Despite enduring the longest winning streak since July 2009 – four straight months of gains in the first half of 2014 – are emerging markets currencies about to falter? This panel will look at recent FX movements and make predictions for these currencies. What is the fate of the Indonesian rupiah, Malaysian ringgit, Thai baht and, importantly, the Chinese yuan? Panel: Gundy Cahyadi, Economist, DBS Bank Jason Daw, Head of Asian FX Strategy, Societe Generale Corporate & Investment Banking Naomi Fink, CEO and Founder, Europacifica Consulting

1. Asia: regional resilience,
internal dispersion
Profit & Loss Singapore 2014
Naomi Fink
CEO, Europacifica Consulting

2. What to expect when
expectations are everything
 The “taper tantrum” in September showed the sensitivity
of global markets to Fed actions
 However, the Fed is also gauging market expectations to
time its actions – withdrawal will happen, but when
minimum damage may be done
 It is inevitable that withdrawal of liquidity will slow activity
in some sectors (e.g. commodities, high yield bonds) but
some sectors will do better than others… expect greater
dispersion.
 The question is where does Asia sit in the global context,
how vulnerable is it to global expectations for inflation
and growth? How will greater dispersion affect Asian
currencies?
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3. Asia’s relative advantages
 External position; Surplus-holding Asia still has the luxury of gradualism
in fiscal and monetary consolidation; domestic output gaps are
closing gradually, thus policy should remain comparatively
accommodative vs. the Fed’s; fiscal positions are not as extreme as
Europe’s.
 China: China’s investment-consumption shift is likely to be relatively
positive for exporters of consumer goods, though negative for raw
materials exporters.
 Financial sector health, policy leeway: Private sector leverage is one
risk, but the financial system is sound, and corporate lending is
moderate vs the 1990’s (pre Asia crisis). Ability to loosen Macro-
Prudential Policies gives some leeway if strains arise.
 Debt/equity mix: A better debt-equity balance than other regions and
a trend toward rising equity trading volumes lend capital market
support.
 Regional integration can help buffer the weaker portions of ASEAN
(Indonesia, Thailand) with export diversification boosting productivity
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4. Increasing equity interest in
Asia is a relative boon
Source: World Federation of Exchanges, IMF
• Growing Asian volume of share trading, lower debt/equity ratios
4

5. Improving productivity in
Asia (unlike Australia)
Source: FRED
5

6. Regional resilience, factors
of dispersion
 Asian asset markets have more recently showed reduced
volatility in comparison to the “Taper tantrum” of
September 2013 at times where withdrawal expectations
escalate
 Asian financial institutions appear sound – their Tier 1
capital is at global (US, European) standards; while their
liquidity ratios are slightly lower, NPL balances are much
lower than in the rest of the world. Relative financial
conditions will be an intra-regional dispersion factor.
 External surplus positions in many large Asian economies
provide a buffer, while fiscal deficits tend mostly to be
slighter than in the US, UK, Australia.
 Aside from India, monetary policy rules appear consistent,
even without considering serial correlation.
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7. Regional resilience, factors
of dispersion
Source: IMF, Europacifica
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8. One big contingency:
competitive conditions!
 Weaker currencies are exporter boons, and providing risk aversion is
contained, may support capital inflows into stock markets where
productivity (and profitability) gradually picks up.
 The connection between capital inflows and credit growth (IMF, REO
2014) may prove a drag; then again, flows into stocks vs bonds might
prove supportive of Asian economies with well-capitalized equity
markets (Singapore, Thailand).
 Inflation remaining contained thanks not only to a gradually closing
output gap but also to weaker commodity prices is also one
contingency.
 Continued structural improvement: subsidies for technological
development in industry (Malaysia) a longer-term positive to prolong
TFP advantage
 Trade before capital: regional integration initiatives such as the AEC
can help expand goods/services trade in regional currencies, paving
the way for increased local-currency capital flows (ASEAN).
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9. Long-term valuation (PPP)
Source: World Bank WDI, FRED, XE
9
24%
56%
36%
16%
42%
12% 50%
1%
0.87 6.1235 12079
107 3.274
1.27513 61.46
32.41

10. Marginal factors for OECD
and regional currencies
 AUD: Over-valued and inflated by a long run of commodity strength;
badly-diversified. Sell.
 JPY: Relatively looser policy means weakness vs USD but this will help
competitiveness, hence output.
 IDR: Relatively bearish among ASEAN currencies thanks to high
inflation, external deficit, reform uncertainty.
 INR: Bearish vs. ASEAN – alongside weaker fundamentals, could fall
behind as ASEAN ramps up productivity.
 MYR: Bullish, though likely to under-perform USD. Positive fundamentals
and promising reforms. High credit growth remains a risk, however.
 SGD: Bullish; likely to under-perform USD; high credit growth remains a
risk but positive productivity may help in the long-run.
 THB: Hurt by politics and uncertainty ahead of 2015/16 elections but
current account position may give it an advantage over IDR.
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11. Summary of key views
 Risk tolerance is likely to be a pre-requisite for Fed liqudiity withdrawal
(which is now strategic). This in turn is likely to push the dollar higher on
interest rate differentials, not flight to quality
 Sectors most inflated by cheap liquidity – such as commodities – are likely to
be the worst-hit. We are bearish on the Australian dollar and comparatively
unproductive Australia.
 Asian currencies are likely to decline vs. an appreciating dollar, but are
likely to weather volatility relatively well thanks to positive fundamentals.
 Expect divergence between external surplus holders and debtors, high vs
low inflation areas: We like Malaysia and Singapore, remain bearish on
Indonesia and India, and look for Thailand to out-perform Indonesia.
 Greater integration in the ASEAN region is likely to breed advantages in
trade competitiveness, productivity and regional resilience. We would be
long ASEAN currencies vs INR.
 The link between capital market volatility and domestic credit remains one
risk; success of Chinese investment-consumption rebalancing another.
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12. Disclaimer
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