Chalongphob Sussangkarn knows a thing or two about volatile currency markets.
Until February, he was the finance minister of Thailand, which over the last decade saw its currency plunge too low and surge too high. On Thursday, I bumped into Chalongphob at a Madrid hotel as he grappled anew with the vagaries of exchange rates—this time as a consumer exchanging dollars.
“I should just get rid of these dollars before they fall even more,” joked the president of the Thailand Development Research Institute, as we exchanged US currency for euros.
Thailand’s currency, the baht, has risen 16% against the dollar over the past 18 months, part of an Asiawide trend. Hastening the dollar’s slide is a Federal Reserve set on avoiding recession at all costs. On 30 April, the Fed lowered its benchmark interest rate by a quarter point to 2%, the seventh cut since September.
While the Fed hinted it may be ready to pause, the amount of monetary stimulus in the pipeline is a growing threat to Asia. One immediate side effect is rising currencies, which poses challenges for Asia’s export-dependent economies.
The bigger issue is that easy money is fuelling global inflation. “With inflation running very high in most countries, the ability of central banks to reduce interest rates to offset the impact of the US slowdown is going to be constrained,” says Subir Gokarn, Tokyo-based Asia-Pacific chief economist at Standard and Poor’s.
Fed chairman Ben Bernanke acts in the US’ interest. Yet, the Fed’s cuts are adding ever more liquidity to global markets. While bad weather and the increased use of biofuels explain part of the run-up in food prices, rising oil costs are as a much a consequence of liquidity as demand.
Asia is on the front lines of the phenomenon, especially with investors such as Mark Mobius betting on more rate cuts. Mobius, who oversees $47 billion (Rs1.9 trillion) in emerging market equities at Templeton Asset Management Ltd, says Bernanke may cut rates to 1% as US housing foreclosures worsen.
Central bankers in Asia could be excused for feeling a bit, well, fed up by sliding US rates. Their concern is over “hot money” flows of the kind that wreaked havoc in Asia a decade ago. Investors who had poured in amid rapid growth, fled even faster at the first sign of trouble. Large amounts of the liquidity created by the Fed are heading Asia’s way to tap its rapid economic growth.
Too much money
The meltdown at Bear Stearns Companies Inc. in March raised the stakes as the Fed stepped up its campaign of rate cuts. Asia was already awash in money, thanks to the Bank of Japan (BoJ). Even though Japan has been growing steadily since 2002, BoJ’s key lending rate is still a mere 0.5%.
Excess liquidity is dovetailing with Asia’s record build-up of currency reserves. China, Japan, Taiwan, South Korea and India hold a combined $3.5 trillion of reserves. There’s increasing evidence that Asia’s currency holdings are seeping into the money supply, adding to inflationary pressures.
In a perfect world, economists would be predicting aggressive rate increases in Asia. Yet, with more than two-thirds of the world’s poor living in the region, central banks may be reluctant to slam on the brakes.
The real risk
Officials in Indonesia, the Philippines and Thailand may raise interest rates as higher oil and commodity prices feed into inflation, say economists such as Beng Ong at JPMorgan Chase and Co. in Singapore. It’s unclear, though, how aggressive central banks will be even as crude oil, rice, corn, wheat and soya bean prices reach unprecedented levels.
Timidity might be a mistake. Inflation is the real risk to Asia’s long-term prosperity, not slowing US growth. China’s inflation has quickened to the fastest pace in 11 years, and consumer price rises in Sri Lanka and Vietnam have exceeded 20%. Singapore’s consumer price gains have reached levels not seen since 1982. There can be little doubt inflation concerns will dominate the Asian Development Bank’s (ADB) annual meeting, which begins this weekend in Madrid. ADB predicts inflation in Asia will reach a decade-high this year even as economic growth cools.
Paying the price
“It’s hard to exaggerate how much of a problem rising inflation is to Asia’s short-term stability and longer-term prosperity,” ADB chief economist Ifzal Ali told me in Tokyo last month. “It really is the issue.”
Some Asian policymakers sympathize with Bernanke’s plight. As Philippine central bank deputy governor Diwa Guinigundo sees it, the Fed is pursuing a “first-things-first approach.” The trouble is, low rates are treating the symptoms of the US’ problems, not the underlying sickness.
What ails the US is too much consumption, too much debt, too little household savings and a financial system that’s more vulnerable than once thought. Fixing these imbalances will require strong action from lawmakers and economic officials—not more liquidity. Japan squandered a decade believing low rates would restore its economy to greatness. The longer it takes the US to heed those lessons, the more Asia may pay the price.
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