SINGAPORE/BANGKOK -- Southeast Asia's central banks are moving to shield their economies and financial markets from an uncertain regional outlook triggered by rising U.S. interest rates and Washington's trade war with Beijing.
After standing pat on Thursday, the Federal Reserve is widely expected to increase rates again in December as the U.S. job market goes from strength to strength. The view that the Fed will continue to gradually tighten policy sent stock markets across Asia falling.
Central banks in Asia are taking various steps to pre-empt further Fed action.
Bank Indonesia and the Monetary Authority of Singapore agreed Monday on a $7 billion local currency swap and $3 billion repo agreement.
"In the midst of this global economic uncertainty, economic cooperation was our focus," Indonesian President Joko Widodo has said.
Singapore will, in effect, shore up Indonesia's credit to curb speculative selling by hedge funds and other investors. The Indonesian rupiah had recently fallen under the psychologically important threshold of 15,000 per U.S. dollar to a 20-year low but is showing signs of stabilizing following the October deal.
Most of Asia's bilateral currency swap agreements involve the monetary authorities of China or Japan dispensing the funds. The MAS' decision to improve the credit of a neighboring country is "highly unusual," said a source familiar with international finance.
But market opinion on Indonesia, which is running current-account deficits, has yet to fully recover. Bank Indonesia has already raised interest rates five times since May and is likely to do so again this year to prevent the rupiah from softening further.
Thailand, whose policy rate has been kept relatively low at 1.5% per year, is increasingly expected to raise rates as well for the first time in seven years. The central bank is concerned about overheating in the real estate market after years of easy money. The default rate on mortgages from financial institutions at the end of June was 3.4%, 1 percentage point higher than three years earlier. At the last policy meeting, two of the central bank's seven board members pushed for a rate hike.
Southeast Asian central banks are under further pressure to take action in anticipation that the Fed will continue to raise rates. Low domestic interest rates make a country relatively less attractive to investors and could trigger capital flight and currency depreciation.
Indonesian stocks fell 1.5% in Friday morning trading after the Fed offered no sign of slowing its pace of rate increasing. Markets in Singapore, Thailand, the Philippines and Malaysia also took a hit.
The region's central banks have been forced to calm investors wary of emerging markets. Southeast Asia is also vulnerable to the trade war's impact given its proximity to China.
In the Philippines, where inflation is rising, the central bank decided at the end of September to raise the policy rate for the fourth time in a row. Singapore's MAS also tightened its monetary policy at both of its board meetings this year, in April and in October.
In the wake of the 1997 Asian financial crisis, the Association of Southeast Asian Nations set up a multilateral currency swap arrangement with Japan, China, Hong Kong and South Korea. The Chiang Mai Initiative, as it is known, draws from a pool worth $240 billion. Many countries also have bilateral agreements, such as with Japan and China.
Multilayered frameworks like these serve to enhance credit, and the Chiang Mai pact has never had to be used. Many members of the agreement also have relatively high growth rates compared with developed nations. And unlike Pakistan, which was forced to ask the International Monetary Fund for support, Southeast Asia does not face a grave economic crisis.
There is concern, however, that funds will flow out of Southeast Asian markets should investors try to avoid risk while the effects of the U.S.-China trade war remain unclear. The region's central banks are expected to continue considering measures to maintain or defend their currencies.