An investor exodus from India and Indonesia has led many to compare today’s emerging market volatility to the Asian financial crisis of 1997-98.
The amount of debt in Asia held by foreign investors today is high – over 40% of Indonesian bonds are held offshore, similar to the lead-up in the 1997 crisis, when local companies and banks borrowed substantial amounts from abroad.
India’s central bank implemented liquidity tightening measures earlier this month to boost the weakening rupee and tighten the reins on its account deficit. However, the country has suffered billions in investor outflows after US Federal Reserve chairman Ben Bernanke hinted it would taper its quantitative easing programme.
Fitch acknowledges that the Fed’s plans coupled with severe weakening of both the rupee and Indonesian rupiah have encouraged investors to pull cash, and that private sector credit growth, widening fiscal deficits, and ongoing inflation could lead to an even greater loss of global investor confidence. As such, both could be dealt negative ratings.
Yet Andrew Colquhoun, Fitch Ratings’ head of Asia Pacific sovereigns, highlights a number of key differences between today and the late 1990s, and defends Fitch’s stable outlook for both countries, which are rated BBB-.
He stresses that India’s and Indonesia’s sovereign credit profiles are much stronger today than 16 years ago as they now rely on foreign-exchange reserves.
India’s FX reserves at mid-August stood at $279 billion. While down from $291 billion a year ago, this is still five-and-a-half months’ worth of reserves, Colquhoun notes, compared with about one month's worth in 1990. And unless there is a “significant flight of domestic capital”, Colquhoun expects India’s reserves to be $230 billion by March 2014.
Similarly, Indonesia’s reserves stood at $93 billion at July 31, down from $106 billion a year ago, but still offering about four-and-a-half months’ worth of import cover.
“Foreign exchange reserves have come under pressure but are still sizeable,” Colquhoun argues. “In both countries, reserves remain higher than residual maturity short-term debt.”
Both countries have also adjusted their economic policies. Fitch expects India to employ similar policy restraint to last year, with the budget deficit remaining in the range of 5% of GDP, while Indonesia’s fiscal deficit will likely remain around 2% of GDP.
The ratings agency also argues that structural reforms taken by both countries, including fuel subsidy reforms, should help to prop up public finances in the medium-term, support domestic savings rates, and eventually reduce external deficits.
Fitch suggests that supply-side reforms could, in theory, boost growth rates and attract more foreign investment, although this will not happen in the near-term.
Fitch warns that China is a country to watch in the second half of this year. Its sovereign currency balance sheet is strong, and as such, Fitch does not anticipate investor flight to disrupt China’s economic stability.
What’s more relevant, however, is how the slowing growth will impact the construction industry, as well as the neighbouring nations that rely on the mainland’s construction industry, which includes Indonesia and, to a lesser extent, Malaysia.
While demand is slowing, it is not stopping, Colquhoun notes, saying the long-term structural demand for raw material among Chinese companies will still be there “even if it’s not growing as quickly”.