Emerging markets tend to be more vulnerable to external shocks or disruptive negative events. This is particularly the case for countries with large external financing needs, which covers both the funding requirements for the current account deficit and for the amortization of external debt.
During challenging times, when global economic or financial conditions are difficult, capital flows can dry up or reverse, making it even more difficult to fund external needs without drawing down FX assets. Hence, it is important to track and analyse different measures of external vulnerability in EM. In this article, we focus the analysis on the large Southeast Asian (ASEAN) economies of Indonesia, Thailand, Malaysia and the Philippines.
We assess external vulnerability along two dimensions: the external financing needs and the overall level of official FX reserves. Countries with large external financing needs are required to finance it either with additional foreign capital or drawing down their own FX wealth.
Official FX reserves can be an important backstop to absorb external shocks. However, the level of FX reserves should be considered in context, including not only short-term external financing needs but also other key macro metrics. Traditionally, a country’s FX reserves are considered within adequate levels whenever they range above 3 months of imports and they are enough to cover for 20% of the overall volume of local currency held by the public or at least for a full year of external debt obligations. The International Monetary Fund (IMF) created a useful composite indicator for such measures, called the IMF reserve adequacy metric. Countries are deemed to hold adequate levels of FX reserves whenever they can cover the 100-150% threshold of the IMF metric.
Our analysis delves into the current account position and FX reserves of the ASEAN countries we are analysing, drawing conclusions about their resilience against potential global or regional shocks.
Despite a high exposure to the global economic cycle (manufacturing exports and tourism), Thailand is still in a good position to weather sudden changes in capital flows. Even with international tourism still significantly below pre-pandemic levels, the situation remains stable. The country continues to run sizable current account surpluses, which helped it amass USD 221 Bn in official FX reserves, comfortably covering 209% of the IMF reserve adequacy metric.
Malaysia, a big producer of both manufacturing goods and commodities, is another resilient ASEAN economy. Like Thailand, the country had also run persistent current account surpluses for years. As a net oil and soft commodity exporter, Malaysia has been positively affected by the overall strength of commodity markets in recent years, which resulted in a bigger current account surpluses. Malaysia’s reserve adequacy metrics are much tighter than those for Thailand, with the central bank holding almost half of the amount of FX reserves that Thailand holds at USD 113 Bn. However, Malaysia is still in the safe zone of the IMF reserve adequacy metric with a 115% coverage.
The Philippines is a net external borrower, which means that it runs current account deficits. With a large trade deficit that is currently only partially offset by sizable inflows of remittances from the community of Philippine expatriate workers, the country is expected to run a current account deficit that amounts to around 2% of GDP. While the deficits are partially driven by a healthy push for much needed investment, the deterioration of the external position has so far been sizable. However, monetary authorities control ample FX reserves. Official reserves of USD 103 Bn cover 196% of the IMF reserve adequacy metric.
Indonesia, traditionally the large ASEAN country most exposed to potential external shocks, is now back to a current account deficit position. This comes after a short hiatus benefiting from a commodity boom that has propped up its external revenues, due to high prices for coal, gas and palm oil. In fact, the country is now expected to run a current account deficit of about 1% of GDP this year. The deficit is expected to last for longer, as the delivery of a sizable pipeline of capital expenditure projects will require more imports. Indonesian official FX reserves amount to USD 136 Bn, covering 112% of the IMF reserve adequacy metric.
All in all, large ASEAN economies are relatively resilient to sudden changes in risk sentiment and capital flows. Such resilience is a major source of support in a context of higher uncertainty associated with global monetary conditions and regional FX volatility.
Download the PDF version of this weekly commentary in
English
or
عربي
