'Original sin' returning to haunt South-east Asian borrowers: Analysts

NEW YORK - Indonesian and Malaysian governments and companies have sold more foreign-currency debt this year than they did in the whole of last year as a global bond rout pushes up yields and their currencies weaken.

Analysts say the South-east Asian countries are at risk of repeating mistakes of the late 1990s, when a heady mix of foreign borrowing with weakening currencies led to a hangover that was the financial crisis. After that meltdown, economists Barry Eichengreen and Ricardo Hausmann coined the term "original sin" to describe the difficulties encountered by developing nations borrowing overseas.

"There are worrying signs that original sin is returning," said Mr Chua Hak Bin, head of emerging Asia economics at Bank of America Merrill Lynch in Singapore. "Governments are forced to opt for more foreign-currency debt financing, as local bond yields surge and foreign appetite diminishes."

Indonesia's rupiah fell to its lowest level since 1998 last week and Malaysia's ringgit dropped to within 1 per cent of a dollar peg installed that year to stem a currency collapse. As the dollar gains and the Federal Reserve prepares to raise interest rates, it will become costlier for Asian borrowers to service foreign-currency debt, Mr Eichengreen said.

"I doubt that the ultimate consequence will be another Asian financial crisis, but it will mean rougher sledding for the principal emerging markets."

Indonesia has sold US$6 billion (S$8.05 billion) of foreign-currency bonds this year, compared with US$6.8 billion last year, Finance Ministry data shows, and still plans to offer euro and yen notes before year-end.

Malaysia has issued US$1.5 billion of the debt this year after no sales last year. Companies from the two nations have sold US$11 billion of global securities this year, more than the US$10 billion total last year, data compiled by Bloomberg shows.

Foreign-currency borrowing accounted for 34.3 per cent of Malaysia's gross domestic product (GDP) on March 31, compared with 60 per cent at the end of 1998, the central bank said in an e-mailed response. It said the govern-ment's share was 1.5 per cent of GDP.

"The current landscape of Malaysia's external position is different from the situation leading to the Asian financial crisis," Bank Negara Malaysia said. "With the advancement of the domestic capital market, Malaysian companies have been able to tap into domestic sources of funding."

Indonesia is not selling too many foreign-currency bonds, according to Finance Minister Bambang Brodjonegoro. "If we sell in different currencies, that spreads out our risk and makes our local market less vulnerable to flow reversals," he said in an interview in Jakarta. "What would be risky is if we sell too many rupiah bonds."

Too much foreign debt can fuel currency and capital market volatility, hurt ratings and restrict monetary policy flexibility, according to Bank of America.

"What could be very detrimental for these countries is not so much the Fed hike, which has been very well telegraphed, but rather... the timing and the expectations of the overall (Fed) tightening cycle," said Mr Jean- Charles Sambor, the Asia-Pacific director of the Institute of International Finance here. "If markets start repricing this, it would be very negative and impact Indonesia and Malaysia first."


A version of this article appeared in the print edition of The Straits Times on June 17, 2015, with the headline ''Original sin' returning to haunt South-east Asian borrowers: Analysts'. Print Edition | Subscribe