This paper quantifies the likelihood of spillovers to emerging ASEAN-4 economies (Indonesia, Malaysia, Philippines and Thailand) and Korea from shifts in US monetary policy, given the increasing hawkish rhetoric by the Fed to rein in strong US inflation. Using a newly constructed local stress index (LSI) to capture stress levels in the local currency-denominated sovereign bond and currencies markets, and applying the Capital Flows at Risk (CfaR) methodology, it is found that the spillovers to local market stress and the attendant risk of capital outflows in ASEAN-4 and Korea are non-trivial. The estimated LSI suggests that strains have emerged in local bond and currencies markets on more aggressive US Fed tightening policy. The level of stress is comparable to the previous stress episode in August 2015 when China announced changes to the renminbi/US dollar central parity rate. Counterfactual analysis using the CfaR framework suggests that shocks to 10-year US real rates would sharply increase the probability and magnitude of non-resident portfolio capital outflows from the region over a six-month horizon.
Working Papers