Months before Lehman Brothers Holdings Inc. sank into bankruptcy, its chief said the bank’s capital position had never been stronger. The past six years have been unkind to those predicting that crises were contained.
Even so, policy makers in Asia are confronting Russia’s debacle from a stronger position than when emerging markets were roiled around the globe in 1997-98. With shrinking current-account deficits, cheaper oil and higher reserves in their favor, the biggest Southeast and South Asian economies may see a situation more akin to 2002, when disasters in Argentina and Turkey failed to trigger crises in the region.
While markets haven’t been unaffected -- Indonesia and India bought their currencies this week after they slid -- policy shifts and domestic demand may help. With swelling middle classes clamoring for better homes, transport and entertainment, companies in the region have homegrown sources of growth, and deeper local capital markets to turn to for financing.
“Good policies are being made quickly across Asia,” said Glenn Maguire, Singapore-based Asia Pacific chief economist at Australia & New Zealand Banking Group Ltd. “A number of economies have reduced budget subsidies and the decline in oil prices is an
incredibly powerful tonic for the region’s economies.”
Nations including Thailand, Malaysia and Indonesia have embarked on a period of structural reforms since the Asian financial crisis, taking steps to reduce government spending and deficits, accumulating reserves, raising interest rates and improving governance. That’s helped the region withstand the fallout from Turkey’s crisis in 2001 and Argentina’s default, then the world’s largest, in 2002.
Currency Reserves
Asia-Pacific nations have accumulated about $7.3 trillion of reserves they can deploy to support their currencies. External liabilities of Asia’s emerging economies accounted for 16 percent of gross domestic product last year compared with about 34 percent in 1998, according to data from the International Monetary Fund.“Every Asian central bank has moved into international standards in reporting reserves, and policy makers have also reduced the build-up of external debt and tightened rules on currency mismatches among companies,” said Frederic Neumann, co-head of Asian economics at HSBC Holdings Plc in Hong Kong. Most economies have stronger policy credibility, with the new governments in India and Indonesia also more likely to deliver reforms, he said.
The slump in crude to five-year lows has also given India, Malaysia and Indonesia room to start dismantling energy subsidies this year as they take steps to strengthen current-account positions.
Fuel Subsidies
With debt ratios steady, improved current accounts, lower oil prices and Federal Reserve rate increases priced in, “Asia appears more than able to ride out any bouts of weak investor sentiment that may arise in the months ahead,” David Carbon, managing director at DBS Group Holdings Ltd. for economic and currency research, said in a report today.Indonesian President Joko Widodo has cut fuel subsidies and is considering a shake-up of a decades-old pricing system. Lower demand for fuel imports would help trim the trade and current account deficits, and a smaller current-account deficit will reduce investors’ concerns about funding the gap, said Tamara Henderson, an economist at Bloomberg LP in Singapore.
In India, a new central bank governor and a new government have improved the economy’s position. The country was counted among the “Fragile Five” along with South Africa, Indonesia, Turkey and Brazil as it faced a current-account deficit and a plunging currency last year after the Fed signaled its bond purchase program would end.
Adequate Ammunition
Raghuram Rajan, the former IMF chief economist who took the helm of the central bank in September 2013, offered swaps for dollars raised by banks to shore up the exchange rate, boosted the key interest rate to 8 percent, and adopted a policy to slow consumer-price inflation to 6 percent by January 2016.The election of Narendra Modi as prime minister in May, and his plans to overhaul the economy and reduce the budget deficit should also help attract more foreign capital, said Shubhada Rao, an economist at Yes Bank Ltd. in Mumbai.
“India, over the last six to 12 months, has built a fairly adequate degree of ammunition to be able to withstand financial market volatility,” she said. While there will be a phase of volatility, “India has done well in strengthening its domestic fundamentals on a relative scale and adding to its forex reserves to be able to intervene as and when the situation warrants it.”
Street Protests
Risks remain: while Thailand’s low government debt, strong external balance sheet and ample liquidity are strengths, political uncertainty continues, Standard and Poor’s said yesterday. A coup in May led to the formation of a military-run government there, while in Indonesia thousands have taken to the streets to protest the fuel-price increases.Indonesia’s relatively low foreign-exchange holdings add to its fragility: its reserves are only enough to cover 6.6 months of imports, central bank figures show, less than the 10.7 months for the Philippines and 8.4 months in Malaysia. Indonesia’s bond risk has surged as much as 34 percent in the past two weeks and foreign funds have pulled 18.2 trillion rupiah ($1.4 billion) from local-currency sovereign bonds this month, heading for the biggest outflow since June 2013.
“The risk-off sentiment would be temporary and eventually investors will look for higher yields,” said Dian Ayu Yustina, Jakarta-based economist at PT Bank Danamon Indonesia. “Unless Russia collapses, in which case the contagion impact would be great.”
All Tools
Policy makers say they are ready to act: Bank Indonesia has said the “bitter” medicine of a rate increase still needs to be taken, while Philippine Governor Amando Tetangco said “all tools are open” should there be signs of extreme market volatility or potential contagion.Developing Asia will grow 6.2 percent next year from an estimate of 6.1 percent in 2014, the Asian Development Bank said this week. Lower oil prices may mean an upside surprise in 2015, as most economies in the region are oil importers, it said.
“Drawing parallels between the late 1990s and today is a little bit misplaced,” said HSBC’s Neumann. “Higher reserves, more fiscal space, and a far more robust external payments position should be enough to see the region through this financial storm.”
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