Even if the Fed does raise interest rates before the end of the year, it won’t prompt a “tightening tantrum”, meaning no big worries about major economic damage to EMs, notes HSBC.
Frederic Neumann and team at HSBC in their April 24, 2015 research note titled: “Tightening tantrum?” take a closer look at how much of a stumble Asian markets really took during the 2013 “taper tantrum”.
Alleged damage from 2013 tightening tantrum
The HSBC team examines the damage the tightening tantrum allegedly inflicted on Asia. By analyzing the change in local currency values against the U.S. dollar and the change in FX reserves held by the respective central banks between May and September 2013, the analysts highlight that a number of currencies took a sharp dive. However, they point out that most Asian economies didn’t necessarily suffer severe financial stress.
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For instance, the foreign exchange reserves in Taiwan and Singapore actually rose despite currency weakness, while central banks in Malaysia, Thailand, Indonesia and India witnessed a bigger plunge in their currencies and were more ready to “sell US dollars” to stem the slide. However, as can be evidenced from the following graph, Indonesia was the only country where FX reserve losses were substantial at close to 15%. The HSBC analysts point out that in many markets, the tightening tantrum thus didn’t seem to amount to major financial risk from the perspective of monetary officials:
Neumann et al., however, note the big, “shocking” move during the tightening tantrum was the spike in U.S. 10-year Treasury yields, which witnessed a jump from 1.62% to 2.99%. They note investors hadn’t sold out of EM fixed income markets, at least not sufficiently to send local interest rates soaring. As set forth in the following graph, only Indonesia and Hong Kong’s 10-year yields rose more than equivalent US Treasury bonds, while in other places interest rates rose by less than in the U.S.:
“Fairly relaxed” about possible Fed rate hike
From an economic perspective, the HSBC analysts remain fairly relaxed about a possible rate hike by the Fed this year. Focusing on the vulnerabilities to assess the biggest pressure points in the region, they note when the short-term external debt is measured as a share of FX reserves, Korea and India appear far more robust than in 2013, though Malaysia stands out as being much more vulnerable:
Considering macroeconomic vulnerabilities can’t be reduced to a single indicator, the HSBC analysts considered countries’ current account positions then and now. This analysis reveals India has sharply trimmed its external financing needs and might even have run a current account surplus in the first quarter, while Malaysia has witnessed a drop in its surplus:
Looking at loan-to-deposit ratios to measure local financial risks, Neumann and colleagues highlight that Korea, Singapore, Indonesia, Malaysia and Hong Kong have climbed since 2013, rendering local bond yields potentially more sensitive to swings in U.S. interest rates, while India, Thailand and Philippines look more robust.