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.
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.
“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.
Fuel Subsidies
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 Federal Reserve signaled
its bond purchase program would end.
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.
Adequate Ammunition
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.”
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.”
To contact the reporter on this story:
Karl Lester M. Yap in Manila at
kyap5@bloomberg.net
To contact the editors responsible for this story:
Stephanie Phang at
sphang@bloomberg.net
Rina Chandran, Iain McDonald