Although the big event of the week was the conclusion of US presidential elections, central bank rate action continued to vie for markets’ attention. The outsized rate cut by the Bank of England, an unexpected one from the Swiss National Bank and a modest cut from the European Central Bank were matched by another large rate cut by the Reserve Bank of Australia on 4 November. The policy rate was cut to 5.25% from 6%. In the last two months, the rate cuts have totalled 200 basis points in Australia.
Soon, there will be no “carry-trade” currencies. All currencies will become “carry-trade” funding currencies! So, at some point, questions will?surface?as to whether central banks were repeating the mistakes of 2002-04 when they over-reacted and cut rates too much and left them too low for too long.
All these lower rates, etc., should not encourage the households in Australia or the UK to take on more debt. They have too much of it. It should make funding available to those who could still use it for productive purposes. When private demand is weak, governments have to step in.
How much to step in and how much to allow the “natural healing process” to do its job so that long-term lessons are learnt and remembered is the eternal challenge. In recent years, most governments have leant towards “growth at all costs” versus pain, lessons and long-term values. That stores up even bigger trouble for the future and, I suspect, that that routine is being repeated now too.
As before, Asian fault lines keep surfacing. In Indonesia, continued uncertainty clouds the Bakrie and Brothers’ leverage problems. The stock remains suspended. That is not a good sign. On top of this, there is the systemic uncertainty and damage caused to the reputation of Bank Indonesia when it allowed Bank Indover to default on a $500 million obligation.
In Thailand, scouring the local newspapers gives one an idea of the political stalemate and persisting uncertainty. Of course, local investors point to double-digit dividend yields, even accounting for slowdown in corporate earnings, those dividend yields must be attractive. Nonetheless, growth forecasts released by the governments of Thailand and Malaysia for 2009 appear somewhat too high and risks are firmly on the downside.
In India, the central bank, under the direction of the government, has been reacting aggressively to induce both external and internal liquidity to the system. However, problems would persist in the short term. It appears that India, which avoided the Asian crisis, has now fallen victim to the same behaviour that Asian corporations engaged in 10 years ago. They have used short-term trade credit to finance local currency long-term projects or even foreign acquisitions.
As long as dollar liquidity remains tight, this issue would cast a cloud over India’s economic and financial market fortunes. It would also exert pressure on the dollar to appreciate against the rupee. India’s reserves have come off from a high of at least $300 billion to around $250 billion. Yet, they are ample and the central bank should eventually be able to reliquefy the banking system. The operative word, however, is “eventually”.
Whenever the central bank tried to tighten domestic credit, the government loosened external borrowing requirements and, thus, largely diluted the monetary tightening efforts of the central bank. The country is now paying a price for ignoring risk in good times, as many other countries are doing. Thus, India is not guilty of any special errors but, at the same time, India had abandoned its own cautious approach that served it so well during the Asian crisis. The lesson for the Indian government is to meddle less. The message, it appears, is yet to be understood either by the government or by its acolytes.
Lastly, there is needless noise and anxiety in Asia over the election of Barack Obama as the next US president. The concern is that he might not be an enthusiastic advocate of free trade with Asia. He had also hinted at relooking at the recently concluded free trade agreement with?South?Korea.
In reality, economic circumstances in the US do not augur well for Asian export growth for the next two years, in any case. Second, neither Obama nor McCain would have had any choice over favouring local jobs and local manufacturing in the current circumstances. Third, Asia for its own sake needs to reduce dependence on external demand as it has left Asian economies very vulnerable to global downturns.
China, too, regardless of whether Obama wants it or not, has to revalue the yuan in the near future to provide greater stability and sustainability to its economic future.
Therefore, anxieties in Asia over the election of Obama are needless and we could save our worries for more real economic troubles likely to arise in the next two years.
V. Anantha Nageswaran is head, investment research, Bank Julius Baer & Co. Ltd in Singapore. These are his personal views and do not represent those of his employer. Your comments are welcome at email@example.com