Interest rates

How will rising interest rates affect the Southeast Asian economy?

Like most emerging market (EM) countries, the Southeast Asian region has come under downward pressure from global inflation fears and the rising dollar. Rate hikes by the US Federal Reserve could shake the armor of the economy, but the economy should remain resilient, according to an article by The diplomat.

“We’ve seen equities fall. We’ve seen cryptocurrencies fall. We’re seeing rising mortgage rates. And we’re seeing capital outflows from emerging markets, with many currencies losing value versus to the dollar,” James Guild wrote.

“The good news is that we knew these US rate hikes were coming and policymakers around the world, especially central bankers, had plenty of time to prepare,” Guild added.

Emerging countries are usually linked to the performance of the local currency, and although the dollar has risen against these currencies, central banks were already anticipating this move by the Fed. Thus, monetary policy measures were probably already in place to counter the rise in rates.

“Many central banks in the region have taken steps to prepare by hoarding foreign exchange reserves precisely so they can support the currency during periods of volatility like this,” Guild wrote. “The Bank of Thailand, for example, closed 2021 with $224.8 billion in available foreign exchange reserves. Other countries, such as Indonesia, have seen their commodity exports soar, helping to strengthen the current account and stabilize the currency in the short term.

“In the meantime, we will almost certainly see interest rate hikes across the region as central banks seek to either retain capital or attract new capital flows by offering higher yields,” Guild added. . “That won’t be a problem in itself.”

Get exposure to Southeast Asia

If the worst of the equity selling pressure has passed, investors seeking exposure to emerging markets in Southeast Asia can look to Global X FTSE Southeast Asia ETF (ASEA).

ASEA seeks to provide investment results which generally correspond to the price and yield performance of the FTSE/ASEAN 40 Index. The underlying index tracks the performance of the shares of the 40 largest and most liquid companies regions of the Association of Southeast Asian Nations (ASEAN): Singapore, Malaysia, Indonesia, Thailand and the Philippines.

The rise in commodities, as mentioned in the Reuters report, is concentrated in Indonesia and Malaysia. ASEA effectively gives exposure to this country pair as a way to play on commodity inflation.

ASEA Fund Highlights:

  • Efficient access to a large basket of Southeast Asian titles.
  • Targeted exposure to a specific region.

For more news, insights and strategy, visit the Thematic investment channel.