Why Asia’s dollar squeeze is different this time
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Singapore: There is a dollar squeeze in Asia, but it’s nothing like the crunch of 2013.
Unlike three years ago, the banking system most exposed to tight hard-currency funding conditions isn’t India. It’s Malaysia. And that’s probably one reason investors are nervous about the nation’s banking stocks.
To see why such misgivings may be justified, consider the simple way a bank in Asia can raise short-term dollar resources: borrow locally in the interbank market, use those funds to buy greenbacks in the spot market and then sell them forward by, say, three months.
In the summer of 2013, after Ben Bernanke first hinted at tapering the Federal Reserve’s quantitative-easing program, the total cost of this operation had shot up to 1.2% for Indian banks, compared with three-month dollar Libor of 0.28%. Dollar liquidity was suddenly so elusive that the central bank gave a subsidy to lenders for raising foreign-currency deposits from expat Indians at high interest rates.
That was then. Dollar Libor has since surged to as much as 0.87%. That’s partly because of expected monetary tightening and partly because of a seismic overhaul of the $2.6 trillion money-market industry that kicks in next month.
But Indian banks aren’t breaking a sweat: they can effectively borrow the US currency at just 0.39%, a discount to Libor.
Not everybody in Asia is so fortunate. If there’s truly a dollar-funding crunch for banks in the region ex Japan, it’s in Malaysia, where three-month dollar borrowing is as expensive as 1.44%.
The timing couldn’t be worse. Several countries are investigating allegations of theft and laundering of billions of dollars from 1MDB, a Malaysian state fund whose advisory board was until recently headed by Prime Minister Najib Razak.
Meanwhile, Malaysian banks’ deposit growth has stalled, led by a 10% decline in foreign-currency deposits so far this year. Advances have also slowed, though not as much. Loan-to-deposit ratios, as a result, are now in excess of 87%.
So while the big publicly traded Malaysian banks—Public Bank, Maybank, CIMB, Hong Leong and RHB—still earn a respectable 0.9% return on assets on average, revenue growth could taper off in the second half and higher funding costs might squeeze margins, according to Bloomberg Intelligence analyst Diksha Gera.
Making matters worse, after a brutal 19% slide in 2015, the Malaysian ringgit has risen almost 4% this year, and is the only Asian currency other than the Philippine peso that isn’t expected to weaken against the dollar by the end of next year, consensus forecasts show.
Those expectations of stability could prove another roadblock. The way the hard-currency funding deficit is shaping up in Malaysia’s banking system, it might actually be more helpful for lenders if the ringgit got cheap enough for the country’s non-commodity exports to rev up, and for dollars to start pouring back in. Bloomberg
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.