The US Federal Reserve’s decision to postpone its roll-back of stimulus offers Asian policymakers extra time to address domestic economic fragilities as the region copes with diminished capital inflows.
“The policy adjustment at the Fed is going to happen” at some point, World Bank managing director Sri Mulyani Indrawati said yesterday in Bali, where finance ministers from the Asia-Pacific Economic Co-operation forum met. Knowing how markets would react when that occurred, many emerging markets needed to persist with structural reforms, she said.
The Fed’s move spurred a rally in stocks and currencies from India to Indonesia, where officials in recent months have had to take steps to stem an outflow of capital, including raising some interest rates. The reprieve still leaves India with the challenge of opening more industries to foreign investment, Indonesia with domestic infrastructure weaknesses, Malaysia with a persistent budget deficit and the Philippines with its anti-corruption campaign unfinished.
“The fact that the money train will continue for a while means the risk of a hard landing or a balance of payments crisis has been greatly reduced, if not averted,” Frederic Neumann, the co-head of Asian economic research at HSBC in Hong Kong, wrote in a note yesterday. “Policymakers in Asia will need to use this brief window to implement structural reforms to put growth on a more sustainable path.”
Emerging markets should continue reforms while waiting for the Fed’s policy shift, Indonesian Finance Minister Chatib Basri said in Bali.
“We cannot prevent the Fed from doing the scale-back,” he said. “It is absolutely their policy decision, but if they can communicate in a better way with emerging markets, with Europe, we would end up with a much better situation” of less turmoil for developing nations while a clear timetable for easing would allow policymakers to anticipate.
Some emerging markets might have preferred earlier Fed tapering. Luciano Coutinho, Brazil’s state development bank president, said in New York yesterday that he expected currency volatility to increase.
“I would rather see it start today and have some date to finish because then we will feel the whole impact. The worst thing is the uncertainty.”
The Brics (Brazil, Russia, India, China and South Africa) pledged this month to create a $100bn currency reserve pool to guard against shocks from the withdrawal of US stimulus.
Brazil and Indonesia have embarked on a series of rate increases to buoy the real and rupiah, while the Indian central bank took steps to boost the supply of dollars to alleviate depreciation pressure on its currency. – Bloomberg