Lull before storm

Asia's fear of Fed is now infecting more economies

After a rough summer, Asian markets are calm once again. But beneath the surface, the fear of what the Federal Reserve may do next is beginning to spread beyond India and Indonesia.

The MSCI Asia-Pacific-ex-Japan stock market index is up 11 per cent from its end-August low. The intense selling pressure on the Indian rupee and the Indonesian rupiah has eased since the Fed's surprise September decision to keep its $85-billion-a-month money-printing programme intact for now.

But the fragilities that prompted investors to rush for the exits remain. With prices of coal and palm oil exports in the doldrums, Indonesia's current account shortfall - a broader measure of the country's reliance on foreign capital - may remain elevated at the second quarter's level of 4.4 per cent of GDP.

By contrast, India isn't much of a commodity seller. Its exporters, therefore, are benefitting from a weaker currency, and the trade deficit is narrowing.

However, the nation's savers are still losing money on bank deposits because of double-digit inflation. If US interest rates shoot up, another round of capital outflows is possible.

To be fair, Indonesia has raised short-term interest rates and India has attracted deposits from its large diaspora. Both are now accumulating foreign-exchange reserves to help prepare them for the eventual end of quantitative easing. So are South Korea and Taiwan.

Malaysia and Thailand are not taking the same precautions. Neither country has managed to recoup the reserves it lost in August.

That's a worry, considering foreigners own 28 per cent of Malaysia's sovereign bond market. Pending the implementation of a goods and services tax from 2015, the country's public finances remain shaky.

At the peak of the summer turmoil, the cost of insuring against default on Malaysian government bonds was slightly higher than for Philippines debt, which carries a lower credit rating. The gap has widened since.

Finally, debt is soaring. In Thailand, bank loans to individuals have jumped 20 per cent in the first nine months of the year, higher than last year's 18 per cent growth.

Meanwhile, the Thai economy has lost momentum, the politics has become unstable, and the current account has tipped into a deficit. Instead of easing, Asia's fear of the Fed is spreading wider.