The majority of countries across southeast Asia witnessed buoyant capital inflows during the first months of 2015, but bond yields have risen lately in tandem with a loosening of five-year CDS spreads.
Experts taking part in Euromoney’s country risk survey have simultaneously lowered their scores to signal heightened threats for bond investors as US Federal Reserve policymakers prepare to tighten the taps on dollar liquidity amid a build-up of dollar-denominated debt.
China, Hong Kong and South Korea were among those sovereigns becoming riskier during the first half of this year, according to the survey:
Ranking 13th and 21st on ECR’s global scoreboard, Hong Kong and South Korea are still comparatively safe locations for Asia bond investors, alongside Singapore (third) and Taiwan (17th), but their downgraded scores this year show how anxiety is now creeping in.
Country-risk experts are asked to evaluate 15 economic, political and structural indicators. These are added to values for capital access, debt indicators and credit ratings, and weighted to compile a total risk score where a higher value indicates more safety and a lower value increased risk.
Another borrower failing to convince the experts is Thailand, lower down the rankings in 61st place, where the junta is still in charge, and commercial banks’ non-performing loan books are growing as consumer debts increase and the economy underperforms.
Scores for economic growth, the labour market, corruption and transparency in Thailand have been downgraded over 12 months.
There are other sovereigns, too, with potentially favourable longer-term returns becoming riskier this year.
They include Indonesia, one of the region’s worst performers, having now slipped into the fourth of ECR’s five categories, denoting a shift from medium- to high-risk despite its inflows reviving in April.
Indonesian president Joko Widodo seems to be sending the country in a more nationalist economic and political direction as his own personal popularity ratings waver, while growth and inflation risks have risen thanks to currency depreciation and the dismantling of fuel subsidies.
ABN Amro senior economist Arjen Van Dijkhuizen says: “The main risk to the outlook stems from the massive rise in bond yields in advanced economies and [faster-than-expected] monetary tightening in the US, which could trigger a new round of capital outflows from emerging markets.”
On Indonesia, specifically, he argues although the external position has improved since the 2013/14 taper tantrum, “the elevated share of US dollar denominated external debt and high debt-service ratio leaves Indonesia vulnerable to further rupiah weakness.”
Trade vulnerabilities and political risks were also cited.
Falling out of favour, too, is Vietnam – another tier-four sovereign – along with Cambodia and Myanmar. Both are tier-five issuers, already signalling the highest risk of default.
Vietnam devalued its currency, the dong, in May, Cambodia’s desire to increase trust in its own currency, the riel, remains questionable with dollar confidence soaring, and Euromoney recently issued a reminder of Myanmar’s extreme risks.
Disparate exchange-rate pressures, falling heavily on free-floats where capital dependency is high, have seen wide gaps in monetary/currency scores emerge (where 10 points equates to maximum stability):
Hong Kong and Thailand have each shed a point during the past 12 months, partly reflecting changing perceptions over China, which is half a point down in the survey this year and four in total since 2010, now that its financial risks are heightened and growth miracle subsiding.
Newly released forecasts from the Asian Development Bank (ADB) predict a shallower profile for China’s GDP growth, with its real-terms expansion decelerating from 7% this year to 6.8% in 2016.
China has seen slightly slower consumption and exports this year, but it is investment in manufacturing and real estate that are causing the most concern.
Two years after its risk-ranking improved, China has failed to make any more headway, with experts marking down scores for economic growth, employment, the regulatory environment and bank stability, while also becoming more cautious over the country’s looming demographics crisis placing demands on the public finances, not least the pensions system.
East Asia as a whole, meanwhile, is downgraded to 6.2% for 2015 and 2016, according to the ADB, with growth predictions lowered for Hong Kong, South Korea and Taiwan.
Indonesia and Malaysia have seen their currencies depreciate by more than 6% against the dollar this year, coinciding with their attenuated risk scores since March, as the threat of a US policy interest-rate rise underpins the dollar on the foreign exchanges.
Meanwhile, volatility caused by the Greek crisis might ease after the bailout agreement reached with creditors, but the situation is far from resolved and a flight to safety is also spelling greater volatility in Asian bond markets, exacerbated by the increasing use of exchange-traded funds, the ADB warns in its latest Asia Bond Monitor (June 2015).
Low liquidity in Asia’s markets is another factor that will spark outflows, says the ADB.
Malaysia ranking 36th in the survey is a safer bet than Indonesia (66th), but the general rise in risk only increases the search for safety with debt-servicing costs rising as local currencies weaken against the dollar.
ECR data show the Philippines faring best. The sovereign’s score increased by 0.2 in H1 2015 to 52.3 points, continuing an upward trend which has seen it rack up 5.5 points in total since 2010 to send the country up to 58th in the rankings and into a comfortable tier-three position.
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