New | Stronger US dollar raises risks for Asian economies

A rapidly strengthening US dollar amid anticipation of tighter US monetary policy is putting some Asian economies at risk of recession or financial market turmoil, with excessive external borrowing making them particularly vulnerable to capital outflows, a Moody's report has warned.

The ratings agency said Asian economies such as Malaysia and Thailand were more vulnerable to the negative impact from a soaring greenback, as their borrowing in non-local currencies accounted for a big portion of their liabilities. But the mainland could be an exception, thanks to its largely closed capital account and the yuan's stable performance against the US dollar.

As the US dollar appreciated, external debt refinancing would become expensive as capital was expected to leave emerging markets as dollar-denominated assets became attractive.

Meanwhile, local companies would find it more expensive to pay foreign currency debt as their local currencies suffered from deep depreciation against the US dollar.

"A disorderly reaction to tightening of US monetary policy could lead to significantly worse economic outcomes for a few vulnerable countries and markedly hamper global growth for a few quarters," Moody's analysts led by Marie Diron said in a report released yesterday. "However, it is unlikely to trigger a global recession.

"Pressure on currencies and foreign exchange reserves could lead the central banks to raise interest rates, which would exacerbate the tightening of financing conditions. Heightened risk aversion would combine with higher financing costs to weigh on investment and consumption."

The US dollar appreciated by about 13.5 per cent in effective terms in the year to last Thursday, it said.