Asia feels impact of European woes

Economists are fretting that Asia will suffer as European banks try to shrink their balance sheets while still supporting clients at home. A combination of warnings about the effect of European woes on Asia and concrete signs of foreign capital leaving the region have multiplied in recent days, especially for countries with deficits that by definition have to import capital.

South-east Asia has already seen dramatic reversals of the capital inflows of a few months back as foreign holdings of local currency bonds in the region fall. In Indonesia, for example, foreign ownership of local currency bonds has dropped 51 per cent from August through November, according to data from JPMorgan Chase Bank, putting downward pressure on the currency which has dropped 7 per cent against the dollar.

In Thailand, foreigners cut back holdings of baht denominated bonds by 24 per cent in that same period. Such outflow, “combined with already high foreign currency loan deposit ratios within the banking sector have likely tightened domestic liquidity further”, Sin Beng Ong, JPMorgan’s Singapore-based economist, notes. Vietnam is particularly dependent on syndicated loans with a high degree of European bank participation, given its weak external accounts and high domestic funding costs, according to Citigroup Global Markets.

In its most recent quarterly report, the Bank for International Settlements noted that Asia was the most exposed to sudden capital withdrawals, in part because so much of the flow from foreign banks comes from cross-border lending rather than lending that is booked locally. Moreover, Asia is particularly vulnerable because a handful of European banks account for over 40 per cent of all trade finance in emerging Asia, according to Dealogic. Aircraft leasing and project financings are particularly at risk.