Asian economies brace for QE tapering's potential capital outflow of US$1.4t

Will they be able to manage the outflows?

In a release, United Overseas Bank (UOB) said that it expects Asian economies will be able to manage the potential capital outflows of US$1.4 trillion arising from the impending pullback of quantitative easing (QE) in the United States (US).

Jimmy Koh, UOB’s Head of Research and Investor Relations, said that QE tapering and the potential rise in interest rates may lead to an outflow of global capital from Asia. This may place continued pressure on Asian currencies which have been weakening since May 2013.

The Thai baht in particular has depreciated approximately ten per cent against the US dollar from end April to date. UOB anticipates the Thai baht to remain volatile and the US dollar likely to end the third quarter at 33.00 against the Thai baht and stabilise towards 31.50 at the end of the year.

“The recent depreciation in Asian currencies is not a reflection of economic weakness in the region but a result of improving economic data coming out of the US,” Mr Koh said.

“Having learnt from past crises, Asian companies and financial institutions have built stronger balance sheets and healthier gearing levels, making them more resilient and in a better position to manage market volatility. 

Asian policy makers are also more proactive and pre-emptive in managing asset price inflation and consumer credit. We are confident that Asian economies today are equipped to ride out the current economic and interest rate cycles.”

According to Mr Koh, the US Federal Reserve will only raise short-term interest rates in 2015 in view of the modest pace of the US economic recovery. This will give time for Asian central banks to adjust their monetary policies and for investors and businesses to manage potentially higher
borrowing costs.

While UOB does not expect Thailand’s central bank to make any changes in its interest rate policy till the end of 2013, the Bank believes that there is still room for the interest rate to fall below the current 2.5 per cent if there is a need to cushion further any downside risks to domestic demand.