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[JAKARTA] The uptick in Southeast Asia's forex reserves last month is a respite after a drop of about US$60 billion since mid-2014. But the gain of less than 1 per cent is hardly boosting coverage for the region's external finances, which are more stretched than they have been for many years.
Years of low interest rates have fuelled a borrowing binge in Southeast Asia, with Malaysia, Thailand and Singapore seeing especially sharp spikes in indebtedness. Efforts by regulators in Indonesia and the Philippines to stem borrowing have been hindered by cross-border dollar loans and bonds. At the same time, forex reserves have not kept pace with the growth in indebtedness, exposing the region to a potential dollar crunch when eventual rises in US interest rates pull capital from emerging markets.
Of the region's five largest economies, Malaysia has seen the sharpest rise in external debt. Offshore borrowing has soared from about 35.9 per cent of gross domestic product in mid-2008 to nearly 66 per cent today. With its reserves of US$105 billion barely covering its US$93 billion in external debt due this year, Malaysia looks to be one of the region's most stretched economies. The terms of trade of Southeast Asia's only net exporter of oil have also been hammered by crude prices, which are still low by historical standards.
Fitch Ratings is more likely than not to downgrade Malaysia's creditworthiness in May or June, Andrew Colquhoun, head of Asia-Pacific sovereign ratings at the agency, told Reuters. "The country would sit more naturally in the triple-B range," he said. "It had previously been supported by very strong external finances, but those are no longer looking so strong." Doomsayers occasionally point to Singapore's debt-to-GDP ratio, the highest in the region. The ratio of more than 400 per cent is due to the volume of corporate fund-raising associated with a major financial centre and government securities issued to the country's national pension fund. On the whole, Southeast Asia doesn't look that bad. The region remains a net creditor despite its indebtedness. Of its five big economies, only Indonesia runs a current account deficit. Standard & Poor's raised its outlook on Indonesia's speculative rating on Thursday, partly due to reduced risk of capital flight. Southeast Asia's overall reserves relative to its short-term external debt are also higher than those of many emerging markets in Latin America and Eastern Europe.