Asia well placed to withstand Fed interest rate hikes

The US Fed looks almost certain to raise interest rates at its meeting later today. For most of Emerging Asia, higher rates in the US do not pose a major threat, even if the US Fed ends up hiking rates more aggressively than is generally expected over the next couple of years. Most countries in the region run current account surpluses (or in the case of India and Indonesia small deficits) and have a healthy buffer of foreign currency reserves, which will guard against instability in the event that US rate hikes cause foreign capital inflows to dry up. Foreign currency denominated debt is also relatively low across most of the region, which limits the risk of US rate hikes and dollar strength causing financial stress. The exceptions to this are Hong Kong and Singapore. Because of their exchange rate regimes, higher interest rates in the US automatically lead to a rise in local rates. Higher borrowing costs could lead to renewed fall in Hong Kong property prices, dragging on consumption. Higher rates could also pose problems for Singapore’s indebted households.