Asian Economies: Tapering Bomb Still Ticking


Asia’s emerging economies have been urged to seize the window of opportunity given by the U.S. Federal Reserve’s delayed start to “tapering.” The warning from the Asian Development Bank (ADB) came amid claims that the ultra-low rates imposed by major central banks are akin to an unexploded bomb.

“A delay in US bond tapering gives the region a bit of extra time to make sure its economy and financial systems are resilient enough to face the likely market volatility ahead,” Iwan J. Azis, head of ADB’s Office of Regional Economic Integration, said in a statement marking the release of the bank’s latest Asia Bond Monitor.

According to the Philippines-based lender, emerging East Asia “remains vulnerable to a shift in investor sentiment when the US eventually scales back its asset purchase program…Volatile capital flows make it tougher for policymakers to manage the economies while looming tighter liquidity could push down asset prices, particularly in the property sector, undermining the health of financial firms.”

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Highlighting the risk of capital flight, the ADB said the region’s bond market had expanded by 12.5 percent over the past year, led by gains in Indonesia, the Philippines and China.

The fact that the clock may be ticking on tapering was highlighted by the Fed’s latest policy minutes, which said the U.S. central bank may taper its $85 billion a month in bond buying “in coming months” if the U.S. economy continued to improve.

In its October 29-30 minutes, Federal Open Market Committee (FOMC) participants said they “generally expected that the data would prove consistent with the committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months.”

“It sounds like they’re moving closer to tapering,” Sam Coffin, economist at UBS Securities in New York, told Bloomberg News. “There’s a lot more focus on their forward guidance and a lot of that is because if they’re moving closer to tapering they want to signal they’ll stay easy after the tapering has begun.”

The start of tapering is expected to signal the end of a bull market in emerging economy debt and a capital flight back to Wall Street and other perceived safe havens. After flagging in May the start of tapering in 2013, the Fed’s delayed action has meant a respite for emerging markets such as India and Indonesia, which are vulnerable due to large current account deficits.

Market Crash?

The prospect of an eventual end to money printing by the Fed and other major central banks has led analysts to warn of the risk of a market crash.

“[Tapering] is a process that I think is going to be critical – how they tighten versus the steady improvement in the economic conditions that are prompting the increase in rates. So it is an unexploded bomb, but it is one that we are all aware of, we just don’t know when it is going to go off,” Nomura analyst Kevin Gaynor told the Australian Financial Review.

The analyst warned a market crash was possible if central bankers “slam on the brakes too soon” before the economic upturn gained traction.

The consequences of quantitative easing (QE) have been highlighted in a report by the McKinsey Global Institute, which showed that QE has caused a massive transfer of wealth to governments and corporate borrowers, at the expense of households.

According to the report, governments in the eurozone, the United Kingdom and United States “collectively benefited by $1.6 trillion both through reduced debt-service costs and increased profits remitted from central banks,” while nonfinancial corporations gained $710 billion over the period from 2007 to 2012.

However, households lost a collective $630 billion in net interest income, with Japanese households in particular bearing a large burden. In 2013, Japanese households had $9.5 trillion in interest-bearing assets compared to $3.5 trillion in liabilities, with 90 percent of such assets invested in low-interest deposit accounts.

“With government bond yields averaging less than 2 percent, Japanese households have earned very little on their savings for well over a decade,” McKinsey said.

Although QE has inflated the value of stock and house prices around the world, analysts see the eventual start of tapering causing a correction in asset prices. Time is fast running out for Asia’s weaker economies to prepare for the shock.

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