Businesses griping, but central banks are ahead of the curve
In a positive sign of financial sobriety, central banks in Asia are showing they have learnt how to do their jobs properly
Emerging markets are toast. That’s the clear message echoing out of the sudden torrent of doom-and-gloom from economic analysts, who are warning that it’s 2013 all over again — and perhaps even 1997.
Risks abound, surely. It’s naïve to downplay the quadrupling of emerging-market debt over the last decade. Ditto for Donald Trump’s trade-war trigger-happiness, which imperils global growth prospects. But here’s one reason for optimism: Asian central banks are finally doing their jobs.
A central banker’s role, as one-time Federal Reserve head William McChesney Martin memorably said, is “to take away the punch bowl just as the party gets going.” What is different about the rallies in global equities over the last 12 months is that monetary authorities aren’t enabling them, and in fact are withdrawing some liquidity from the punch bowl.
A case in point: India’s tightening move on Wednesday, its first in more than four years. This was a gradual step — a 25-basis-point increase in the benchmark repurchase rate to 6.25% — but that didn’t stop some businesspeople from griping about the economic fallout.
It’s the latest example of an Asian monetary authority leading, rather than simply following the desires of markets. After all, it was the second habit that got Asia into so much trouble in 1997, when bubbles from Thailand to Indonesia to South Korea all began to burst.
In November, the Bank of Korea became the first major central bank in Asia to hike interest rates since 2011. It was a big statement by Governor Lee Ju-yeol, and a signal that efforts to normalize liquidity after the 2008 “Lehman Shock” were underway.
More recently, Indonesia has hiked borrowing costs twice, partly to protect a currency that is again under threat. A product of Jakarta’s chronic current-account deficit, the pressure on the rupiah is intensifying as the Fed tightens, President Trump tosses grenades at global trade and Europe’s long-term debt crisis flares up anew.
But Bank Indonesia is sending the right signals that it is safeguarding Southeast Asia’s biggest economy. It’s working to avoid a repeat of the 2013 “taper tantrum.”
Even Tokyo is dropping hints that the bar may be closing. On June 1, the Bank of Japan scaled back on government bond purchases. While far from a tightening move, BOJ Governor Haruhiko Kuroda is leaving little doubt that this team has replenished the punch bowl enough times since 2013. The onus is now on Prime Minister Shinzo Abe to hasten growth via structural reforms and rekindle Japan’s animal spirits.
There are myriad examples of what not to do, too. Take the Philippines, where rate policy is falling behind the inflation curve. The 4.6% spike in prices in May — a five-year high — is imperiling the credibility of Bangko Sentral ng Pilipinas. For six months now, policymakers have dismissed talk they are avoiding rate hikes for fear of crossing populist President Rodrigo Duterte. Either way, Manila needs to turn off the money tap.
Malaysia’s central bank is embroiled in its own drama, though one more about corruption than rates. Governor Muhammad Ibrahim resigned Wednesday amid a purge of top officials seen as close to the scandal-plagued previous government. As new Prime Minister Mahathir Mohamad shines daylight on big losses at state fund 1Malaysia Development Berhad, questions abound about the role of officials at Bank Negara Malaysia.
There are constraints on how much tightening central bankers can, and should, do. Heightened debt levels are the most obvious barrier, leaving Asia exposed to a repricing of credit risk at any moment. High household debt from Korea to Malaysia is another concern. In China’s case, meantime, any effort to drain liquidity could lead to serious hangovers. For example, at the end of 2017 mainland corporate debt equated to 160% of gross domestic product.
Yet from Mumbai to Jakarta and beyond, there are encouraging signs that Asia’s monetary mixologists are declaring “last call” at a pivotal moment.