Which countries are highly exposed?
According to Morgan Stanley, the exogenous rise in real rates will constitute a pro-cyclical monetary tightening for all the countries in the region. This will weigh on credit growth and domestic demand and accelerate the pace of formation of non-performing loans in the banking system.
Rising real rates will imply an increase in the cost of capital and debt burden of borrowers.
Moreover, an environment of rising real rates with moderating GDP growth tends to be less supportive of risk assets, which would further depress domestic consumer/corporate confidence.
Overall, this suggests downward pressures on the region’s growth outlook. We use a three-factor framework to assess individual country exposure to this trend of rising real rates/dollar: 1) Reliance on external sources of funding, 2) Increase in domestic leverage ratios 3) Starting point of real interest rates
Our analysis suggests that within AXJ, countries with current account deficits or close to balanced current accounts will face greater immediate pressures due to funding risks.
Countries that have levered up meaningfully over the past few years when real rates were low will also be exposed (Exhibit 3).
These metrics indicate that India, Indonesia, Australia, Thailand, Hong Kong and Singapore will be most exposed. The adjustment in countries with CADs has taken place more quickly and suddenly, and we expect that to continue.
Yet the continued upward pressures on real rates in the region will slowly but surely be felt across the region.
Do you know more about this story? Contact us anonymously through this link.