Critics say many governments have done too little to remove barriers
to domestic and foreign business investment, cut red tape, upgrade
infrastructure and develop deep, well-functioning financial markets
when the region was flush with cheap money.
Now that economic rocks are emerging as the tide of the Fed's easy
cash recedes, central banks are having to step in, detouring from
their price and financial stability mandates, to shore up weak
India and Indonesia were first in the firing line of investors last
year when the Fed's plans to scale back its $85 billion in monthly
cash injections started to take shape. Both took emergency steps,
intervened in markets and raised interest rates to shore up battered
Since then the Fed has started winding down its stimulus in earnest,
putting emerging markets on the back foot once again as investors
look to target the most vulnerable economies.
Indonesian and Indian authorities have improved their defenses
against rapid outflows but their governments have failed to tackle
supply bottlenecks and market rigidities that fuel inflation and
limit room for policy maneuver, economists say. Both face national
elections this year that could lead to populist measures and further
In Thailand, months of political turmoil have paralyzed government,
leaving the central bank as the mainstay of economic support.
"Government and monetary policies should be fairly balanced," says
Rob Subbaraman, chief Asia economist at Nomura in Singapore.
"In India, and increasingly Thailand, the governments have not done
their part. There's a risk Indonesia goes this way as the elections
draw closer," said Subbaraman, who since mid-2013 has been warning
of emerging Asia's growing exposure to market turmoil.
Even in Japan and China, with their strong and stable political
leaderships, central banks appear to be doing most of heavy lifting.
In Japan, a blast of central bank money has boosted the economy and
markets, but Prime Minister Shinzo Abe's economic reforms have
disappointed. China's central bank is trying to rein in an explosion
of off-balance sheet and risky lending as cautious government
regulators resist speedier financial reform that would force markets
to price risk more realistically.
Asian central bankers rarely air their frustrations in public.
India's former central bank governor Duvvuri Subbarao was an
exception, regularly sparring with New Delhi over economic reforms
Sometimes though, their concerns do bubble to the surface.
After a series of rate hikes by Indonesia's central bank, an
official there in October voiced his vexation that the government
was not tackling the root cause of a widening trade and current
account gap — its own spending.
"We need to address the cause of illness when running a fever," Dody
Budi Waluyo, executive director of Bank Indonesia economic and
monetary policy department told Reuters at the time. "The medicine
should not only be Panadol to lower the fever."
In picking up the reins from government, the risk is that central
banks will deliver neither the stability they seek, nor the economic
support that is needed.
In Japan, for example, the concern is that optimism spurred by the
Bank of Japan's massive cash injections will fade without reforms to
unshackle the economy's untapped growth potential and help overcome
the problems of a fast ageing society.
The Chinese central bank's attempts to curb risky lending by
calibrating supply of money market funds have triggered repeated
cash crunches that threaten to ignite market panic.
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Indonesian and Indian central banks may be forced to tighten
monetary policy more than their slowing economies would otherwise
have warranted because of fragile market sentiment and sticky
inflation that remains high even when growth cools. In an ominous
sign for India, foreign investors have been net sellers of the
country's stocks this year.
Thailand's central bank is under pressure to fill the void left
by stalled infrastructure spending and provide the struggling
economy with stimulus, but is well aware of the risks.
"Maintaining monetary policy in an accommodative mode for a long
period of time runs the risk of delays in reforms as they may seem
less pressing and the risk of financial imbalances build up," Bank
of Thailand spokeswoman Roong Mallikamas told Reuters.
In Japan, one concern is that without fundamental reforms promised
as part of Abe's "Abenomics" revival plan, markets will reverse and
Japan lurch back into its deflationary equilibrium or "stagflation" — a spell of tepid growth and rising prices. Japan Risk Forum, which
groups risk managers from Japan's major financial institutions, sees
nearly a 50-50 chance of that happening.
"We cannot rely solely on monetary policy forever and the time will
come when the government's resolve will be tested by markets, likely
around summer," said Hiroshi Watanabe, head of state-run lender JBIC
and Japan's former top financial diplomat.
To be fair, central bankers may have contributed to their own
predicament by keeping monetary policies too loose for too long
after the global financial crisis, either because of political
pressure or fear of more turmoil.
Nomura estimates that taken as a whole, real interest rates measured
as a difference between official rates and inflation in Asia's 10
biggest economies excluding Japan were negative for more than half
the time since 2008 — a recipe for rapid debt buildup and property
and stock market bubbles. By contrast rates were negative for only
16 percent of the 1996-2007 period.
"By over accommodating the Fed's easing, central banks allowed asset
price inflation to occur, causing an intoxicating party in full
swing," said Thirachai Phuvanatnaranubala, former Thai finance
minister and deputy central bank governor. "With tapering, the party
is over. Some emerging markets will now have to deal with the
bubbles that crept up while everybody dreamily enjoyed himself."
There are also some signs of change. India is embarking on an
ambitious monetary policy overhaul that would make it harder for the
government to lean on the central bank, while the government has
curbed gold imports and secured $34 billion in overseas financing to
try to close its current account deficit.
Indonesia's ban on ore exports drew fire, but it is a sign Jakarta
at least recognizes the need to reduce its reliance on raw
commodities exports. It has also taken steps to shore up public
Still, central bank efforts can easily unravel once elections are in
motion, said Toru Nishihama, senior emerging markets economist at
Dai-ichi Life Research Institute in Tokyo.
"As elections are looming in many emerging countries this year, no
matter how central banks tighten policy to control inflation, their
governments are tempted to loosen fiscal policy, offsetting central
banks' efforts," Nishihama said.
(With reporting by Orathai Sriring in
Bangkok, Nilufar Rizki in Jakarta, Suvashree Choudhury in Mumbai,
Tetsushi Kajimoto and Leika Kihara in Tokyo and Kevin Yao in
Beijing; writing by Tomasz Janowski; editing by Neil Fullick)
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