Fed rate hike, Malaysian domestic rate cut

Malaysia and Indonesia are probably most vulnerable to large capital outflows on steeper than expected Fed rate increases. Both countries have seen a surge in the foreign ownership of local currency bonds. 

Malaysia is vulnerable given its high external debt, low FX reserves to short-term external debt cover, falling current account surplus, high household debt and high quasi-public debt. 

Also, concerns about the return of Original Sin, a higher proportion of foreign denominated debt, as funding costs in local currency debt rise and foreign appetite wanes.

Bank Negara Malaysia has room to ease, given low inflation, but will probably cut rates only if there are visible signs of a significant economic slowdown. 

"For now, a 25bp policy rate cut to 3% in the second half of the year, given a weaker growth can be expected", says Bank of America.