While global macroeconomic conditions remain challenging, Taiwan and South Korea are capable of withstanding the consequences of potential capital outflows from Asia as the US Federal Reserve is preparing to scale down its bond purchasing measures, Credit Suisse said yesterday in a report.
The outflows could trigger higher financing costs and exchange rate volatility for Asia-Pacific economies, keeping monetary policymakers in the region on high alert, especially those with sizable current account deficits or inflexible exchange rates, Standard & Poor’s (S&P) said in a separate report.
The remarks by analysts at Credit Suisse and S&P came at a time when concerns over the planned phasing out of the US central bank’s quantitative easing have started weighing on some emerging markets in Asia, and raised market concerns about whether the situation will spread to other parts of Asia.
“While some ASEAN economies such as Thailand and Malaysia could be vulnerable, we believe [South] Korea and Taiwan possess strong external funding positions that can withstand contagion,” Credit Suisse’s Hong Kong-based economist Christiaan Tuntono said.
Both the New Taiwan dollar and the South Korean won have lost value in recent weeks along with other Asian currencies on speculation that the Fed will soon scale back its monthly US$85 billion bond purchase, but the two countries’ sizable current-account surplus could help protect their currencies from the severe selling pressure that has been seen with India’s rupee and Indonesia’s rupiah.
“[South] Korea and Taiwan run a strong current-account surplus at present, with the former at 5.1 percent of GDP and latter at 10.6 percent of GDP in the second quarter 2013,” Tuntono said.
In comparison, India and Indonesia reported current-account deficits in the quarter, that accounted for 4.8 percent and 3.2 percent of their GDP respectively, he said.
Moreover, Taiwan and South Korea have far higher foreign exchange reserves than India and Indonesia, both in terms of absolute amounts and in percentage of GDP, he added.
While both Taiwan and South Korea are likely to be able to withstand any unexpected stress triggered by redemption pressure from foreign institutional investors, they are not exempt from financial volatility due to the Fed’s tapering, S&P said.
"Most sovereigns are likely to see economic growth weighed down somewhat by modest-to-moderate increases in funding costs," said Kim Eng Tan (陳錦榮), an S&P credit analyst based in Singapore. "The strain is likely to be greater in economies that run sizable current-account deficits or have inflexible exchange rates."
Economists said delayed policies or inappropriate responses, or even any political developments that would negatively surprise investors, could have a bigger impact that an economic slowdown in Asia.
"The Fed’s scaling down of bond purchase should be a margin call for Asia," said Daiwa Capital Markets economists Christie Chien (簡民惠) and Kevin Lai (賴志文), referring to its negative impact on economic growth and financial system stability in this region.
For Taiwan, it should beware that the potential slowdown of its Asian peers through trade channels could hit its export-oriented economy, Chien and Lai said in a research note on Wednesday.