WILL Malaysia suffer any contagion risks in this latest round of emerging markets (EMs) rout exacerbated by a plunge last Friday in the baht following an earlier 6% drop in the Argentine peso?
Even Thailand, with “solid growth and sizeable current account surplus” was not spared. Would countries with strong fundamentals like Malaysia escape the contagion?
Among the latest challenges include possibly more aggressive US rate hikes, rising trade tensions and strong dollar fuelled by the European Central Bank’s (ECB) decision to leave rates unchanged until middle of next year.
While the Fed is progressing on its withdrawal of liquidity, the ECB said its similar programme would commence end of the year.
China’s weaker-than-expected data in May on industrial output and retail sales, added to the gloom in EMs.
“Countries with strong fundamentals such as Thailand aren’t immune from sell-offs elsewhere,” Jitipol Puksamatanan, a Bangkok-based strategist at Krung Thai Bank, was quoted as saying by Bloomberg.
Such pressure on EMs is expected to stay until at least the next quarter. The baht headed for its biggest loss in a decade, seen as “a blow to one of the few EM currencies that gave investors carry returns (of holding the asset) this year,” said Bloomberg.
Earlier, India and Indonesia had raised rates to defend their currencies. “Money is flowing back to the US; dollar funding shortage is caused by the Fed paring down its balance sheet (ending of its bond buying programme, a stimulus following the financial crisis).
“All EMs are affected, to one degree or another. We are lucky the ringgit is relatively well-behaved, at the moment,” said Pong Teng Siew, head of research, Inter-Pacific Securities.
“The ringgit’s strong fundamentals will win out, after a short period of post-election adjustments.
“We are looking at the ringgit hitting 3.8 to the dollar next year,” said Hor Kwok Wai, chief operating officer, global markets, Hong Leong Bank.
“The Fed’s guidance of more aggressive rate hikes will be a bane for EMs, via financial channels, exerting pressure on capital reversals and foreign exchange markets.
“Volatility is inevitable although (Malaysia with its) fundamentals should be able to withstand the pressure,” said Lee Heng Guie, executive director, Socio Economic Research Centre.
The MSCI Emerging Markets Index has retreated more than 10% from its peak in January 2018.
“The risks are reflected in the undemanding market valuations. Malaysia is viewed similarly vis-à-vis other EMs,” said Thomas Yong, CEO, Fortress Capital.
Continued escalation of trade tensions seems to be the order of the day. The G7 meeting of major economies broke up when the US refused to endorse the communique on free and fair trade.
Tensions have gone so high that after a cordial meeting, Canadian Prime Minister Justin Trudeau was told “there is a special place in hell” for him (for which the person has apologised) when he announced retaliatory measures.
After the latest round of US tariffs, China was warned that more would be slapped on them if they retaliated, which they did over the weekend.
“Widespread trade tensions add headwinds to markets and the global economy. So do rising rates, financial market re-pricing and volatility, and geopolitical risks,” said Suhaimi Ilias, group chief economist, Maybank Investment Bank.
Other trade measures may be imposed as ‘’the Trump administration seems fixated in the belief that trade deficits reflect ‘losses’ in international trade,” said Nor Zahidi Alias, chief economist, Malaysian Rating Corp.
“Trade deficits can be a sign of the strength of the US economy (which is led by demand). That US trade deficits have been financed through foreign capital flows, to some extent, reflect investors’ confidence in the economy,” said Zahidi.
Just looking at the trade deficit is misleading; the US has an “aggregate sales surplus” of US$20bil with China and US$1.4 trillion with the rest of the world, said Bloomberg, quoting DeutscheBank.
“If services are included in the trade equation, the data may be different; the US is a global leader in high value services like finance, telecommunications and education,” said Zahidi.
It is urgent to reduce the US current account deficit (a broad trade measure that includes the trade deficit) which, among other things, is financed by borrowings in terms of foreign asset ownership of, for example, government bonds.
“Interest paid on debts is climbing even at low rates. Imagine what it will be like when rates are fully normalised,” said Pong.
With a US$462bil current account deficit last year, which is lower than its trade deficit at US$552bil, the US’ focus is to drastically reduce that trade deficit by ‘‘even targeting traditional allies,” said Pong.
Columnist Yap Leng Kuen notes the panic button on deficit reduction has been pressed.