Volatility to hound emerging markets

MANILA, Philippines - Emerging economies in the region are expected to continue seeing bouts of volatility ahead but Standard & Poor’s (S&P) stressed the situation is still far from what happened in the 1997 Asian financial crisis.

In a report titled South And Southeast Asian Economies Grapple With Growth And External Financing Risks, S&P said regional markets have experienced sell-offs since early this year due to the impending tapering off of the US Fed’s bond buying program.

“Market participants have sold assets in the markets with the highest risk, sometimes aggressively. And emerging economies in Asia have certainly seen their share of the sell-offs,” S&P said.

At the same time, capital flight seen by the region coincided with the downgrade of growth forecasts for a number of Asian economies.

“After considering the worsening growth profile and financial market turbulence, some commentators believe the risk of another Asian financial crisis is rising fast, with India and Indonesia most vulnerable,” the debt watcher said.

S&P said emerging economies in Asia grapple with two external macroeconomic risks: growth and financing.

Risks to growth escalate depending on a country’s openness of economy, while external financing risks rise as those with current accounts deficit will have a need to borrow from abroad.

“In times of normal risk appetite, this dependency may not be a problem. However, when markets become risk averse, economies with current account deficits often find themselves facing external financing pressure. These include weaker currencies, shorter tenors for debt, and higher borrowing costs,” S&P noted.

But despite the risks faced by emerging Asian economies, S&P stressed it does not see the situation as a repeat of the financial crisis experienced by the region in the late 1990s.

“We don’t expect any currency collapses, balance-of-payments crises or IMF-sponsored programs in the region,” S&P said.

For one, the debt watcher said, “external positions are now much stronger. Current account imbalances are generally narrower or foreign reserve levels are much higher, in some cases, both are true.”

Meanwhile, officials from Philippine Stock Exchange-listed firm said the sell-offs in the local bourse can be an opportunity for those wanting to invest.