Yellen risks exposing old vulnerabilities in modern Asia
THE POPULIST leaders of India, Indonesia and the Philippines won office with promises of massive spending to upgrade their country’s roads, railways and ports. Doing so, the thinking goes, would supercharge economic growth and emulate China’s success.
India’s Prime Minister Narendra Modi intends to spend a record US$ 60 billion ( RM270 billion) on infrastructure this fiscal year. Philippine President Rodrigo Duterte set an infrastructure spending goal of seven per cent of gross domestic product, while Indonesian leader Joko Widodo has added 7,000 kilometers of new roads and four new airports and last week vowed more.
In a global landscape starved of yield, foreign investment has poured in to help fund the ambitions, lured by young populations and some of the world’s fastest rates of economic growth. As a sign of their resilience, the trio have even shaken off interest rate hikes by the Federal Reserve, something that has tripped up many a developing nation in the past.
But now the Fed is set to embark into uncharted territory by shrinking its US$ 4.5 trillion balance sheet and old vulnerabilities are starting to resurface.
The problem the three nations face is that, unlike China, they lack the industrial, export and domestic savings bases needed to fund their plans.
To dig foundations and pour cement, heavy equipment must be imported, weakening current accounts just as faster growth is also swelling imports. And the cost of the projects is pressuring budget deficits, leaving the governments heavily reliant on foreign cash.
“Stepping up infrastructure investments in these large Asian emerging markets will likely widen the current account deficit and increase external debt,” said Chua Hak Bin, a Singapore-based senior economist with Maybank Kim Eng Research. “Depending
Stepping up infrastructure investments in these large Asian emerging markets will likely widen the current account deficit and increase external deb.
on the form of external financing, some emerging markets could become more sensitive to volatile foreign capital flows and currency mismatch risks.”
There are already signs of that strain in foreign- exchange markets.
The Philippine peso is Asia’s worst performer against a lackluster greenback this year, down more than three per cent. Indonesia’s rupiah is the thirdworst, while India’s rupee is in the middle of the Asian pack.
With the world’s top central bankers gathering at the Jackson Hole mountain retreat in Wyoming this week, any comments signaling a fasterthan-anticipated normalisation in developed-world policies could sharpen investors’ minds on the potential fallout.
When compared with other major emerging markets like Brazil, South Africa, Turkey and Russia, the economies of India, Indonesia and the Philippines look in relatively good shape, said Rob Subbaraman, chief economist for Asia ex- Japan at Nomura Holdings Inc. — WPBloomberg
Chua Hak Bin, a Singapore-based senior economist with Maybank Kim Eng Research