Any increase in capital outflows could make it more difficult for companies and governments to refinance foreign debt in developing East Asia, with Indonesia and Thailand most at risk, the World Bank said yesterday.
Outflows pose “potentially disruptive implications for business operations and solvency on the corporate side, and for deficit financing and debt sustainability on the sovereign side,” the World Bank said in a report.
The threat of bankruptcies in Indonesia and Thailand is limited though, it said.
Foreigners have pulled a net US$6.6 billion of equity investments from Thailand this year and almost US$3.7 billion from Indonesia.
“Rollover risks are potentially acute for Indonesia and Thailand, given their siz[e]able stocks of short-term debt,” the report said. “However, it is unlikely that liquidity risk would translate into solvency risk in these countries, given their relatively low levels of foreign debt, strong financial sector capital adequacy and liquidity, and ample monetary and fiscal buffers.”
In new forecasts, the World Bank cut this year’s economic growth projections for Indonesia, Malaysia and the Philippines, while estimates for Thailand and Vietnam were raised.
Indonesia’s economy is much stronger than during the 1997 Asian financial crisis and the currency’s weakness is a source of strength, the World Bank said.
“With a flexible exchange rate now, moderate devaluation makes imports more expensive, exports cheaper and the [US] dollar value of profit transfers lower,” World Bank country director for Indonesia and Timor-Leste Rodrigo Chaves said in a statement on Wednesday.
“These elements reduce the current-account deficit automatically,” he added.
Indonesia is among the hardest hit in Asia by an emerging-market rout. The rupiah weakened past 15,000 per US dollar this week for the first time since the Asian financial crisis.
The government is stepping up measures, including import curbs to restrain the current-account deficit.
The rupiah swung wildly during the Asian crisis, going from a regulated rate below 3,000 versus the US dollar to almost 17,000 when a flexible exchange rate was implemented.
Chaves lauded the government’s policy responses this year as “quick, decisive and coordinated.”
The central bank has raised interest rates despite inflation being within its target and has not defended a level for the rupiah, he said.
“While there are risks coming from overseas, let me be clear: Indonesia has strong fundamentals and an adequate policy response function,” Chaves said. “The fact is clear that 2018 is not 1997 or 2013, for that matter. Indonesia is in a much stronger position today than in the past.”
Chaves urged the government to boost exports and foreign direct investment, and to reduce its fuel subsidies.
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