12/19/2014
Asia / Economics
US rate hikes are looming and the oil price is low. Some fear contagion yet Asia looks more than able to cope in 2015..
The US Federal Reserve is inching closer to interest rate hikes and oil prices have plunged to US$60 per barrel (bbl) – a 45% drop from levels averaged in the first half of 2014. This has raised investor concerns about capital outflow from emerging markets similar to the ‘Taper Tantrum’ in 2013.
Inevitably, comparisons are drawn once again with the Asian financial crisis of 1997/98 and the Russian debt default of 1998, which was hastened / exacerbated by a 55% drop in crude oil prices.
Falling oil prices are, in theory, good for Asia. And, markets have fully anticipated a first Fed hike in mid-2015 for more than a year now. Still, as most are aware, investors often don’t distinguish one market from another nor one risk from another when sentiment sours. Contagion is a risk that has to be considered by all whether it ‘makes sense’ or not.
Who in Asia is vulnerable to a bout of poor sentiment? Countries with low foreign currency reserves and/or large amounts of foreign borrowings. Generally, that means India and Indonesia, as it did in 2013, though Malaysia and South Korea attract attention in this regard as well.
For the most part, Asia’s debt fundamentals have improved modestly since 2013 and very significantly since 1997/98, owing to improved current account balances.
So, here is the bottom line. With debt ratios steady, current accounts improved, oil prices lower and Fed hikes long-ago priced in, Asia appears more than able to ride out any bouts of weak investor sentiment that may arise in the months ahead.
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