Fed hike will hit South-east Asian liquidity and debt

Subject

Implications of a US rates hike for South-east Asian economies.

Significance

Stress from the dollar's rapid appreciation could spill into ASEAN economies if a US Federal Reserve (Fed) interest-rate hike goes ahead in September. Fears of capital flight are already being realised in South-east Asia as foreign investors lose confidence in the growth prospects of key economies and withdraw their funds from stock and bond markets. The devaluation of the yuan last week has further destabilised ASEAN currencies by removing an anchor of stability. Commodity exporters Malaysia and Indonesia will suffer the deepest impacts, but market contagion could drag other industrialised South-east Asian economies into a currency crisis.

Impacts

• Financial systems have adequate safeguards against market volatility, but liquidity would suffer.
• Capital controls could be employed if conditions deteriorate in foreign-exchange markets.
• Rising repayment costs on dollar loans could trigger debt defaults.