By Stephanie Jacob
In the final part of this series, Kinibiz summarises why the so called emerging markets crisis is not going to happen and why there may even be an eventual silver lining to the US Federal Reserve’s quantitative easing taper decision.
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With a measure of discernment seemingly returning to the markets, an Asian Financial Crisis ala 1997/98 reoccurring in Malaysia as a result of the US Federal Reserve (US Fed) quantitative easing tapering decision is looking more and more unlikely.
Of course there a distinct possibility that there was never a real likelihood that one might occur to begin with, at least not for Malaysia.
Sanjay Mathur
When discussing the impact of the US Fed’s decision on Malaysia, Royal Bank of Scotland plc (RBS) managing director and head of economic research for Asia (ex Japan) Sanjay Mathur said that he believed that “the taper will by itself have a small impact on exchange rates and the ringgit, as bond yields in Malaysia have already adjusted by around 100 basis points over the course of 2013, and the trade surplus is no longer narrowing.”
All in all, the sell-off in December and January appears now to be the result of an unfortunate mix of panic and greed – the two ingredients that according to many experts played a serious role in the crisis of 97/98.
Which then places the spotlight firmly back on the speculators and their role in sell-off, and in promoting the sense of panic that invaded the market over the December and January period.
In late January, a Kinibiz TigerTalk already highlighted that hedge funds might be talking a little too loudly and boldly about an emerging market crisis, and advocated caution as it was likely that many had already taken positions in order to make large profits from the so-called crisis.
As seen in the third part of this series, it is an opinion that is now being put forward by more and more economists and financial experts; with one local economist bluntly pointing out that unlike salaried researchers, fund managers need to make money and one such way to do that is to create a market movement.
But as discussed in the second part of this series, the are important economic fundamentals that differentiate Malaysia’s outlook today versus its outlook in 1997/98 and also in comparison with the countries being hardest hit by the US Fed’s decision to scale back its bond buying programme.
With a current account surplus, and international reserves amounting to several times the countries short-term external debt level, Malaysia is in a far better position to weather external shocks then it was 17 years ago.
Furthermore in contrast to 1997/98, the make-up of the market is also different with local institutions (like the Employees Provident Fund or Permodalan Nasional Bhd) making up the bulk of the investors rather than retail investors; which is important as local institutions are likely to be less susceptible to knee jerk or panic reactions.
This likely holds true even for the portion of foreign investors in the market, with RBS’ Mathur saying that there appears to be a larger proportion of long-term players (like foreign central banks or sovereign wealth funds) who have plenty of holding power, and this will likely provide a buffer of sorts for the market.
QE tapering and its silver lining
This week in speaking to the US Congress, the US Fed’s chairwoman stated that tapering was here to stay and would continue at likely the same level that it had been progressing at unless there was “notable change in the outlook” for the economy.
With the pace of the tapering likely to remain gradual, there is a small chance of any sudden large external shocks (at least in terms of QE) suddenly hitting our economy in the coming months.
Yeah Kim Leng
As such says RAM Holdings group chief economist Yeah Kim Leng, emerging markets and in particular Malaysia who have already absorbed the shock of the decision will be fairly unaffected going forward.
Furthermore as the progress of the QE taper is incumbent on improvements in the US economy, there is an argument that Malaysia as a net exporter may in fact have the opportunity to capitalise on the recovery taking place.
If that proves to be the case, then the fear of a crisis as a result of the QE taper might soon be replaced by the silver lining of a new opportunity as a result of the very same decision.
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