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The yuan drop just added US$14 billion to Asia Inc's debt burden
[BEIJING] The record devaluation of the yuan has dragged down almost every currency in Asia. As they drop, the foreign debt bills of the region's companies are rising.
Almost US$1.6 trillion of bonds and loans denominated in dollars and euros across Asia outside Japan and China has just become US$14 billion more expensive for companies that service the debt in their home currency, Bloomberg-compiled data show. While many borrowers have hedged their exposure, the cost of doing that and repaying interest and principal is going up.
The People's Bank of China cut its daily yuan reference rate by a record on Tuesday, triggering the currency's biggest two-day loss since China unified official and market exchange rates in 1994. The move accelerated a selloff in other parts of Asia, pushing the Indonesian rupiah and the Malaysian ringgit back to 1998 lows and the Thai baht to a six-year trough.
"The impact on the rest of dollar Asia is pretty negative," said Tim Jagger, a Singapore-based portfolio manager at Aviva Investors Global Services Ltd, which managed some US$386 billion as of March 31. "My worry in times like these is that some unintended consequences come out of this type of action." The yuan's devaluation has rippled across other debt markets. The cost to insure Malaysian government debt against nonpayment touched 171.5 basis points Wednesday, the highest since October 2011. Protection costs in Thailand, Indonesia, India and Vietnam also tested altitudes not seen in over a year.
Investors are also demanding a steeper premium to hold junk notes in Asia, with the spread over Treasuries rising 25 basis points since Monday, a Bank of America Merrill Lynch index shows. That compares with a 5 basis point rise for investment- grade notes in the region.
Indonesian companies are likely to be worst hit, according to Singapore-based Wai Hoong Leong, who tracks Asian high-yield investments at Nikko Asset Management Co, which manages about US$162 billion.
"If you look at Indonesian high-yield corporates, dollar debt is likely to be their major source of borrowings," Mr Leong said. "Thus the currency weakness will induce a bigger swing in their profit and loss relative to Chinese corporates." US currency bonds of tire maker PT Gajah Tunggal and animal feed producer PT Japfa Comfeed Indonesia plunged to their lowest on record earlier this week as the rupiah dropped 1.8 per cent. Both companies have recently been downgraded by Standard & Poor's partly because of the effect a weaker currency has on their operations.
In Malaysia, the ringgit's 2.3 per cent slide is adding to concerns. Malaysia's economy expanded the least in almost two years in the three months to June after a new consumption tax curbed private spending. Foreign funds have dumped about US$3 billion of the nation's shares this year as Prime Minister Najib Razak grapples with allegations of financial irregularities at a state investment company.
The extra yield over Treasuries investors demand to hold the 10-year 5.25 per cent dollar bonds of state-owned oil company Petroliam Nasional Bhd - among Malaysia's most liquid notes - has risen 11 basis points this week to the highest since March.
"We're especially worried about Malaysia as its currency faces the most stress after the yuan devaluation," said Gordon Tsui, the head of fixed income at Taikang Asset Management (Hong Kong) Co. "Many Asian funds hold the country's benchmark bonds such as Petronas. And the bad performance in those bonds shows investors are exiting the market." The impact is being felt in stock markets too, with emerging-market shares sinking to the lowest level since 2011, extending declines in a bear market.
Some of the region's currencies have started to recover, and PBOC Assistant Governor Zhang Xiaohui said at a rare briefing on the currency in Beijing Thursday that there's no basis for the depreciation to persist. The adjustment spurred by Tuesday's change to how the PBOC determines the yuan's daily reference rate is basically already completed, she said.
"At the moment I still don't think it's a headache," Aviva Investors' Jagger said. "But the pips are starting to squeak in various parts of the region."