Thursday, February 06, 2014

Asia Stronger, Able To Deal with Volatility

CONFIDENT: Economists respond to concerns that Argentine peso plunge may lead to contagion of currency crises
THE plunge in the Argentine peso last week has triggered fears of a currency crisis contagion, but economists are confident that Asia is now fundamentally stronger and able to deal with market volatility.
The vulnerability of the Asian markets has taken centre stage again as fears of a currency crisis contagion arise akin to the Asian financial crisis in 1997/1998.

The Argentine peso plunged by more than 15 per cent last Thursday after the country's central bank appeared to withdraw support for its currency.

This has sparked concerns about the risk of a currency crisis contagion in emerging markets.

CIMB Investment Bank said this is pertinent, given the current environment of capital reversals with the United States Federal Reserve starting to reduce its monthly bond purchases this year.

"While the policymakers cannot stop the capital reversals, a reality check for the Argentinian and Asian economies shows that Asia is fundamentally stronger and is well-positioned to deal with the market volatility," says CIMB Investment Bank.

Asia, it said, is still offering decent economic growth against Argentina's subdued growth while the inflation level has not reached alarming levels as that of Argentina (where inflation had reached double digits).

"Asia has a strong war chest of foreign reserves, while that of Argentina has depleted to a low level, prompting strict capital controls to stem capital flight."

The Asian economies, it added, have adopted flexible exchange rate regimes or managed float exchange rates, which enable the central banks to implement monetary policy without having to worry about defending the exchange rate at a particular level.

"As such, the exchange rate will adjust to two-way capital flows, allowing the system to better cope with external shocks."

Credit Suisse said the combination of renewed Chinese economic and financial stability concerns, ongoing US quantitative easing tapering and Argentina's peso devaluation have triggered another "wobble" in emerging markets. 

"No one yet knows if this will turn into a financial storm of the sort witnessed in May-September last year, or a short-lived squall."

In its comparison on the macro vulnerability, the research house concluded that "the extent of the damage" for a given shock is likely to be less for countries like Malaysia, the Philippines and Thailand.

India and Indonesia have both narrowed trade deficits while interest rates have also been raised.

"Nevertheless, we still worry about the high level of foreign bond holdings in Malaysia, the political situation in Thailand and low real interest rates in both Thailand and the Philippines."

China, Hong Kong, South Korea and Singapore have better trade positions now, while Argentina, Turkey and South Africa are worst placed according to the Credit Suisse's criteria.

As to the exposure of the countries to the vulnerable economies in Latin America and EMEA (Europe, Middle East and Africa), Credit Suisse said the importance as export destinations is very small across the board.



No comments: