HONG KONG—Major emerging markets in Asia plunged Monday on growing concerns among foreign investors that many of the region’s largest economies look increasingly fragile as a period of global easy money appears to be coming to an end.
China, India and Brazil are disappointing investors. Manufacturing and export growth have slowed in all three countries. Why are stocks from developing countries doing better than those from the major developing economies? WSJ’s Jason Bellini has #TheShortAnswer. Image: Getty
The Indonesian rupiah fell to its lowest level in four years and the Indian rupee hit a fresh low adding to signs the emerging market selloff from this summer is deepening.
Global investors are betting the U.S. Federal Reserve will soon start winding down its massive bond-buying program, a view that got a boost from encouraging U.S. employment data last week.
That belief already has pushed up long-term interest rates and drawn billions of dollars in capital back to U.S. assets. On Monday, the yield on 10-year benchmark U.S. Treasury notes hit a fresh two-year high of 2.878%.
The three Asian countries whose markets Monday took the brunt of selling—Indonesia, India and Thailand—are among the most exposed to rising global interest rates.
As their export engines have sputtered, due to China’s slowing growth and weak demand in the U.S. and Europe, these economies have started to run large current-account deficits.
During the era of low rates that followed the global recession, they had no trouble attracting capital to boost growth. Imports soared as Asian consumers ran up debt to fuel purchases. But as investors begin demanding higher returns for taking on risk, nations with large economic imbalances are getting punished.
“These economies definitely look suddenly a lot less impressive,” said Frederic Neumann, an economist with HSBC in Hong Kong. “Investors have woken up to the fact the Fed is serious about tapering.”
Leading the decline, Indonesia’s benchmark Jakarta Composite Index fell 5.6%, wiping out all of its gains so far in 2013. The rupiah currency fell to a four-year low of 10,520 to the dollar and is off 9% so far this year, making it one of the region’s worst-performing currencies.
Indonesia’s economy, which is dependent on selling commodities like iron ore and coal to China, is growing at below 6%, its slowest rate of expansion in three years. As exports have faltered, and inflation remained high, investors have headed for the exits.
The selling Monday was sparked by data late last week that Indonesia’s current-account deficit widened to $9.8 billion during the three months through June from $5.8 billion in the previous quarter.
Despite the selloff, Bank Indonesia, or BI, the central bank, has been loath to raise rates to attract capital, fearful this could further crimp growth.
“The market took the view that BI was not that concerned about the weakness of the currency,” said Robert Prior-Wandesforde, an economist with Credit Suisse in Singapore.
In India, markets faced a second straight session of declines. The rupee currency fell to a record low of 62.82 to the dollar. The Bombay Stock Exchange’s S&P BSE Sensex lost 1.6%, following a 4% fall on Friday.
Government bond yields spiked, with the yield on 10-year benchmark bonds shooting up to 9.17%, its highest level in five years.
India, too, is vulnerable to shifts in investor sentiment because it needs foreign capital to finance a massive current-account deficit. Unlike Indonesia, the country also has built up large government debt.
India’s situation is particularly precarious because it relies on huge energy imports to fuel its economy. Investment has ground to a halt due to the government’s failure to push through clear rules meant to open up sectors like retail and aviation to foreigners.
Analysts say Indian markets are caught in a vicious cycle where losses in one asset are undermining confidence in the others, and spurring further selling.
“The single biggest factor making investors nervous on India is the currency,” said Jyotivardhan Jaipuria, a research analyst with Bank of America Merrill Lynch in Mumbai.
As the rupee falls, it has negative implications for several aspects of the Indian economy. For instance, an eroding currency pushes up the cost of oil and other imported goods like electronics and stokes inflation, which is already about 10% for consumers. It also increases the government’s spending on fuel subsidies, potentially widening the fiscal deficit.
Analysts now expect the Reserve Bank of India to keep interest rates high in a bid to defend the rupee, but higher interest rates would hurt India’s economic growth, in turn making India less attractive to foreign investors.
Kaushik Basu, chief economist for the World Bank, said on Monday that he expects India’s growth to fall further in the near term.
Investors also have become jittery due to a string of measures India has taken to stem the rupee’s decline. On Wednesday, the country reduced the amount of money that residents and companies can send abroad, sparking fears of more draconian measures.
The government denies these moves are a prelude to capital controls and says it doesn’t plan to impose restrictions on companies repatriating profits.
In Thailand, news Monday that the country has entered a technical recession—largely due to a falloff in exports to China, its largest trading partner—sent markets lower. The SET Index ended down 3.3% at its worst finish in six weeks
Thai gross domestic product, the broadest measure of economic activity, contracted 0.3% on a seasonally-adjusted basis from the first quarter. GDP was 1.7% lower in the first three months of 2013 compared with the previous period. A common definition of a recession is two or more consecutive quarters of GDP contraction.
Thailand, too, has been facing growing imbalances. The nation’s current account swung from a $1.3 billion surplus in the first quarter to a $5.1 billion deficit in the three months through June. Investors also are concerned about Thailand’s high level of private debt—a consequence of years of easy money.
Private credit growth has grown more than 12% on-year in recent months and Thai household debt now accounts for 80% of GDP, a large jump from 55% at the start of 2009, and one of the highest ratios in the region.
As in Indonesia, monetary authorities in Thailand also are constrained in how much they can cut rates to help boost growth and aid consumers. Economists expect the Bank of Thailand, which meets Wednesday, to keep rates steady at 2.5%.
“Maintaining financial stability has become more important, due to increasing household debts and loans,” said Usara Wilaipich, a senior economist at Standard Chartered Bank.
Few analysts expect the current clouds over the region to presage a full-blown crisis, like the one that slammed the region in 1997-98. That is because governments and companies in the region have much lower external-debt burdens than back then and nations have ample stocks of foreign reserves.
But pressure on these economies is unlikely to abate any time soon.
Indonesia’s central bank has been selling dollars to attempt to stem the rupiah’s decline. Its foreign reserves now stand at around $92.7 billion, about enough to cover five months of imports.
“One shouldn’t shrug off the risk,” Mr. Neumann said.
—Shefali Anand and Nopparat Chaichalearmmongkol contributed to this article.
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