Diminished capital flows due to currency risks could also weigh on the emerging markets. Since investors would pull out of foreign markets if the U.S. dollar strengthens, emerging market currencies would weaken and the local central banks could tighten rates or drain banking liquidity to help stem the flows.
“Although a weaker currency could help exports in theory, Malaysia has little room for credit expansion to spur domestic consumption and investment. According to the IMF Malaysia’s debt to GDP stands at 165% – one of the highest of all emerging market countries,” according to the Global Investor.
Malaysia’s ringgit is one of the worst-performing emerging currencies against the dollar this year, perhaps explaining why investors have yanked about $84 million from EWM.
iShares MSCI Malaysia ETF
