(This story was originally published in IFR Asia edition 810, a
Thomson Reuters publication, on August 24.)
HONG KONG, Aug 26 (IFR) - An emerging-market sell-off took
on a far more ominous tone last week in Asia as investors
slashed their exposure to the region's most vulnerable
India and Indonesia bore the brunt of the pressure as
investors abandoned the countries with the worst current account
deficits, but the storm soon reached the Philippines and
Credit spreads spiralled, and currencies and stocks tumbled,
leaving even the most optimistic investor worrying about a
funding crisis among the many companies that have come to depend
on regular access to the capital markets after a funding spree
in recent years.
"Deteriorating cash generation and adverse borrowing
conditions on already leveraged balance sheets open up a new
downside scenario," said Viktor Hjort, head of Asian
fixed-income research at Morgan Stanley.
"A steady rise in leverage in recent years means Corporate
Asia now has the most leveraged balance sheets globally. Those
balance sheets face a combination of slower growth and higher
Rating agency Fitch said it planned no action on either
India or Indonesia, but noted that a "broader and sustained loss
of confidence among investors" could undermine economic
Indonesia's main share index slumped 9% in the first two
days of last week, while the Philippines equivalent tumbled 6%
last Thursday after a three-day holiday. The rupiah slid 4.1%
against the dollar and the Indian rupee lost 4.7% in the first
four days of the week. Malaysian five-year CDS jumped 15bp on
Thursday to a 21-month high as the ringgit came under pressure,
touching a three-year low against the dollar.
Higher US Treasury yields and soaring credit spreads added
to the pain for companies with US dollar liabilities. Ten-year
Treasuries spiked again last week to almost 2.9%, up from 1.62%
in early May, on renewed expectations that the US will scale
back its bond purchases sooner rather than later.
Credit spreads for Indian banks spiked early in the week,
with State Bank of India five-year CDS, widely seen as a proxy
for the Indian sovereign, trading at 351bp on Monday, up 45bp on
the day. Indonesia five-year CDS also surged to a high of 277bp
last Thursday, up from 205bp on August 15, according to Markit
Local markets are offering little respite from the higher
funding costs. The yield on India's 10-year government benchmark
reached 9.26% early last week, its highest since August 2008,
shortly before the collapse of Lehman Brothers. The 10-year
Indonesian rupiah benchmark hit 8.45% last week, its highest
since March 2011.
Asia's local funding markets have collapsed due to capital
outflows since May 1, with new issue volumes down sharply in all
currencies versus the same period last year. Bond sales in
rupiah, Hong Kong dollars, Singapore dollars, Philippines pesos
and Malaysian ringgit are all down at least 50%.
Tighter credit conditions and slumping currencies are
raising fears of a rise in default rates among the region's
dollar borrowers, reminiscent of the Asian financial crisis that
followed a rout of South-East Asian currencies in 1997. While
analysts believe the region is in far better shape than 16 years
ago, tighter bank lending is adding to the challenges.
Bumi Resources, Hidili, Winsway Coking Coal and Mongolian
Mining Corp have all been downgraded to Triple C in recent
weeks. Morgan Stanley predicts a 1.8% default rate in Asia in
the next 12 months, up from its 0.8% forecast as of December.
India Ratings & Research, Fitch's local arm, said last month
that the debt-servicing ability of India's BSE 500 listed
companies was at its weakest since 2008.
Analysts see the next 12 to 18 months as the most
challenging business environment for Indian corporations since
2000, in part due to elections due by May 2014, but also because
of uncertainty surrounding an end to the US Federal Reserve's
"My worst-case situation is if the Fed starts tapering the
QE3 only in and around the general elections in India," said
Deep N Mukherjee, head of the corporate group at India Ratings.
While investors acknowledge that weaker currencies and a
stronger US recovery will help exports, last week's price
movements show the focus remains firmly on the need for
On Friday, Indonesia unveiled measures to reduce imports and
boost investment. The emergency fiscal package is aimed to
strengthen the current account. The new policy will see an
increase in import taxes on luxury goods and tax incentives for
labour-intensive industries. The central bank will also ease
restriction to ensure banks and exporters have access to dollar
"The sell-off in Indonesian debt is exaggerated.
Fundamentals have not deteriorated to the extent suggested by
the prices," said Anthony Chan, analyst at AllianceBernstein
Fixed Income. "The market has indiscriminately penalised
Indonesia along with India."
Amid the gloom, investors were still watching out for
bargains. Credit markets began to stage a recovery towards the
end of last week, with the Philippines' 2032 note, for example,
up 0.75pts on Friday, according to Tradeweb, while the long-end
of even Indonesia's curve was performing better with the
sovereign's 2042 notes also up 0.75pts.
"I think a few investors feel they sold out too cheaply in
the last couple of weeks and are now coming in to cover some
more shorts," one trader said.
(Reporting By Steve Garton, additional reporting by Umesh
Desai, Manju Dalal and Sudip Roy; Editing by Matthew Davies)