Time to pray: These Asian nations will fear Fed tapering the most in 2014

New Year, new worries.

At least, that will be the case for some countries in Asia.

According to UBS Research, some Asian economies are in for rough times in 2014, especially because of the imminent tapering of the US Federal Reserve’s bond-purchase programme (the wind-down starts from January).

In a report titled “Asia Outlook 2014: Reforms, restructuring, and eight issues to ponder,” the investment house notes that Fed tapering could turn foreign inflows into outflows for some nations. It picks India and Indonesia as the most vulnerable to Fed tapering in the region.

“We stay cautious on currencies of markets that are more domestically oriented and reliant on capital inflows, such as theIndian rupee (INR) and Indonesian rupiah (IDR),” it notes.

Thailand is also vulnerable, mainly because political turmoil could make investors uneasy about parking money  there.

UBS says that since the end of 2008, India, Indonesia and Thailand have attracted $90 billion altogether into their local government bond markets, which could witness turbulent outflows as global investors become more choosy about where they want to invest their funds when the Federal Reserve begins to gradually suck money out from the financial system.

In addition, politically, also, the three nations have crucial events coming up in the new year. Given below is what UBS had to say about each of them:

India

“India will hold general elections in 2014. Comprehensive reforms are critical, but these are low-hanging fruits that could be implemented without new legislation.One example is the approval of various pending industrial projects.

“Recent polls suggest the NDA opposition coalition led by the BJP party could take over the reins in May. If the NDA fails to accumulate enough votes, it may end up in a weak position relative to other outside support parties that may not back Modi. In our view, a Modi-less government will surprise investors and douse hopes for swift reforms,” says UBS.

Indonesia

“In Indonesia, the most popular contender for the presidential post, according to polls, has yet to be nominated by any party. Jakarta’s governor Joko Widodo is known for championing public infrastructure investments and has a reputation for clean politics. We think the PDI-P party is increasingly likely to nominate him as its standard-bearer.

“Since the party also wants to command as many votes as possible and is looking to have bargaining power over potential coalition partners, Widodo’s nomination could be made official in early 2014.

“While the issues facing Indonesia will be hard to resolve for any incoming president, we think infrastructure construction companies are almost certain to see a revival of fortunes should Widodo be elected,” UBS predicts.

Thailand

“Amid a slowing economy, Thailand’s opposition Democrat Party has reignited a deep-seated conflict between the party and the Shinawatra dynasty. This has culminated with the year-end dissolution of the Thai parliament and Prime Minister Yingluck Shinawatra calling a snap election by mid-February.

“Opposition leader Suthep Thaugsuban’s political agenda is vague but seeks to replace Thailand’s constitution and democratic institutions. It remains unclear whether his party would be prepared to accept another defeat at the polls at the hand of Shinawatra.

“The key casualty from this political deadlock is the Thai economy, which has suffered a sharp growth slowdown in 2H13 (second half of 2013). There is an increasingly high likelihood that the execution of the 2 trillion thai baht infrastructure plan will be delayed due to political obstacles, challenging Thailand’s 2014 growth outlook, in our view,” UBS notes.

[Image Credit]

P.S: This is the last post for 2013. Wallofmoney will be back on January 6, 2014.

Wish you all a very happy and prosperous New Year!

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