KUALA LUMPUR: Mongolia, Sri Lanka, Malaysia, Hong Kong, Singapore and Taiwan rank top in terms of vulnerability to the effects of sustained capital outflows, warned Moody's Investors Service today.
In a latest report, it noted the marked drop in financial asset prices in the region since the US presidential elections in November which led to currencies in the Asia Pacific region to depreciate against the dollar together with falling equity prices and reversal in portfolio flows.
Against a backdrop of tighter global financial conditions, direct vulnerability to capital outflows is limited in the region, as foreign exchange reserves generally provide coverage for external debt repayments, current account deficits are narrow and government liquidity positions are robust.
Only a few sovereigns in Asia Pacific have direct credit risks from sharp depreciations and lower capital inflows.
The few countries in the region that currently face external liquidity challenges include Mongolia, Pakistan and, to a lesser extent, the Maldives, Papua New Guinea and Sri Lanka.
Malaysia is also impacted to a lesser extent but is also vulnerable to shifts in global market conditions.
"Sustained capital outflows or markedly lower inflows pose indirect challenges for economies with already high leverage, particularly if domestic authorities are constrained in their ability to use fiscal and monetary tools to offset the tightening impact of global financial conditions."
Hong Kong, Singapore and Taiwan however have fiscal space to buffer negative shocks, it noted.
Vulnerable sectors include corporates in China, households in Australia, Korea, Malaysia, New Zealand, Singapore, Taiwan and Thailand.
"In response to negative shocks, highly leveraged corporates and households would potentially cut spending significantly.'