Asian currencies vulnerable to Fed rate hike

NOT for the first time, US Federal Reserve Chair Janet Yellen in July opined that a US rate hike before the end of 2015 was well warranted.

As such, Asian countries may be on the receiving end of huge capital outflows when the Fed eventually pulls the trigger on raising interest rates - but which Asian economy will fare the worst when that happens?

The three usual suspects - India, Indonesia and Malaysia - come to mind.

Indonesia boasts the worst current account deficit to GDP ratio among them. At -3 per cent, this figure is worse than the -1.5 per cent seen during the 1997 Asian crisis, making for some very uncomfortable seats among Indonesia investors. Bank Indonesia accepts that little can be done at this stage - credit growth and investment flows are important for the country.

India is the other country that runs a current account deficit among emerging Asian economies. However, markets perceive the twin leadership of Prime Minister Narendra Modi and central bank governor Raghuram Rajan as stabilising factors, and are placing their faith in these two personalities.

Malaysia, an oil-exporting country, is seeing strains on its current account surplus due to falling oil prices. Besides having the highest household debt-to-income ratio, Malaysia also has one of the highest foreign ownership of its government bonds. These make Malaysia susceptible to quick capital pullbacks.

Since 2013, the ringgit has fallen 16 per cent against the dollar. The rupiah has dipped 9 per cent while the rupee has lost 2 per cent.

We can reasonably expect these currencies to continue depreciating when the Fed officially hikes rates, with Malaysia and Indonesia expected to be the worst hit.

India is fortunate to have top leaders at its helm, but nothing is certain in the marketplace.

Currencies are one of the most direct ways to take a position in a country's economy - unfortunately, these three countries do not have freely traded currencies. Non-deliverable forwards, therefore, are typically used by the interested investor.