India, Indonesia, Philippines to Suffer from Fed Rate Hikes in 2019

Diep Nguyen

15:35 29/11/2018

BizLIVE -

Fitch expects quantitative tightening to commence in 2019, with the aggregate balance sheets of central banks in the US, Eurozone, the UK and Japan to contract for the first time since quantitative easing began.

India, Indonesia, Philippines to Suffer from Fed Rate Hikes in 2019

Photo: Traveller Corner

Fitch expects the US Fed to continue hiking interest rates steadily, by another 75bp in 2019, which would bring cumulative rate hikes since end-2017 to 175bp. On top of this, Fitch expects quantitative tightening to commence in 2019, with the aggregate balance sheets of central banks in the US, Eurozone, the UK and Japan to contract for the first time since quantitative easing began. These forces are likely to result in a further rise in global bond yields and the dollar, and reduced capital inflows to emerging markets, including the APAC region.
Emerging markets with current account deficits are likely to feel the largest effects, namely India, Indonesia and the Philippines. They have already seen some of the steepest currencdepreciations, and are responding with interest-rate hikes and currency intervention. Indonesia has placed more emphasis on currency stability, and has correspondingly used up a greater share of its foreign-currency reserves to defend the rupiah.
We expect pressures from tightening global financial conditions to persist in 2019, punctuated by bouts of risk aversion toward emerging markets and financial market volatility. Nevertheless, strong fiscal and external buffers, along with shock-absorbers embedded in flexible policy frameworks, should enable the region’s economies to weather these pressures.
However, frontier markets such as Sri Lanka and Pakistan will need to cope with rising external pressures and refinancing risks, with possible assistance from the IMF.
The rise in offshore interest rates has begun to feed through to domestic policy settings, with rate hikes having commenced in 2018 in India, the Philippines, Indonesia and Pakistan. Hikes in the former two have been in response to domestic inflationary pressures; while Indonesia, as noted above, has focussed more on currency stability.
Fitch expects further rate hikes in 2019 along with a shallower rate-hike cycle in Australia, Korea, and Thailand. In contrast, the Bank of Japan will maintain its accommodative stance, despite some tapering in asset purchases. 
Fitch expects the region’s economies to withstand the expected tightening of monetary conditions, with two risks to watch. First, higher interest rates will contribute to some moderation in growth momentum and may pose downside risks to our projections. Second,higher interest rates will put pressure on household and corporate debt burdens, which have risen sharply since the 2008 global financial crisis. The rise in household debt has been especially pronounced in China, Korea and Thailand, and remains high elsewhere.

DIEP NGUYEN

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