A reversal of hot money inflows is a worry for Asia. But there’s another: policymakers must guard against their own savers turning tail.
The end of quantitative easing is drawing near. Half the members of the U.S. Federal Reserve’s monetary policy committee anticipate the liquidity spigots will close by year-end. For Asian households, that means the prospect of earning higher rates abroad than have been available for years.
At the same time, real returns at home look unappetizing when compared with pre-financial crisis levels. Take Indonesia, where the inflation-adjusted interest rate was 5 percent in late 2007. Now, the gap between 10-year Indonesian risk-free rates and consumer price inflation has shrunk to 1.2 percent.
Wealth owners in India have it worse; they face minus 3 percent real interest rates on a 10-year bond. A strengthening U.S. dollar further dims the appeal of keeping money at home and boosts the lure of U.S. real interest rates of around 0.7 percent, the best since March 2011.
For savers to chase higher returns overseas wouldn’t be all bad. Since the financial crisis, yield-starved depositors have displeased authorities by chasing returns in asset classes that can bring worrying side effects: wealth-management products in China, real estate in Singapore and gold in India. Where savers are able to take their money across borders, some of these vulnerabilities will go away as US interest rates normalize.
Besides, not all economies are equally exposed. Taiwan and South Korea may withstand withdrawal of global excess liquidity better than India or Indonesia. Malaysia and Singapore have acquired more overseas assets in the past six years than foreigners have bought in these two economies. That’s a source of strength for their currencies, mitigated only by a surge in Malaysian government debt.
In the event of serious outflows, though, policymakers’ hands are tied. Capital controls can be circumvented by fake trade transactions, as China learned earlier this year. Raising interest rates could hurt growth and stall investment, though Indonesia is now being forced to go down that route to stem capital flight. Thailand and the Philippines aside, Asian GDP growth rates are now lower than in late 2007. The Fed has done Asia’s depositors a favour, but put its policymakers in a tight corner.