Asia Macro Matters: Excess Liquidity Indicator – an update - BNP Paribas

The 9 August decision by the US Fed to maintain interest rates to at least mid-2013 augurs well for our proprietary BNPP excess liquidity indicator. As of end July, this indicator shows growth of 9% y-y. While it is near its historic peak, it would need a sharp downturn to cause us to turn bearish. We do not think this is likely to happen anytime soon as the fed fund rate is expected to stay low and the USD is forecast to stay weak.

From an Asian perspective, the continued expansion in our excess liquidity indicator has two major implications. First, it would mean foreign reserves will continue to rise steadily and boost money supply in the region. Indeed, Singapore’s foreign reserves shot up to a new peak of USD249.1b in July, up by USD6.9b in June and in the process pushed interest rates down and money supply growth up 19% y-y in June. This is the same for the rest of the region where their foreign reserves have also been rising steadily: Korea (+USD6.6b to USD401b), Indonesia (+USD3b to USD123b), Thailand (+USD2.7b to USD187b), Philippines (+USD2b to USD71b) and Malaysia (+USD1.1b to USD135b) .

Second, it may not sound correct right now but the robust growth in our excess liquidity indicator is good news for Asian equity markets over the medium term. Note the correlation between our excess liquidity and the MSCI Asia ex-Japan is 0.665. In our view, a correlation any higher would mean that other drivers will be irrelevant. That said, current negative sentiment (arising from the fiscal problems in the EU and concerns over the potential for a double-dip recession in the US economy) can and will drive equity markets down from time to time.

The bottom-line here is that Asia’s liquidity conditions remain at a very robust level, which in our view will put them in a strong position to counter the currently volatile global financial markets. This is especially so as their fiscal positions are also in excellent shape with their public sector debt below 60%.