India, Indonesia face more capital outflow pressure: CIMB

After the FOMC comment on tapering, there has been a broad global sell off in tapering, says Shane Lee, Director-Economist of Equity Research at CIMB. He says markets still aren’t prepared for tapering to begin.

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He feels, going ahead, there will be a lot of capital outflow pressure on a lot of the ASEAN countries. Twin deficit nations like Indonesia and India for example will face more pressure and economic effect will be larger, he adds. Below is the verbatim transcript of Shane Lee's interview on CNBC-TV18 Q: Last time when we spoke with you, you were cautious on India due to the QE taper concerns and the weak rupee, quite a bit has changed since then, the rupee has recovered to the levels that we are seeing currently, what remains your assessment now that the rupee is back to 63/USD?
A: We think basically now that the Fed is firmly back on the table in terms of tapering its assets purchase programme in March but possibly spilling over the risks that may skew little bit later certainly into the first half of next year. I think that has become more apparent over the last few days where we saw the minutes from the FOMC suggesting that Fed will advance in terms of planning the communications around tapering to the market. So if that is right then we think that equity markets aren't prepared for that at the moment that we can see a broad global sell off in equities. Of course this has some fairly significant implications for the region particularly all the ASEAN countries where we see a lot more downside risk to the market than southern north-Asian countries. Q: I am going to ask you the one fear that the market has, the recent developments in China, their economic reforms etc that have been announced, there is a fear that perhaps a lot of the incremental FII money will move to China rather than to India, how have you assessed the situation in China?
A: Broadly, fairly I guess we are still positive on China on a longer-term. There are some structural problems at the moment with investment taking up too much share of the economy and that over time needs to come back in that consumption and other parts of the economy need to take center stage. But these types of policy initiatives are longer-term positives over the next few years. I think it is just an inevitable that the economy was slow, will remain recently resource intensive, so countries like Australia and Indonesia will still have some very close trade linkages, but over the longer-term those trade linkages will start to dissipate. Q: In that case with the tapering concerns and weak currencies in Asia what would be your advise to the investors?
A: There is going to be a lot of capital outflow pressure again on a lot of the ASEAN countries. It is difficult for policymakers to stand in the way of a lot of that. For example, back in May when we started to see Fed expectations, countries like Thailand and Malaysia, there was a fairly large adjustment in the currency but it seems fairly oddly. The twin deficit countries like Indonesia and India for example we think there is going to be more pressure there and that the pressures will be more extreme there that they will have possibly a larger economic effect.