The U.S. Federal Reserve’s decision to postpone the “tapering” of its easy money policy has given emerging Asia valuable breathing space. But with continued uncertainty over the Fed’s actions, how long before the Asian market sell-off begins afresh?
News of the Fed’s September 18 decision to maintain its current pace of quantitative easing helped markets in Indonesia, India, Thailand and other emerging economies stage a relief rally, with currencies and stocks strengthening.
More than $47 billion has been withdrawn from global funds’ investments in emerging market stocks and bonds since May, when Fed Chairman Ben Bernanke signalled that the U.S. central bank would move to exit quantitative easing. Hedge funds focused on emerging markets account for $155 billion of the industry’s $2.4 trillion of assets under management, highlighting the risks of a mass exodus.
Economists surveyed by Bloomberg News had expected the Fed would initially curtail its monthly bond buying by $5 billion to $40 billion, while maintaining its buying of mortgage-backed securities at $40 billion. Instead, the Fed said in its statement that it would “await more evidence that progress will be sustained” before changing policy.
Yet bankers and traders in nations hard hit by the subsequent sell-off, such as Indonesia, are not relaxing.
“For us, this is a short-term relief,” Bank of Indonesia spokesman Difi A. Johansyah told the New York Times after the Fed’s decision.
“They reduce some of the pressures for capital outflows and reduce the pressure on the rupiah for the time being, but we have to work on our homework to stabilize the rupiah. The root of the problem is domestic, the current account deficit and inflation.”
Indonesia’s foreign debt burden has almost doubled to $134 billion since 2008, and with nearly 90 percent of it dollar-denominated, the 15 percent slide in the rupiah this year has caused debt servicing costs to surge. Rising domestic rates have also hit domestic activity, giving Indonesian companies a double whammy.
"Uncertainty around the timing of an inevitable Fed tapering will no doubt return," Philipp Lotter, Singapore-based managing director of corporate finance with credit ratings agency Moody's, told Reuters.
"The bigger concern is around some of the bigger importers and those that have dollar debt coming due over the near term," he said. "Interest rates in Indonesia are rising, and this could have a knock-on effect on Indonesian growth."
India has also suffered the effects, with its rupee the worst performer among the world’s internationally traded currencies in August. As noted on this blog, the nation’s newly installed central bank governor has hiked interest rates and urged the nation to take advantage of the delayed tapering, saying it was an opportunity to bolster the “national balance sheet and growth agenda.”
Analyst Jim Walkers of Asianomics told India’s Economic Times ahead of the Fed’s decision that an end to tapering could even aid emerging economies.
“If the Fed takes a hawkish stance, emerging markets will go up. The reason it would go up is that we would get away from all this easy money, and start focusing on who are the beneficiaries of an improving world economy. Most of the emerging countries are exporting markets, and it will be a good news for them if there is much quicker reduction in [quantitative easing]," he said.
Yet the capital inflows caused by the Fed’s easy money policy have left even some of the region’s stronger economies exposed. According to ANZ research, Hong Kong’s external liabilities reached HK$21.5 trillion in 2012, compared with the 2008 low of HK$13.3 trillion, with the current level representing 3.5 times the city’s foreign reserves.
“Given these figures, a potential outflow triggered by the US tapering is a legitimate concern,” ANZ analysts wrote in September 17 research note, although adding that the impact “should be much smaller compared with previous crises.”
Nevertheless, Asia’s emerging economies are seen having only a brief window to strengthen their economies.
“Markets will start to fret again about tapering beginning in December. And that won’t be the end of it. Once tapering begins, the next worry will be when asset purchases will end altogether. And then, when rates will rise,” HSBC equity strategists at HSBC wrote in a research note. “We see a year or more when equity markets dip [and then recover] each time the Fed moves to [or toward] ending its ultra-easy policy.”
The Fed may have given the region a short stay of execution, but policymakers cannot avoid action for too long.