have either broken or are breaking below important technical supports, with the likelihood of accelerated losses ahead. There may be corrective rebounds in emerging-market currencies and equities over the coming week or two, but these are likely to be pauses rather than reversals. There are no quick fixes to the savings deficits in the economies worst hit by falling currencies, equities and bond prices.The policy dilemma is excruciating. Falling stock markets, selloffs in government bonds, weakening currencies and fund outflows could reinforce each other to form a dangerous negative feedback loop. But some of the policy remedies being pursued could amplify these dangers. For example, while the Indonesian government announced some worthy supply-side reforms last Friday, its plan to juice growth through infrastructure spending could aggravate Jakarta’s current account deficit.

In a similar vein, emerging market policy makers could end up digging themselves into bigger holes selling U.S. Treasurys to defend their currencies. Data shows a notable decline in EM central bank reserves over recent months. Morgan Stanley suggests a decline of $81bn since May. Standard Chartered data speaks of a $71bn decline this year. US Treasury International Capital System (TIC) data – which tracks foreign flows in and out of US bonds, should eventually bear this out, albeit with a lag. Whatever edge EM central banks gain from buying their own currencies will likely be taken back by the higher Treasury yields they help create. In the process, they squander precious reserves.

Meanwhile, portfolio positions are lagging increasingly negative sentiment towards emerging markets and will likely be cut progressively over coming weeks. Margin calls will exacerbate the impact of those portfolio adjustments. That will add to outflows from emerging Asia and pressures on these countries’ currencies.

Some say Asia’s recent difficulties are purely cyclical and will burn out quickly. Yes, U.S. Treasury yields have probably overreacted to tapering and could correct. And yes, cyclical slowdowns in economic growth should eventually pass. In particular, economic growth in China appears to be stabilising.

But the “cyclical vs. structural” debate treats the two as mutually exclusive. They are not. The cyclical has exposed the structural. That is, the receding tide of capital flows has exposed glaring structural flaws.

The biggest of these is countries’ current account balances. It was no coincidence that cracks first appeared in India and Indonesia, both of which run large current account deficits. Indeed, the rupiah started accelerating downward after Indonesia’s release of its deficit figure on Friday. At 4.4% of GDP, Jakarta’s deficit was larger than the deficit recorded just before the Asian Financial Crisis. India’s deficit is even higher, at around 5% of GDP.

A repeat of that earlier crisis is what Asian policy makers have feared ever since developed economies began their ultra-loose monetary policies. What quantitative easing gave, tapering is now taking back. Whether tapering starts in September or December is probably irrelevant. Tapering will occur, and U.S. Treasury yields will, over time, push higher.

Economies which had developed dependencies on U.S. inflows to fund their consumption and investment now face painful adjustments. And the market knows the dollar risks moving higher in tandem with Treasury yields.

The dynamics are familiar. The Mexican Crisis of 1994-95, the Asian Financial Crisis of 1997 and the Russian Crisis of 1998 were preceded by a turning point in U.S. monetary policy, with the Fed interest rates doubling to 6% in early 1995 from 3% in early 1994. Speculative flows into emerging markets created highly leveraged investment and spending booms that fell apart when the hot money dried up.

If there’s good news for today’s leaders amid a slew of bad policy options, it is this: despite the 1990s parallels, we are not necessarily headed for another emerging market financial crisis. While there are pockets of weakness, current account positions are generally stronger in the emerging markets today compared to the 1990. External debt to GDP is lower. International reserves are generally higher relative to GDP and number of months of imports, and international banks’ claims are lower relative to the economy.

However, this good news is not evenly distributed across emerging markets. For example, current accounts are generally stronger in emerging Asia than Latin America. But even within emerging Asia, there are wide differences, with large surpluses in North Asia and sizeable deficits in Indonesia and India. Forex reserves relative to short-term external debt are slim in these two economies as well. And then there is South Korea, which enjoys a large current account surplus but has relatively low reserves relative to short-term external debt.

Meanwhile, China–which had been the subject of much negative analysis and media coverage over recent months–will likely prove the most stable of the emerging economies. Its attempts to dominate the “impossible trinity” (its currency, its interest rates and its capital account) have caused economic distortions. But financial crisis is also unlikely where the capital account “gate” is controlled; where the lenders and the biggest borrowers are government-owned; and where the government still has considerable financial resources.

If there is anything resembling a financial crisis, it is likely to be limited to those economies with the weakest fundamentals, the most vulnerable being India, Indonesia, Brazil, South Africa and Turkey. While contagion is always possible, stronger fundamentals in other emerging markets will mitigate those risks.

Mr. Lim is chief investment officer of group wealth management and private banking at DBS Bank.

Thai to Indonesia Stocks Falling Most Since 2001: Southeast Asia

Stocks in Southeast Asia are tumbling at the fastest pace in 12 years relative to global equities, sending the regional benchmark index into a bear market as foreign investors cut holdings for a third month.

The MSCI Southeast Asia Index has dropped 11 percent this month and is down 21 percent from this year’s peak on May 8. The gauge’s August retreat is 9.1 percentage points bigger than that of the MSCI All-Country World Index, the widest gap since April 2001. The Asian measure is valued at 1.8 times net assets, falling below the global index’s multiple of 1.9 for the first time since at least 2009, data compiled by Bloomberg show.

Foreign investors have sold a net $2.2 billion of Thai, Indonesian and Philippine shares this month amid signs of slowing regional economic growth and speculation that the U.S. Federal Reserve will soon cut stimulus. While the retreat has spurred state pension funds in Indonesia and Thailand to boost stock holdings, Bank Julius Baer & Co. and Societe Generale SA say it’s too early to buy. The MSCI Southeast Asia gauge has posted average losses of 44 percent in bear markets since 1995.

“Investors have a mentality of take money out first, ask questions later,” David Poh, the regional head of portfolio-management solutions at Societe Generale’s private bank, which oversees about $113 billion, said by phone from Singapore. “We are not entering the market in the near future.”

Biggest Losers

Emerging-market equities are headed for a second weekly retreat as speculation grew that the U.S. will take military action in Syria.

In Southeast Asia, the Philippine Stock Exchange Index has led declines among regional equity gauges with a 14 percent retreat this month, while the Jakarta Composite Index dropped 13 percent and the Thai SET Index fell 10 percent to the lowest level since November. Singapore’s Straits Times Index sank 6.8 percent and the FTSE Bursa Malaysia KLCI Index dropped 4.9 percent.

SM Investments Corp., owner of the largest Philippine shopping-mall operator and biggest grocery chain, and PT Bank Mandiri, a Jakarta-based lender, were among the biggest losers in the MSCI Southeast Asia index, with declines of at least 22 percent.

The MSCI gauge, which includes shares with a total market value of about $1.2 trillion, has had eight bear markets since Bloomberg began compiling the data in 1995, with an average duration of 298 calendar days. The current retreat has lasted 112 days.

“We are three months into a bear market,” said Mark Matthews, the Singapore-based head of Asia research at Bank Julius Baer, which had about $331 billion of client assets as of June 2013. “It’s not a good time to start buying.”

Pensions Buying

State investment funds added to equity holdings after valuations fell. Thailand’s Government Pension Fund, which manages about $19 billion, has increased positions in shares of some of the nation’s biggest companies and plans to buy more, Chief Investment Officer Yingyong Nilasena said in an interview, declining to name specific companies.

The SET index trades at 11 times estimated earnings for the next 12 months, the lowest level in more than a year, according to data compiled by Bloomberg. That compares with 13 times for the MSCI All-Country index.

“The best time to buy is when there is blood on the streets,” Kittiratt Na-Ranong, Thailand’s finance minister, said at a conference in Bangkok yesterday. “This correction presents an opportunity to increase investments in Thailand and the region.”

PT Jamsostek, Indonesia’s biggest pension fund, entered the stock market yesterday, President Director Elvyn Masassya said in a text-message without elaborating. Masassya said on Aug. 20 that the $13 billion fund is increasing purchases of local shares. The Jakarta Composite rallied 1.5 percent yesterday, erasing an earlier retreat of 3.3 percent.

‘Staying Calm’

“We are staying calm, doing lots of research as always and seeing where we can take advantage of the market correction,” said Abdul Jalil Abdul Rasheed, a Singapore-based investment director at Invesco Asset Management Ltd.

International investors have been net sellers of regional shares this month, according to exchange data compiled by Bloomberg. Outflows in Thailand were $1.3 billion through yesterday, while Indonesia had $570 of withdrawals this month and the Philippines had $347 million.

Thailand’s gross domestic product unexpectedly shrank 0.3 percent in the three months through June from the previous quarter, when it contracted a revised 1.7 percent, the National Economic & Social Development Board said on Aug. 19. The state agency cut its full-year expansion forecast to as little as 3.8 percent from a previous estimate of 4.2 percent. It lowered its export growth target to 5 percent from 7.6 percent.

Indonesia Rates

Indonesia’s quickest inflation in four years, the weakest rupiah since 2009 and the nation’s record current-account deficit are fueling speculation that the central bank will tighten monetary policy further after it raised the benchmark interest rate in June and July. The monetary authority will convene for an extra meeting today to look at various policies including interest rates and the exchange rate, Deputy Governor Perry Warjiyo said yesterday.

In the Philippines, protests in Manila over the misuse of discretionary government budgets have spurred concern about a slowdown in state spending, which accounted for 8.1 percent of the economy in the fourth quarter of 2012.

“People are finding excuses to sell,” said Patrick Chang, the Kuala Lumpur-based head of Asean equities at BNP Paribas SA. “There’s a bit of a shift of money from emerging markets.”

Bottom Picking

The outcome of the Fed’s Sept. 18 policy meeting may determine the short-term outlook for Southeast Asian shares, according to Alan Richardson, whose Samsung Asean Equity Fund outperformed 96 percent of peers tracked by Bloomberg during the past three years.

The Fed will probably cut its $85 billion in monthly bond purchases next month, according to 65 percent of economists surveyed by Bloomberg from Aug. 9-13. Fed policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing bond buying if the economy improves, with a few saying tapering might be needed soon, minutes of their last meeting showed.

Thailand, the Philippines and Indonesia led the four-year rally in global shares through May as Fed stimulus spurred international investors to seek higher-yielding assets.

“It may be risky to attempt to catch a bottom because it rarely works,” Richardson said. “It is more prudent to take a wait-and-see approach.”

To contact the reporters on this story: Weiyi Lim in Singapore at; Anuchit Nguyen in Bangkok at; Ian Sayson in Manila at


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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