Fears mount of foreign fund outflow from Southeast Asian markets

WATARU YOSHIDA, Nikkei staff  writer

SINGAPORE -- With more foreign investors dumping the region's shares and local currencies trending weaker, the investment exodus out of emerging Southeast Asian nations has become harder to ignore.

     Malaysia is going through political turmoil and Indonesia is suffering from a double-whammy of current-account and fiscal deficits. Both nations' currencies have fallen to depths not seen since the Asian currency crisis of the late 1990s. Factors like a possible U.S. interest rate hike, a slowing Chinese economy and the Greek debt crisis brought on this state of affairs.

     The currencies of key Southeast Asian nations are generally weakening against the greenback. The Malaysian ringgit was recently trading at around 3.8 per dollar, more than 8% weaker than at the start of the year. The ringgit was touching 17-year lows in the beginning of July. The Indonesian rupiah is now trading in the 13,300 range against the dollar, a level not seen since August 1998. The Thai baht and the Philippine peso are also losing strength.

     The main cause can be found in the outflow of foreign investment funds. According to financial research firm Malaysian Industrial Development Finance, foreign investors have been net sellers of stock in principal Southeast Asian markets since the end of April. Foreign-affiliated funds had sold a net $1.96 billion in the Malaysian market between April 27 and July 10. For Indonesia, it was $1.06 billion, and $990 million for Thailand.

     A significant amount of funds flowed into the Southeast Asian stock markets from 2014 until the start of this year. Stocks were hitting record prices in places like Indonesia and the Philippines amid hopes of economic growth.

     But then came the anticipation that the U.S. Federal Reserve will raise interest rates by year's end, the Chinese stock market crash and the troubles with the Greek bailout. That caused investors to seek safer harbors, and the money has been flowing out of developing nations and into the U.S. and other places.

     Emerging nations with weak economic fundamentals are being hit by the sell-offs. Investors are renewing their focus on risks they had previously discounted. Malaysia and Indonesia are the biggest targets, and their neighboring Southeast Asian countries are also getting caught in the storm.

     Malaysia's political instability presents the biggest risk factor. Prime Minister Najib Razak and his predecessor, Mahathir Mohamad, have been trading public accusations surrounding the government investment fund 1Malaysia Development and its debt load of over $11 billion. The wealth fund found itself in another scandal earlier this month when it supposedly deposited millions of dollars into Najib's personal bank accounts. An official investigation is looking into the matter.

     More observers are noting that if Najib's hold on power is weakened, government-sponsored projects will be delayed. Malaysian exports are suffering due to slumping crude and palm oil prices, pouring salt on the political woes.

     Indonesia's biggest weakness are the brittle frameworks supporting the economy. The country's current-account balance is in the red and it has a budget deficit, prompting foreign capital to head for the exit door. The money originally came in on hopes that the fourth-largest population in the world, at 250 million, would lift private consumption.