The Thai baht and Malaysian ringgit are under closer scrutiny from investors concerned that worsening economic data will put them in a similar predicament to the Indonesian rupiah, which plunged 11 percent this year.

The baht dropped 2.1 percent this week and the ringgit declined 0.8 percent as money was pulled from emerging-market assets on speculation the US Federal Reserve will soon start tapering stimulus. The rupiah slid 4.2 percent during the week, the most since November 2008, after the country reported a record current-account deficit on Aug. 16.

Macquarie Bank and Bank of America Merrill Lynch say the popularity of Thailand and Malaysia among overseas investors makes them vulnerable to outflows as years of economic outperformance show signs of faltering.

Thailand entered a recession for the first time since 2009 and the surplus in Malaysia's broadest measure of trade shrank 70 percent, reports showed this week. Foreign funds hold 31 percent of Malaysian debt, data compiled by Bloomberg show.

"The market appears to be on the hunt for economies running deficits with deteriorating economic activity," Chris Siniakov, chief investment officer of Asia active investments at Deutsche Asset & Wealth Management in Melbourne, which oversees 944 billion euros ($1.3 trillion) globally, said in an interview on Thursday. "The Thai baht may yet see some greater pressure."

Reserves buffer

The current-account surplus in Malaysia shrank to 2.6 billion ringgit ($787 million) in the second quarter, the closest the country's come to recording a deficit in data compiled by Bloomberg since 1999.

Indonesia had a $9.8 billion shortfall in the broadest measure of trade in the same period, while Thailand posted its third monthly deficit in June.

"Pressure is going to continue and we maintain a very negative view on Asian currencies," Nizam Idris, head of fixed- income and currency strategy at Macquarie, Australia's largest investment bank, said in a Tuesday interview from Singapore.

"It's not the same as in 1998, the countries now have the reserves to guide currencies weaker at a more reasonable pace and avoid a crisis."

Malaysian reserves stood at $138 billion as of Aug. 15, compared with $26 billion in 1998 during the Asian financial crisis, central bank data show. Thai stockpiles increased six-fold during the period, while Indonesia's have quadrupled.

Thailand's economy shrank 0.3 percent in the second quarter from the first three months, when it decreased 1.7 percent, official data show. Prime Minister Yingluck Shinawatra extended fuel subsidies last year and increased minimum wages to spur economic growth after the worst floods in almost 70 years.

Bank Negara Malaysia cut its 2013 expansion forecast to 4.5 percent to 5 percent from as much as 6 percent, compared with 5.6 percent growth in 2012, when Prime Minister Najib Razak boosted spending in the run-up to the election in May this year.

The Philippine peso lost 1.3 percent against the dollar this week after markets in Manila opened for the first time on Thursday after floods and a holiday. The economy expanded 6.9 percent in the second quarter, following 7.8 percent growth in the preceding three months, according to the median estimate in a Bloomberg survey before data due next week.

"Assets and currencies in Malaysia and Thailand are more vulnerable to this risk-off mood amid the Fed tapering speculation, but they may not see a sharp sell-off like Indonesia," Takahide Irimura, Tokyo-based head of emerging- market research at Kokusai Asset Management, Japan's biggest mutual fund that manages $38 billion, said in an Aug. 21 interview.

"Relatively stronger is the Philippines, due to its steady remittances inflows and less dependence on exports."

Spread narrows

The yield on Indonesia's 10-year rupiah debt rose 128 basis points, or 1.28 percentage points, this quarter to 8.42 percent, data compiled by Bloomberg show. The rate on similar-maturity Thai bonds rose 46 basis points to 4.21 percent, compared with an advance of 39 basis points to 4.02 percent in Malaysia and a decline of 64 basis points to 3.64 percent in the Philippines.

The extra yield investors demand to hold 10-year notes issued by authorities in Manila over Treasuries reached 67 basis points on Aug. 21, the least in data going back to 1998, following a 40 basis point increase to 2.89 percent for the US bonds this quarter.

"The extra pick-up the lower-yielding countries have over US Treasuries would increasingly get eliminated, which then makes the case for investments into these bond markets very hard to justify," said Guan Yi Low, who helps oversee about $91 billion as Singapore-based fixed-income investment director at Eastspring Investments, a unit of Prudential.

Once the volatility subsides, funds will return to Asia, she said in a Tuesday interview, adding that she favored Malaysian securities.

Fed officials are "comfortable" with a plan to start reducing debt purchases this year should the world's largest economy improve, according to minutes of their July meeting released on Wednesday. Sixty-five percent of economists predict the US central bank will cut stimulus in September, according to a Bloomberg survey.

As positive US economic data added to speculation tapering was imminent, the cost of insuring Southeast Asian sovereign bonds against default climbed. Five-year credit-default swaps for Indonesian bonds rose 65 basis points this month to 285 on Thursday, according to data provider CMA.

That compares with gains of 31 basis points to 150 in Thailand, 27 basis points to 155 in Malaysia and 22 basis points to 147 in the Philippines.

"Asean countries were almost the darlings of Asia for some time because people were saying they had higher growth prospects," Albert Leung, a strategist at Bank of America Merrill Lynch in Hong Kong, said in a Tuesday interview. "Indonesia is the most vulnerable followed by Malaysia."

By Yudith Ho, Liau Y-Sing & Yumi Teso
Bloomberg

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