Manulife: Huge uncertainty continues to weigh as markets worry about banking sector health

KUALA LUMPUR, March 22 (Bernama) -- Enormous uncertainties continue to weigh on sentiment as markets worry about the health of banking sectors, the potential economic fallout arising from the collapse of Silicon Valley Bank (SVB) and implications for central banks, most of which are still trying to tame inflation.

Manulife Investment Management (M) Bhd co-head of global macro strategy Sue Trinh considers possible channels through which the contagion might be transmitted to Asia.

She said, at this time, exposure appears to be limited and while several companies within Asia’s venture capital and tech start-up sectors have exposure to these banks, they appear to be small in scale and few have openly admitted to seeing major losses.

“If problems in the United States (US) and European banking systems were to become more acute and investor risk aversion to spike, it’s fair to say that Asian economies with large current account deficits -- and therefore are reliant on foreign capital flows -- will be most affected,” she said in a statement.

Sue said domestic credit conditions are likely to tighten; financial conditions have tightened since March 9, although conditions remain looser than they were in the middle of last year. However, lower confidence and greater risk aversion among domestic banks could result in weaker lending growth.

More broadly, tighter credit conditions and slower global economic growth will likely increase the risk of non-performing loans.

Understandably, she said the most exposed economies in the region would be those that have experienced sharp increases in interest rates and a significant rise in debt servicing costs -- South Korea, for instance, could be a concern here.

Economies with many financial institutions with low regulatory capital could be left more vulnerable than others, and India could be a candidate in this regard, she noted.

“Tighter global financial conditions could also weigh on Asian exports as demand weakens.

“Economies that are particularly dependent on trade with the US and the eurozone would be most affected; Vietnam, Malaysia, and Taiwan would fall into this category,” she shared.

Strains in the financial sector get worse, funding costs and the US dollar spike

Sue said if this were to happen, some central banks in the region may be forced to hike further than otherwise would be the case to support their currencies.

This is primarily a risk for those economies that have limited foreign currency reserves and are, as a result, highly dependent on foreign capital flows.

“Thailand, the Philippines, India, Indonesia, and Malaysia have become increasingly concerning in this regard,” she said.

Crucially, potential contagion to Asian banks emanating from this SVB episode seems limited; banks in the region are well-capitalised and direct exposures are small in scale. In addition, liquidity coverage ratios are high and deposit bases also tend to be stickier.

It's also worth noting that corporate deposits are well-diversified across industries.

“In our view, direct contagion from the recent banking scare to Asia is largely limited, to the extent that financial and macro stability positions of economies in the region are generally more robust than previous crises,” she said.

Far more important to the Asian regional outlook is the event’s impact on global growth, the US dollar funding conditions and strength.

“If the global economy manages to avoid a hard landing, and the greenback funding costs remain low (with the US dollar staying below its 2022 peak), Asia should be able to weather the storm,” she added.

-- BERNAMA