A risky reprieve
The U.S. Federal Reserve has granted Asia a temporary reprieve. But the longer the relief lasts, the greater the risk that complacency will undermine the region’s financial stability.
The Fed’s decision to delay unwinding its $85-billion-a-month money-printing programme eases the pressure on the two Asian countries with the biggest dollar addiction – India and Indonesia – to cure their habit by squeezing domestic demand. Investors reacted accordingly: the Indonesian Rupiah jumped 1.9 percent against the dollar on the morning of Sept. 19, while Jakarta stocks rose 5 percent.
That’s not an unalloyed blessing, though. The turmoil in the currency market since Fed chairman Ben Bernanke first hinted at curbing the supply of excess dollars in May has elicited some welcome responses. Indonesia has raised its ultra-low interest rates; Malaysia has pruned fuel subsidies; Singapore has sought to wean individuals off unsecured credit; and India has allowed foreign investors greater access to local industries.
Despite the Fed’s backpedalling, Asian countries cannot afford to relax. From just before the onset of the global financial crisis, private sector debt has swelled by 73 percentage points of GDP in Hong Kong and 45 percentage points in Singapore. While these small, open economies can arguably live with large swings in capital flows, the credit surge in Malaysia and Thailand is more worrying. The longer the global liquidity glut lasts, the more painful the hangover will be.
Granted, capital flows may be more muted now. Investors will still be wary – the Fed may yet start withdrawing liquidity by the end of the year. Moreover, GDP growth is slowing almost everywhere in Asia, with the exception of the Philippines. At the same time, the absence of inflationary pressures outside India and Indonesia means policymakers won’t jack up interest rates or exchange rates to tame excessive credit. Adjusted for inflation, Singapore’s real effective exchange rate is already 20 percent stronger than at the end of 2007. The city-state’s exports have fallen for seven straight months.
Besides, China’s debt-laden economy is slowing, and Bank of Japan is printing yen aggressively. Those are two more reasons why Asian policymakers need to stay on their toes. They have very little room to manoeuvre.