East Asia Former Tigers Growl Grounded

The major East Asian markets-ex China have dragged down the MSCI EM Index in USD terms while their currencies similarly struggle as Covid outbreaks ravage the region and most GDP forecasts are slashed. The Asian Development Bank recently downgraded the region’s growth to 4% from 4.4%, with private analysts matching as the delta variant spreads on low vaccination rates. The EFM ASEAN Index is down 4.6% in USD terms through end-August, while the EM-ex Asia Index is up 11.5%%. Indonesia has turned in the worst performance in the group, -8.8%, while Thailand leads with an advance of nearly 1% so far this year. In the currency market, however, the Thai baht is down 7.5% against the USD followed by the South Korean won -6.0%, with the Indonesian rupiah off only 1.6%.

Weaker global growth and slowing trade with the delta scourge will continue to weigh on markets and currencies in the last quarter. In addition, despite the US Federal Reserve’s benign statement at Jackson Hole, many investors are assessing the potential of a 2013-style taper tantrum as the Fed scales back bond buying. The modest withdrawal of stimulus in the US later this year on plenty notice is unlikely to repeat disorderly pullback but hangs over Asian market return.

Indonesia – one of 2013’s “fragile 5” – has shored up its international reserves from less than USD 100 billion to more than USD 137 billion. The current account deficit for this year will come in at far less than half of the over 4% of GDP recorded in 2013 on buoyant commodity exports. Local borrowing pressure will also be less as Bank Indonesia has replaced foreign investors as the largest holder of government debt, having bought some USD 9 billion in the primary market since it embarked on QE. The central bank will continue to finance state spending through bond-buying in private placements through 2022. The draft budget for next year targets growth at 5-5.5%, up from this year’s 3.7-4.5% estimate, on a deficit of 4.85% of GDP, down from almost 6%.

Analysts slashed GDP forecasts for Malaysia as poor pandemic handling resulted in the appointment of a new government last month. While private analysts surveyed by Bloomberg still expect growth to top 4% this year and the central bank expects 3-4%, Fitch Solutions has revised its estimate to zero on widespread lockdowns. The fiscal deficit is likely to hit 7% of GDP, up from 5.4% projected in this year’s budget. The finance ministry has indicated that the statutory debt cap of 60% of GDP is likely to be raised as debt/GDP hit 56.8% in June. Foreign ownership of local stocks is at an all-time low at about 20% of total market capitalization after two years of selling. On the bond market, foreign investors hold some 40% of government securities outstanding and nearly 8% of Islamic compliant sukuks, according to media reports.

In the Philippines record high Covid cases led Moody’s Analytics to note the economy in among the most vulnerable in Asia heading into the presidential election. The government slashed its GDP growth target from 6% to 4% for this year on strict lockdowns, although even that appears optimistic. Domestic debt accounts for 70% of the total, with the debt/GDP ratio at 60.4% at mid-year, up from the record low under 40% in 2019. After recording a budget deficit of 7.6% of GDP last year, the 2021 level is expected at 9.3%, and Fitch revised the sovereign’s BBB credit rating outlook to negative.

South Korea was the first major economy in the region to hike rates due to rising financial risks including soaring household debt and housing prices, with further rate increases expected in the coming months ahead of elections there also. In response to heavy household demand for bank loans, largely for mortgages and stock buying, the government imposed new lending curbs in July, capping provision at 40% of income. The economy is expected to expand near 4% this year but government debt has exploded on pandemic-related stimulus. Debt/GDP was only 36% in 2017 when the current government took office, and in 2022 it is expected to top 50%. The stock market has been turbulent on chip news and foreign investors heavy net sellers, but through end-July they have poured USD 72.2 billion into the local bond market, more than in all of 2020. Their record holdings approach USD 170 billion, according to the Korea Financial investment Association.

Finally in Thailand street protests against the military government’s handling of the Covid crisis continue, as lawmakers debate censuring the Prime Minister. Stock market outflows top USD 3 billion so far this year. The central bank argues relative insulation from spikes in global bond yields, with 90% of corporate financing bank-based despite the large $120 billion domestic bond market. It slashed this year’s growth estimate to 0.7%, and the tourism-dependent country will record twin deficits this year with the current account gap at 2%, while the fiscal deficit climbs into double digits. Pre-pandemic foreign tourism accounted for 12% of GDP. The Finance Ministry expects that the 60% government debt/GDP cap will need to be lifted by 10%-points in the coming months as the government continues fiscal stimulus.

The spread of the delta variant, slowdown in China and supply chain constraints particularly the shortages of chips for electronics, hurt manufacturing and exports more broadly for stock market rebound. While these economies have begun to ease curbs, the poor vaccination rollout and threat of renewed lockdowns will continue to deter foreign investor interest in local equities in the coming months, although a tiptoe back is overdue as over-optimism on virus suppression has been replaced with opposite sentiment.