A significant easing of foreign capital outflows from ASEAN financial markets in May has reduced external liquidity pressures for the region’s economies, said Fitch Ratings recently.
Nonetheless, capital inflows may be subdued in the coming year or two, and volatility could return in the near term — given the environment of heightened uncertainty, the credit rating agency warned, adding that external liquidity will therefore remain a ratings weakness for some ASEAN sovereigns.
Capital outflows from ASEAN accelerated in 1Q20 when the coronavirus pandemic triggered investor risk-aversion toward emerging markets, said Fitch.
This was reflected in a weakening of regional currencies against the US dollar in March, including the Thai baht, Malaysian ringgit, Indonesian rupiah, and Vietnamese dong, according to the company.
Official reserves declined as well, as monetary authorities sought to slow the pace of depreciation, Fitch added.
However, wxternal liquidity pressures will remain a potential source of vulnerability and a rating weakness for a number of ASEAN economies, including Indonesia (BBB/Stable) and Malaysia (A-/Negative) and, among ‘frontier markets’, Laos (B-/Negative), said the credit rating agency.
Both Indonesia and Malaysia have external liquidity ratios — measured by Fitch as a country’s liquid external assets to its liquid external liabilities — below their rating peers, Fitch said.
The share of foreign ownership of their domestic government bonds (32% and 21%, respectively, based on the latest data) is also still sufficiently high as to leave them exposed to shifts in investor sentiment, although this has declined in recent months, Fitch warned.
The proactive fiscal policy stances and central bank liquidity programmes implemented by ASEAN members have yet to be accompanied by use of IMF facilities established to provide liquidity support to countries facing urgent balance-of-payments needs, such as the Rapid Credit Facility and Rapid Financing Instrument, Fitch pointed out.
A number of reasons may explain the lack of demand, including an assessment among ASEAN governments that they do not face such balance-of-payments needs or a perceived stigma attached to such support, which may not be worth the cost, being capped at only 100% of their IMF quotas per year, Fitch added.
“To address such concerns, we understand the IMF is expanding the range of its instruments, with facilities such as the new Short-term Liquidity Line (SLL) which provides higher access limits (145% of quota), designed for emerging markets with strong fundamentals and policy frameworks,” said Fitch. “To the extent that facilities like the SLL act as precautionary and revolving “swap-like” sources of funding, they could provide a cushion during periods of abrupt tightening in external liquidity, and could be supportive of sovereign ratings.”
While Fitch expects economic growth momentum in the region and its key export markets to improve in 2H20, the company said the evolution of the pandemic remains uncertain and could affect this forecast and other factors, such as rising US-China tensions, could also pose risks for the region.