The won is at risk because of the Korean banking system’s exposure to Europe and the relatively low foreign-exchange reserves of the central bank, limiting its power to influence the market, Nomura analysts Prateek Gupta, Simon Flint and Craig Chan say. The rupee is highly exposed because of India's current-account deficit and its emphasis on trade with Europe. The Indonesian rupiah and Philippine peso are next in line, the analysts say.
In a report, Nomura first examined the sensitivity of Asian countries to global risk factors using a "principal component analysis". Korea is most vulnerable to global risk aversion, followed by Indonesia, Malaysia and the Philippines, it says.
Next the analysts compared the importance of major global currencies for various Asian currencies, using an ordinary least squares regression model, concluding that the Korean won, Singapore dollar and Indian rupee are the most vulnerable.
Nomura also examined past performance in periods of heightening Greek debt concerns. The won had the highest beta, or measure of volatility, declining an average 1.3% against the dollar. However, a sudden decline in the won against the dollar may prove more limited next time around, as the Bank of Korea’s rate hike on June 10 showed its inclination towards won appreciation. The rupee lost an average of 1.85% in times when concern about the Greek crisis rose, due to the country’s current account deficit and high reliance on global equity inflows, say Gupta, Flint and Chan. The rupiah and peso have also experienced significant sell-offs, they say.
The Malaysian ringgit and Singapore dollar have both performed well during previous bouts of Greek concern, while other Asian currencies have displayed limited vulnerability, they say.
Finally, the analysts looked at foreign investor positioning in Asian debt and equity markets. Heavy positioning in the Malaysian bond market represents a "significant short-term risk'' – foreign ownership in Malaysian bond market rose to 38% from 32% in March. Collective holdings of Malaysian, Korean and Indian bonds are at an all-time high, they say, and holdings are near a peak in Indonesia, with limited term premium. In the equity markets, positioning in India and Taiwan is now large in historical terms, where foreign investment exceeds pre-financial crisis highs.
Nomura adds that a worsening in the Greek crisis would affect European banks' appetite to extend credit. South Korea, Singapore, Hong Kong and India would be most affected, while the impact on China would be limited. German and French banks lend heavily to South Korea. India's current-account deficit, meanwhile, would probably exacerbate the impact of lending outflows, the analysts write.
A sustained slowdown in the EU might also hurt Asian economies through declining exports, with Hong Kong and Singapore having the highest growth dependence on exports to Europe. India's exports to the region represent 18.8% of its total, Nomura says.
The report also stresses that the market power of central banks affects the vulnerability of Asian currencies. The Thai baht and new Taiwan dollar would be least affected in this respect, as the Bank of Thailand and Central Bank of China can wield a big influence over the market through their foreign-exchange reserves, the analysts say.