Currencies fell and five-year CDS spreads widened for most emerging Asian sovereigns in the second week of December. The Indonesian rupiah and Malaysian ringgit saw notable moves, the former dropping to its lowest level against the dollar since August 1998 and the latter hitting a five-year low. Both currencies rose on 18 December as the ruble and oil prices strengthened and following perceived dovish comments from the Federal Open Market Committee, underscoring how developments beyond Asia-Pacific can drive investor sentiment. The rupiah was also supported by market intervention from Bank Indonesia. CDS spreads narrowed for most Asian sovereigns on 18-19 December.
Volatility in Asian markets may be surprising in the sense that the region's direct exposure to the proximate triggers of lower oil prices and strains in Russia is quite low. Trade and investment links with Russia are minimal. Fitch-rated emerging Asian sovereigns are net oil importers, with the exception of Malaysia. Most emerging Asian sovereigns have stronger external finances than their major emerging market peers. Gross external debt as a percentage of current external receipts for emerging Asia is around 54% in 2014, compared with 138% for emerging Europe and 145% for LatAm emerging markets.
Emerging Asian sovereigns with the biggest financing needs have generally reduced gross external funding requirements relative to foreign reserves since the taper tantrum. We expect both India and Indonesia to have stable or lower gross external funding needs in 2015 than in 2012-2013.
Cheaper oil is positive for the terms of trade of most major Asian economies. But for Malaysia, which is the only net oil exporter among Fitch-rated emerging Asian sovereigns, the fall increases the risk of missing fiscal targets. The risk of a twin fiscal and external deficit, which could spark greater volatility in capital flows, has increased. Malaysia's deep local capital markets have a downside in that they leave the country exposed to shifts in investor risk appetite. Malaysia's foreign reserves dropped 6.8% between end-2013 and end-November 2014, the biggest decline in Fitch-rated emerging Asia. Lower oil prices will also have a negative impact on Vietnam's budget, as roughly 15% of revenues come from oil. Fitch already views Vietnam's public finances as a weakness against rating peers.
Many emerging Asian sovereigns have actually seen nominal effective exchange rates rise in 2014, partly on account of yen weakness, mitigating the support to exports and growth from depreciation versus the US dollar. A rising dollar could also make debt servicing more challenging for non-sovereign borrowers who have increased their dollar-denominated issuance in response to easy US monetary policy. Increasing signs of stress among Asian borrowers coupled with higher US rates could affect investor risk appetite and capital flows.