Emerg­ing Asia can't just rely on China

The Pak Banker - - OPINION - Wil­liam Pe­sek

If you think Fed­eral Re­serve Chair Janet Yellen is stressed, spare a thought for Agus Mar­to­war­dojo. On Tues­day, the gover­nor of In­done­sia's cen­tral bank had to choose be­tween cut­ting in­ter­est rates to sup­port growth or hik­ing them to prop up his cur­rency. He ul­ti­mately de­cided to split the dif­fer­ence and do noth­ing.

Mar­to­war­dojo's dilemma is em­blem­atic of the in­creas­ingly chaotic sit­u­a­tion in the world's emerg­ing mar­kets.

Six months ago, the big­gest fear for Mar­to­war­dojo and his peers in emerg­ing mar­kets from Seoul to Brasilia was that Yellen would soon an­nounce the first tight­en­ing of U.S. in­ter­est rates in a decade. Now, ac­tion by the Fed­eral Re­serve seems al­most harm­less by com­par­i­son with the threat posed by China's slow­down, cur­rency de­val­u­a­tion and stock crash (stocks were down another 6.2 per­cent Tues­day).

What's more, the num­ber of frag­ile emerg­ing na­tions has ex­panded since 2013, when Mar­to­war­dojo took the top mon­e­tary job in Jakarta. Back then, south­east Asia's big­gest econ­omy joined Brazil, In­dia, South Africa and Tur­key as a mem­ber of the Frag­ile Five, Mor­gan Stan­ley's list of emerg­ing economies at risk of stag­na­tion. To­day, the bank's strate­gists are ex­press­ing worry about what could be termed the Trou­bled Ten. These in­clude Asian economies Sin­ga­pore, South Korea, Tai­wan and Thai­land along with Brazil, Chile, Colom­bia, Peru, Rus­sia and South Africa.

But, of these coun­tries, it's Bei­jing's neigh­bors who are most at risk. For years, China's 10 per­cent growth and vo­ra­cious de­mand for com­modi­ties and man­u­fac­tured goods boosted Asia's gross do­mes­tic prod­uct. That masked the in­her­ent weak­nesses in the re­gion's fi­nan­cial sys­tems and growth mod­els, while tak­ing pres­sure off politi­cians to push re­forms -- un­til now.

In­done­sia is Ex­hibit A for this chronic com­pla­cency. Since tak­ing over the pres­i­dency last Oc­to­ber, Pres­i­dent Joko Wi­dodo has been slow to take steps to re­duce red tape, im­prove pro­duc­tiv­ity or strengthen com­petive­ness. Now, he's pay­ing the price as China's de­val­u­a­tion in­ten­si­fies down­ward pres­sure on the ru­piah, one of Asia's worstper­form­ing cur­ren­cies this year. Ex­ports fell 19.2 per­cent in July, while im­ports plunged 28.4 per­cent -- a sign that de­mand is weak both out­side and in­side the na­tion.

Or con­sider Malaysia, whose cur­rency, the ring­git, is at lev­els last seen dur­ing the Asian fi­nan­cial cri­sis in 1998. Al­ready bat­tered by po­lit­i­cal scan­dals and fall­ing com­mod­ity prices, Malaysia's cap­i­tal flight is now ac­cel­er­at­ing as in­vestors get more skit­tish about China's yuan. The same goes for the Thai baht, which had al­ready been un­der pres­sure thanks to the clue­less eco­nomic poli­cies of the mil­i­tary junta rul­ing the na­tion (a mys­te­ri­ous ex­plo­sion in Bangkok on Mon­day that killed at least 20 hasn't helped mat­ters).

Korea's won is also slid­ing. Asia's fourth­biggest econ­omy isn't just strug­gling to deal with the slow­down in China (which ac­counted for 30 per­cent of South Korea's ex­ports in 2014), but Ja­pan's re­newed flir­ta­tion with re­ces­sion. Ja­pan con­tracted an an­nu­al­ized 1.6 per­cent in the sec­ond quar­ter, in­creas­ing the odds the Bank of Ja­pan will seek to re­duce the value of the yen. The last thing Korean Pres­i­dent Park Geun Hye needs is a race to the bot­tom be­tween high-tech Ja­pan and low-cost China.

The cracks are start­ing to show in the cheery story Asia's of­fi­cials and in­vestors used to tell about the re­gion's growth. For too long, that nar­ra­tive, to­gether with China's rapid ex­pan­sion and cen­tral bankers' will­ing­ness to in­dulge in quan­ti­ta­tive eas­ing, sapped the ur­gency for painful struc­tural up­grades to di­ver­sify sources of growth, lower trade bar­ri­ers and re­duce cor­rup­tion. In years past, the re­gion's cen­tral banks would have shored up growth by sim­ply cut­ting in­ter­est rates. But China's slow­down is lim­it­ing Asia's op­tions. For­mer Economist editor Bill Em­mott de­scribed the sit­u­a­tion in a Pro­ject Syn­di­cate op-ed: "Although coun­tries can ride waves of growth and ex­ploit com­mod­ity cy­cles de­spite hav­ing dys­func­tional po­lit­i­cal in­sti­tu­tions, the real test comes when times turn less fa­vor­able and a coun­try needs to change course." The re­gion now faces that pres­sure amid de­clin­ing in­vest­ment re­turns, high lo­cal debt lev­els and skit­tish world mar­kets.

This hardly means a re­turn to the cri­sis days of 1997 and 1998. For all Asia's vul­ner­a­bil­i­ties, its fi­nan­cial sys­tems, debt mar­kets and cen­tral banks are plenty ca­pa­ble of fend­ing off the cur­rent global tur­moil. But a decade of lazily rid­ing China's coat­tails has left Asia ill­pre­pared for the slow-growth pe­riod that's to come. So great is the un­cer­tainty about China that Yellen, too, will un­doubt­edly be fac­tor­ing it into her de­ci­sions at the Fed­eral Re­serve. In that sense, she and Mar­to­war­dojo have more in com­mon than they might re­al­ize.

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