PETALING JAYA: Countries like Malaysia could face the risk of a contagion effect from emerging market (EM) crisis due to the high level of debt despite not operating under the environment of “twin deficit”.
AmBank Group chief economist Dr Anthony Dass said on Monday the risk of a contagion effect was premised on the country’s Exchange Rate Market Pressure Index (ERMPI) sitting between 1 and 2 standard deviation (SD).
ERMPI was developed with the aim to examine if the EM countries could become vulnerable to are likely to potential currency crisis. Here, the readings from the ERMPI for each local currency vis-a-vis the US dollar is compared against a threshold which is two SDs.
“Should the reading of ERMPI breaches the second SD, that particular EM’s currency is on “high” risk of heading into a potential currency crisis. If the reading is between 1 and 2 of the SD, the particular EM country’s currency risk falls into a “moderate” category. And if the reading is less than 1 SD, that EM country’s risk for a currency crisis is low,” he said.
EM countries operating under the environment of fiscal and current account deficits as a percentage of gross domestic product (GDP) or commonly referred to as “twin deficits”.
Based on the index, those EM countries who have fallen into a “high” risk of potential currency crises are Argentina, Brazil, India, Mexico and the Philippines.
Meanwhile, for countries like Malaysia, Thailand and Turkey, they fell into the “medium” risk category. Indonesia, South Africa and Turkey are in the “low” currency risk category.
Dass noted that focus is also on EM countries maturities exposed to US dollar borrowings that need to be repaid or refinanced in 2019.
“There is a growing risk for countries like Argentina, Turkey, Brazil, India Indonesia, Malaysia and Mexico. Tightening global financing conditions raise the risk of debt servicing issues.
“Besides, tightening global financing conditions can impact countries exposed to high gross financing needs. They will be hurt from a reversal of capital flows. Countries like Argentina, Brazil, India, Malaysia and South Africa seek high gross financing due to elevated public debt are on the watch list radar screen,’’ he said.
Dass added that there are two pressing questions on EM countries, namely whether a crack in EM countries will trigger a contagion effect.
Much will depend on their ability to repay US dollar denominated debt, exposure to external financing requirements and the size of foreign investor
pool in domestic-denominated debts.
