For ASEAN countries such as Malaysia and Indonesia that are already battling with steep declines in currency rates, a modest US rate hike could accelerate the decline and in the process, increase funding costs for firms and consumers.
Malaysia's ringgit led regional drops, with the main factor centered around growth concerns amid political instability. According to a recent research report by the Development Bank of Singapore, the ringgit took a dramatic turn for the worse in the third quarter. Versus the US dollar, it traded 3.80 in July, the same level as when it broke the peg to the US dollar ten years ago. This was followed by a drop of 9% in August, its worst decline since the 1998 Asian financial crisis.
On the political front, Malaysian Prime Minister Najib Razak’s ongoing battle against allegations of corruption in the wake of the 1Malaysia Development Berhad (1MDB) controversy has taken a turn for the worse in recent days. Besides facing a parade of inquiries at home, he is now coming under the scrutiny of American investigators as well.
Acknowledging investors concerns, the central bank of Malaysia noted last week that "businesses in Malaysia are currently facing a set of challenging business conditions and some are likely to find themselves ill-prepared to respond".
"The [ringgit's] prospects are unlikely to improve anytime soon. Domestically, there is no light at the end of the tunnel to leadership challenges confronting PM Najib Razak. Externally, August was a rude wake up call to the vulnerability of the ringgit to external shocks," DBS noted.
Al Clark, Nikko Asset Management's global head of multi-asset is also not optimistic about the ASEAN region. He said in a previous interview that Nikko AM downgraded Asian equities a month ago when it started worrying about events in Asia. Clark believes that emerging markets, as an asset class, are not attractive.
Similarly, Elizabeth Soon, PineBridge Investments' portfolio manager noted earlier this month that while ASEAN equity valuations remain on the high side, the political climate presents problems.