Asian policymakers and central bank governors are becoming increasingly concerned at the prospect of rising US interest rates, having been badly burned last May after the Federal Reserve shocked markets when it first raised the prospect of tapering of its quantitative easing programme.
Countries at most risk could be those that are running high levels of debt such as China, Hong Kong, Singapore, Thailand and Malaysia.
Many have voiced their concerns at the ADB’s annual meeting in Astana this weekend, and are demanding better communication from the Fed and other developed world institutions on the timing and nature of their monetary policies.
“There should be clear communication and calibrated announcements up front of how the sequencing will go of tapering and interest rate policies,” said Shamshad Akhtar, executive secretary of the United Nations Economic and Social Commission for Asia and the Pacific, and the former central bank governor of Pakistan.
Amando Tetangco Jr, governor of Bangko Sentral Ng Pilipinas, the Philippine central bank, told Emerging Markets: “We should see clearer communication from the Fed.”
Although tapering is well underway, and the Fed chair Janet Yellen has signalled that its low interest rates will continue for some time, he said it was “still a source of uncertainty because we don’t know their timing as well as the speed of any tightening that they would implement.
“To us, what is important is to make sure that our policy framework is well in place so we can assess the possible impact on our economies and decide on the appropriate course of action.”
Many Asian economies are still dealing with the aftermath of last May, when comments from the Fed triggered a sell-off in emerging market assets, widespread capital flight and the deterioration of currencies, particularly in Asian markets with twin deficits such as Indonesia and India.
They are very keen to avoid such a big shock again. “Based on what we have seen, it’s the announcement that can have a significant impact,” Tetangco said. “Particularly if there is a lack of convergence between what the Fed is trying to say and how the markets are interpreting the statements, like what happened in May and June.”
Akhtar added: “The fact that it took everybody by surprise means that it was not necessarily something where people had been given a heads-up.” She added that “fault lies on both sides in my view. To imagine that this would be a lifetime quantitative easing process was unrealistic to expect. As a former central bank governor I know there’s a time when you have to announce. You have to talk.”
The call was echoed by multilaterals outside Asia. “This communication [by the Fed] is not an easy exercise, but it needs to be clear enough as not to create unexpected volatility in the market,” said Naoyuki Shinohara, deputy managing director of the IMF.
THE NEXT CHAPTER
Also, with tapering now underway without a major impact on Asian economies, attention is turning to the next stage of US policy: the gradual rising of interest rates towards neutrality. This is likely to affect different nations than those who were hit last year.
“Indonesia and India don’t have the debt issues, so the spotlight is going to shift from them to those that have built up debt,” said Paul Gruenwald, chief economist for Asia Pacific at Standard & Poor’s. “The next chapter is rising interest rates and I think we’re looking at a very different group of countries. Now we need to focus on places that are running up a lot of debt — China, Hong Kong, Singapore, Thailand and Malaysia.”
There is an increasing sense that these rate rises now constitute a greater risk than tapering, which Asian markets now appear to have digested. Muhamad Chatib Basri, the Indonesian finance minister said: “Next year there is a possibility of the US rising interest rates, which will have an impact on capital flows from emerging markets.”