U.S. rate hike casts shadow on regional markets

U.S. rate hike casts shadow on regional markets

SINGAPORE (AFP): Further U.S. interest-rate increases could speed up the outflow of foreign capital from Southeast Asia amid a loss of confidence in regional economies and fears of a banking crisis, an investment house warned.

Thailand is most vulnerable, according to Vickers Ballas Investment Research, which predicted another 50 basis-point increase "within the next one to two quarters" in the U.S. Federal Reserve fund rate.

It said a rate hike will produce "strains" on markets within the Association of Southeast Asian Nations (ASEAN), which groups Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

"To a lesser or greater degree, the ASEAN economies are in the midst of an economic slowdown," said the Vickers Ballas Regional Strategy report. "There appears to be de-rating of the ASEAN markets by foreign investors.

"There are doubts about the euphoria over the Asian miracle. This loss of confidence is aggravated by the fear of a banking crisis due to the exposure to the property sector."

It said short-term foreign capital was "heading out" and further U.S. interest rate hikes "could "accelerate the flow."

"Thailand is the most critical. Singapore is likely to be the only exception," Vickers Ballas said.

Tempted by expectations of attractive returns and secure lendings, banks have in many cases increased exposure to the property sector to high levels, according to analysts.

Thailand has been faced with a finance sector crisis amid a property glut and falling prices.

The report warned that Thai interest rates have been kept "artificially high" despite its deepest economic downturn in a decade.

"The fear is what will another 50 basis point increase in the Fed fund rate do to Thai rates? If it threatens to trigger a capital outflow, interest rates will have to be pushed up sharply. It will increase the economic problem."

Vickers Ballas, however, adopted a "neutral position" on the Thai market, saying the longer term was positive. An export-led recovery will set off a "positive chain reaction" and the return of confidence in the economy will allow interest rates to fall, it said.

It said the drain on regional liquidity will have a negative impact on the Hong Kong market, tempering "our otherwise bullish view on earnings prospects, and the benefit of an expanding Chinese economy."

The securities house took a neutral stance on Hong Kong.

It said the Singapore market was on "a recovery play" on the back of a manufacturing-led economic rebound in the second half of 1997, and took an "overweight position" on the city-state.

"The safe haven qualities of the Singapore market are becoming more prominent against the backdrop of increased volatility in the region," it said.

Vickers Ballas took an "underweight" stance in the Philippine market, saying credit restraints will weigh down the bourse in the near-term and poorer than expected results of some big companies could lead to a lowering of consensus earnings forecasts.

"Given the fragile sentiment, a further Fed fund rate hike will be very unhelpful. It will pressure the peso, and cause the central bank to raise the overnight rate," it said.

It said Malaysia was "looking less attractive," citing the negative sentiment generated by recent credit restraints and continued high interest rates, and took an underweight stance on it.

"Interest rates will stay high... Further hikes in the Fed fund rate will not help. It could be another factor nudging the reversal of funds flow," it added.