Weekly: Forecasting Asia’s 2020 funding requirement

The markets are stepping into 2020 with little concern about external debt sustainability. Armed with USD5.5trln in FX reserves, Asian emerging market economies appear in good shape.
Taimur Baig, Duncan Tan08 Nov 2019
  • In fact, total external financing obligations of some Asian economies are very large
  • India, Indonesia, and Malaysia top the list of funding vulnerability
  • The reserves cushion of China and the Philippines have diminished as well
Photo credit: AFP Photo

Looming rollover needs

Given this year’s sharp decline in bond yields and extensive policy easing carried out by central banks worldwide, the markets are stepping into 2020 with little concern about debt sustainability in the sovereign or corporate space. As the stock of negative yielding debt (investment grade) has ballooned to USD12.5trln, any company or country coming to the market with modestly positive yielding issuances looks set to receive considerable bid and enjoy spread compression.

The global economy needs such benign conditions to persist through 2020. While low energy and agriculture commodity prices as well as overall slowing of import demand have kept the current account deficit of Asian economies like India and Indonesia under check, funding conditions are matters of critical importance for all economies, regardless of the size or sign of their current account balances.

The reason for this is simple; both sovereign and private sector external financing needs run independent of current account dynamics. For instance, a country like China, which has sustained current account surpluses for decades, still needs fresh foreign capital every year to take care of external debt redemption and rollover needs.

Related to financing requirement is each economy’s external buffer, namely international reserves. Asian central banks, by international comparison, have pursued prudent policies in recent decades, boosting their reserves base. We expect EM Asia’s reserves to exceed USD5.5trln in 2020.

But is that ample? Repeated bouts of foreign exchange volatility during the course of this decade have taught investors that spikes in global risk aversion take place frequently, and currencies are often the first casualty. Also, the data show that markets tend to invariably put pressure on those currencies that face the most external funding needs.

In the following analysis, we bring together discussions on three key variables related to external financing. First, we look at short-term debt in Asia. We leave China’s outsized figures out of the first three charts and examine its case later. We also leave out Hong Kong and Singapore from this analysis, as these financial centres, by virtue of being the booking and reporting hub of numerous multinational companies, are characterised by current account and debt figures that are not comparable with the other economies.

As for short-term debt, note that the calculation should not only include debt with maturity of one year or less, but also longer-term debt that’s falling due in the next twelve months (i.e. short term debt on a residual maturity basis), foreign currency deposits in the banking system, and trade credit. Not all such liabilities are equally risky, but they all have to be financed nonetheless. For comparison, we plot similar outturns from 2013, the last time Asian economies saw severe funding crunch (around the taper tantrum episode). We refrain from scaling the figures by GDP as we want to shed light on the volume of funding needed in a comparable manner. Also, we take care of scaling issues toward to the end of the analysis.

Short-term debt

The rollover needs of our selected seven Asian economies in 2020 are nontrivial, amounting to USD855bn. Note that these figures are likely to be understated, as among these seven economies, we only have original maturity debt data of Malaysia, South Korea, and Taiwan (while the rest, appropriately, report on residual maturity basis). Compared to 2013, India’s obligations are up the most (54%).

Current account

For the 2020 current account forecast, we take the IMF’s projections. Again, India’s figures are the most striking relative to 2013.

Also of note is the fact the Philippines will likely see a current account deficit in 2020, while Thailand is slated to report a large surplus.

FX reserves

Having been chastened by currency volatility of 2013, the central banks of both India and Indonesia have made progress in strengthening their war chests, but India’s reserves accumulation is by far the most impressive in Asia. Taiwan, South Korea, and Thailand have also moved into more comfortable territory.


China’s corresponding figures are so much larger than the rest that they require examination in isolation. Looking at its three critical external metrics, it is clear that China’s obligations have risen while their reserves cushion has declined markedly in recent years.

Putting it all together

Now we put everything together for the eight economies in our analysis. The denominator of the ratio plotted in the following chart is the gross external requirement (short term obligations plus the current account), while the numerator is international reserves.

Relative to 2013, only one economy in our eight-country sample has seen a sizeable rise in funding cushion—Malaysia. The bottom three are India, Indonesia, and Malaysia; we expect the currencies of these economies to face the most stress if funding conditions were to tighten next year. But even among the surplus economies of Asia, the worsening of the ratio is striking, especially in the cases of China, South Korea, and the Philippines. Of these three, we detect growing external vulnerability in two economies—China and the Philippines.

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Taimur Baig, Ph.D.

Chief Economist - G3 & Asia
[email protected]

Duncan Tan

FX and Rates Strategist - Asean
[email protected]

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