Macroscope | Malaysia emerges as Southeast Asia’s weak spot

The plunge in oil prices and the surge in the US dollar are wreaking havoc on emerging market (EM) assets, notably local currencies.

EM equities have already fallen 4 per cent since the beginning of this month, with sentiment further undermined by Tuesday’s unexpectedly sharp fall in the mainland’s closely watched stock market on fears of tightening liquidity in the banking sector.

The seemingly unending slide in the price of Brent crude - which has fallen to just under US$66 a barrel, its cheapest level in five years - and the recent strength of the greenback stemming from increasing divergences between US and European monetary policy are weighing heavily on EMs.

Emerging Asia, however, has proved relatively resilient to the deterioration in sentiment, partly because investors have been much more bullish on the region compared with Emerging Europe and Latin America but also because Asia’s main economies are all net oil importers and thus benefit from the fall in oil prices to varying degrees.

Yet one country in the region sticks out like a sore thumb in terms of its vulnerability: Malaysia.

Not only is Southeast Asia’s third-largest economy a net oil exporter, it also happens to have one of the largest shares of foreign holdings of local currency bonds in EMs, making it more sensitive to an increase in US Treasury yields.