Foreign-currency loans by companies in Indonesia, the Philippines, Vietnam, India and Malaysia came to US$36 billion at the end of October, up 52% from the same period last year, the Wall Street Journal reports, citing data from Thomson Reuters LPC.
While companies benefit from the near-zero interest rates on the US dollar and the euro, for example, they run the risk of getting hit by local-currency weakness, since they will be servicing their foreign currency loans with local-currency earnings.
So far this year, the Indonesian rupiah is down 17% against the US dollar, the Indian rupee is off 13% and the Malaysian ringgit 4%, notes the Journal. It’s not quite as bad as the run-up to the 1997 Asian financial crisis, when the rupiah plunged 77%.
But things can become more volatile when the US Federal Reserve starts winding down its bond-buying program. Talk about that happening in May had sharply weakened Asian currencies against the US dollar, because a tapering of quantitative easing could cause global benchmark interest rates to rise. What looks like cheap loans now will become more expensive in that event.
In general, an Indian or Indonesian company would have to pay more than 7% for a domestic loan, reports the Journal. By borrowing in US dollars, India’s Reliance Industries paid as low as 1.7 percentage points over the benchmark three-month US dollar Libor, which on 18 November was 0.238%, on one of the tranches of its US$1.75 billion multicurrency loan last week.
“Asian investors anticipate that tapering by the Federal Reserve [of its bond-buying program], should it occur at some stage in 2014, will result in 10-year U.S. treasuries’ yields rising above 3% [from just below 2.7% now], and wider credit spreads for Asian corporates,” the Journal quoted credit rating agency Fitch Ratings.
“This, in turn, is likely to lead to tighter borrowing conditions, and a higher rate of defaults among Asian corporates.”