Banks under stress: impact on Asia’s emerging markets
The recent bank stress in developed-market (DM) economies have triggered volatility in global financial markets, prompting a close look at Emerging Markets (EM) Asia's financial linkages to DM. Christiaan Tuntono, Senior Economist for Asia Pacific at Allianz Global Investors, discusses the associated potential risks of sudden repatriation of capital from EM Asia amidst concerns about broad financial contagion originated from the US, Europe and/or Japan.
Key takeaways
- Our findings, based on data from the Bank for International Settlement (BIS), show that most EM Asian economies have reduced borrowing as a percentage of Gross Domestic Product (GDP) from DM banks in recent years. There are a few exceptions (Vietnam, Thailand, Taiwan, Korea) but generally the extent of increases is limited, with international liability levels remaining sanguine (below 15% of GDP).
- From the perspective of the lenders, DM banks’ foreign currency lending to EM Asia has declined and remained stable as a percentage of GDP since 2008. Even if we would include DM banks’ local-currency lending, the trends of deleveraging from DM banks largely hold in EM Asia.
- We expect manageable direct impact on EM Asia from DM bank stresses at this point. The substitution of tighter US bank lending conditions for much more aggressive Fed rate hikes seems to represent a less adverse policy mix for EM Asia, in our view. In addition, the current positive macro backdrop in EM Asia also helps cushion the impact.
