January 9, 2017 / 8:26 AM / 7 months ago

Banks whiplashed by Asia's distrust of hot money

People walk by the JP Morgan & Chase Co. building in New York in an October 24, 2013 file photo.Eric Thayer

SINGAPORE (Reuters Breakingviews) - Global banks are being hit by Southeast Asia’s distrust of hot money. Indonesia plans to introduce new rules to ensure research about the health of its economy and financial markets is “factual”. It follows a decision by Jakarta to cut business ties with JPMorgan. Meanwhile Malaysia has been clamping down on currency trading. The skittishness moves serve to highlight the region's vulnerabilities ahead of its impressive growth profile.

JPMorgan has been dealt a harsh punishment. The U.S. bank was dropped as a primary dealer for Indonesia’s domestic sovereign bonds after its analysts issued an “underweight” recommendation on local stocks in November. The tactical trading call seems fair given the correlation in recent years between the performance of Indonesian bonds and stocks, and the sell-off in emerging market debt following the U.S. election of Donald Trump.  

It follows an alarmist move late last year by Malaysia's central bank to demand pledges from banks that neither they nor corporate clients would trade the ringgit offshore, via the "non-deliverable forward" markets. That was a heavy-handed way to assert existing rules and minimise pressure on the ringgit, which has fallen almost 40 percent against the dollar in three years. It does nothing to reassure investors worried about the potential return of capital controls.

These actions betray the fears of two countries where foreigners own around 40 percent or more of government bonds. Under Trump, the United States is likely to focus on boosting domestic investment, which will make it look relatively attractive for investors, at least in the short-term. Meanwhile the spread between interest rates in America and emerging markets will narrow as the Federal Reserve continues to hike. 

Against this difficult backdrop, Southeast Asian nations can help themselves by focusing on the positives. Malaysia still offers a not-too-shabby 4.2 percent yield on its 10-year investment grade bonds. There are even more reasons to cheer in Indonesia. Its large economy is on track to grow 5 percent; Jakarta has pushed through a successful tax amnesty; and a cabinet reshuffle has brought back ex-World Bank Managing Director Sri Mulyani Indrawati as finance minister. Shooting the messenger will only backfire. 

On Twitter twitter.com/ugalani

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