Shamim Adam Singapore
EMERGING markets from Brazil to India have taken steps this week to stem an outflow of capital as concern mounts that developed nations are near the beginning of the end of an era of pumping unprecedented liquidity into their economies.
India’s central bank had sold dollars over the past two days to stem the rupee’s slide, two officials said yesterday, while Indonesia unexpectedly raised its benchmark interest rate yesterday.
Brazil said on Wednesday that it would unwind some of the capital controls it began putting in place in 2010 – when the US Federal Reserve was embarking on its second round of quantitative easing. Thailand said it had sold dollars in the past week.
The moves follow the Bank of Japan’s (BoJ’s) decision this week to refrain from adding stimulus even after a slide in the country’s stocks that risks hurting its campaign to revive growth. The MSCI emerging market index of shares has slid more than 10 percent since Fed chairman Ben Bernanke said on May 22 that the central bank could scale back asset buying if it was confident of sustained economic improvement.
“People are taking money off the table wherever they made the most money,” said Tim Condon, the head of Asia research at ING in Singapore, who previously worked for the World Bank. “Markets are repricing for what we would see in a normalisation of US treasury yields and all that central banks can do right now is to batten down the hatches. We haven’t seen the end of this volatility.”
The MSCI emerging market index was down 1.6 percent at 4pm in Hong Kong. The yen, often a haven in times of market turmoil because of Japan’s status as the top net creditor, rose 2.1 percent to ¥94.05 to the dollar at 8.29am in London.
Foreign selling of Thai, Indonesian and Philippine stocks has reached record levels as the threat of reduced Fed monetary stimulus spurs the biggest equity declines since 2011. Overseas investors have unloaded a net $2.7 billion (R27.1bn) from the three stock markets so far this month, the biggest eight-day outflow since Bloomberg began compiling the data in March 1999.
Three years after emerging market policymakers from Brazil to South Korea warned about destabilisation from record Fed stimulus, they are now coping with the prospect of the spigot being tightened. Fed actions have pumped more than $2.5 trillion into the financial system since 2008.
On Wednesday Brazil’s government said it would eliminate a tax on currency derivatives in a bid to arrest the decline of the real to a four-year low. The 1 percent tax had been applied on bets against the dollar in the country’s futures market in a bid to weaken the Brazilian currency. Finance Minister Guido Mantega had already announced on June 4 the elimination of a 6 percent tax on foreign investment in bonds purchased in Brazil.
Indonesia’s surprise increase in its benchmark borrowing cost yesterday comes after the central bank this week raised the rate it pays lenders on overnight deposits and said that it was ready to buy government bonds from the secondary market to support the weakening rupiah. After the decision, the currency pared losses from a four-year low. – Bloomberg