Global rout triggers outflows in warning to Asia’s central banks

REGION STILL VULNERABLE TO WHIMS OF MARKET SENTIMENT DESPITE STELLAR PERFORMANCES

The abrupt sell-off on global markets is happening as investors pull out of emerging markets at the fastest pace since the 2016 US presidential election.

The withdrawal, largest in Asian countries, is a reminder that even as the region fuels the world economy’s best performance in years, it remains vulnerable to the whims of market sentiment.

It could also put the brakes on a nascent shift towards raising interest rates, as monetary authorities were using a window of robust exports and solid demand to adjust policy in line with their global peers, according to Rajiv Biswas, chief Asia-Pacific economist at IHS Markit in Singapore.

South Korea and Malaysia have already tightened and others, including the Philippines, are tipped to follow.

Postponing rate hikes

“During this period of high markets volatility, Asian central banks may temporarily postpone planned policy rate hikes until markets calm down,” said Biswas.

“Asian central banks may also intervene in currency markets to smooth sharp fluctuations in currency markets due to volatile capital flows.”

The Reserve Bank of India sold US dollars early Wednesday to support the rupee, according to traders.

The market sell-off will weigh on the RBI and Bangko Sentral ng Pilipinas, both of which have policy meetings scheduled for this week, according to Bloomberg Economics.

A sustained sell-off could refocus India’s monetary authority on supporting growth, while for the BSP, if the market meltdown results in lower oil prices, it will take a rate hike off the table, according to the Bloomberg Economics team led by Tom Orlik.

The question is how long the sell-off persists. Much will depend on expectations for the pace of interest rate increases by the Federal Reserve.

According to the Institute of International Finance, the portfolio flow slump is the biggest in emerging markets since the 2016 US presidential election. The countries they are tracking registered nearly $4 billion (Dh14.7 billion) in outflows since flows turned negative on January 30. Some $3.4 billion of that has been from equities, it said.

The brunt of the reversal has been felt in Asia with South Korea, Indonesia and Thailand seeing the biggest outflows of the countries in the IIF’s study.

Those withdrawals have been concentrated in equities, while bonds have been hit less hard. India is bucking the trend with continued demand for both stocks and bonds, according to the IIF.

South Korea, after attracting a net $1.96 billion into its equities last month, has seen outflows of $1.8 billion so far in February, according to exchange data.

Indonesia and Thailand, each of which lured more than $2.4 billion into their bonds in January, have seen net withdrawals of more than $400 million and $250 million, respectively, this month, data compiled by Bloomberg show.

The won slid to more than a two-month low yesterday, the Indonesia rupiah touched its weakest level since late-October, while the Thai baht fell to an almost two-week low.

“While we remain generally optimistic on EM flows this year, downside risks should not be understated,” IIF analysts led by Fiona Nguyen wrote in a note.

“A sustained global equity market sell-off would clearly be one such downside risk.”