Spot the Dollar Squeeze Difference

(Bloomberg Gadfly) -- There is a dollar squeeze in Asia, but it's nothing like the crunch of 2013.

Unlike three years ago, the banking system most exposed to tight hard-currency funding conditions isn't India. It's Malaysia. And that's probably one reason investors are nervous about the nation's banking stocks:

To see why such misgivings may be justified, consider the simple way a bank in Asia can raise short-term dollar resources: borrow locally in the interbank market, use those funds to buy greenbacks in the spot market and then sell them forward by, say, three months.

In the summer of 2013, after Ben Bernanke first hinted at tapering the Federal Reserve's quantitative-easing program, the total cost of this operation had shot up to 1.2 percent for Indian banks, compared with three-month dollar Libor of 0.28 percent. Dollar liquidity was suddenly so elusive that the central bank gave a subsidy to lenders for raising foreign-currency deposits from expat Indians at high interest rates.

That was then. Dollar Libor has since surged to as much as 0.87 percent. That's partly because of expected monetary tightening and partly because of a seismic overhaul of the $2.6 trillion money-market industry that kicks in next month.  

But Indian banks aren't breaking a sweat: they can effectively borrow the U.S. currency at just 0.39 percent, a discount to Libor.

Not everybody in Asia is so fortunate. If there's truly a dollar-funding crunch for banks in the region ex Japan, it's in Malaysia, where three-month dollar borrowing is as expensive as 1.44 percent.

The timing couldn't be worse. Several countries are investigating allegations of theft and laundering of billions of dollars from 1MDB, a Malaysian state fund whose advisory board was until recently headed by Prime Minister Najib Razak.

Meanwhile, Malaysian banks' deposit growth has stalled, led by a 10 percent decline in foreign-currency deposits so far this year. Advances have also slowed, though not as much. Loan-to-deposit ratios, as a result, are now in excess of 87 percent.

So while the big publicly traded Malaysian banks -- Public Bank, Maybank, CIMB, Hong Leong and RHB -- still earn a respectable 0.9 percent return on assets on average

Making matters worse, after a brutal 19 percent slide in 2015, the Malaysian ringgit has risen almost 4 percent this year, and is the only Asian currency other than the Philippine peso that isn't expected to weaken against the dollar by the end of next year, consensus forecasts show.

Those expectations of stability could prove another roadblock. The way the hard-currency funding deficit is shaping up in Malaysia's banking system, it might actually be more helpful for lenders if the ringgit got cheap enough for the country's non-commodity exports to rev up, and for dollars to start pouring back in.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

1. Compared with a return on assets of just percent for bad-loan-plagued Indian lenders.

To contact the author of this story: Andy Mukherjee in Singapore at amukherjee@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.