By John Richardson
REFORM complacency could well be one of the harmful results for Asia ex-China of the Federal Open Market Committee’s (FOMC) decision not to taper quantitative easing any time very soon, financial analysts have warned.
“While we could see short-term relief in places like Turkey and India, the risk is that policymakers will become complacent and not implement the structural reforms needed to make their economies competitive,” Viktor Szabo, portfolio manager at Aberdeen Asset Management, told the Wall Street Journal in this article.
“Countries with current account deficits need higher interest rates to cool domestic demand, and there is a possibility that the Fed’s actions may prompt certain central banks to hold on from tightening monetary policy.”
“I don’t think we now go back to where we were in May. The current-account deficits are bigger and there’s more domestic debt,” added Paul McNamara, who oversees $7.5 billion of emerging market debt at GAM.
Quite. And as far as complacency goes, Malaysia was already complacent before the FOMC decision, according to a Kuala Lumpur-based chemicals trader.
“Due to an over-dependence on commodities, the other sectors of the Malaysian economy are lagging behind, with some industries being priced out,” said the trader
“The infrastructure is weak from the ground up, so the opportunity to grow will continue to be restricted.
“Additionally, due to the growing strength of the opposition coalition, the current government has shifted its focus to retaining power rather than developing long-term sustainability of growth.”
His comments seem particularly prescient, given that they were also made ahead of Malaysian Prime Minister Najib Razak’s 14 September announcement that the controversial bumiputra, or sons of the soil, policy would be extended.
Bumiputra was introduced in the 1970s and involves providing ethnic Malays and other indigenous groups with privileges such as reserved university places and government jobs and contracts. The scheme was introduced to close the wealth gap with the country’s ethnic Chinese minority.
It had been hoped that the United Malays National Organisation (UMNO) might even roll back the policy after its success in the general elections earlier this year.
However, analysts now say that because the election was such a close-run thing, the decision was instead made to extend Bumiputra. More business and training opportunities and affordable housing are offered to Malays and the other indigenous groups.
The decision was also taken in order to shore up UMNO support ahead of forthcoming internal party elections, the analysts added.
Critics of the policy, including a growing number of Malays, told the AFP in this article that the affirmative action policy reduces the competitiveness of Southeast Asia’s third largest economy and is abused by the elites to benefit themselves.
There are also concerns that the widening of Bumiputra will further increase government debt, which was at 4.5% of GDP in 2012.
Another problem facing Malaysia is rising consumer debt, according to HSBC. The Fed decision is, of course, also bad news for policy action on this front.
“Malaysia has one of the highest levels of household debt in the region, at 80.5% of GDP in 2012, up from 75.8% in 2011,” wrote HSBC in its Q3 Asia Macroeconomic Report.
“Despite Bank Negara Malaysia’s [the central bank] efforts to increase credit surveillance, loan approvals for residential property purchases appear to be surging again [see the above chart], after some stability between late 2010 and 2012.
“Admittedly there is still scope for BNM to roll out more macro-prudential measures to specifically target the housing market.
“But these would be a complement, not a substitute, for interest rate normalisation, particularly given that the economy has grown above trend for the past two years.”
As chemicals companies prepare their budgets for 2014, they need to think very hard about how interest-rate normalisation will affect Asia ex-China. Fed tapering will eventually have to happen – possibly by as early as January next year, according to fellow blogger Paul Hodges.
“My guess is that Bernanke wants to set the process in motion before he retires in January, but he probably feels that it would be best to wait for a politically quieter time to begin,” Paul said in this excellent ICIS Insight article from my Washington DC-based colleague, Joe Kamalick.
“I suspect that the potential problems over the debt ceiling and the budget may well have been a key influence in the decision to postpone tapering.”
And as Joe points in the above article, another reason why the FOMC made its surprising decision on Wednesday was because the US economy is not performing as strongly as had been expected. This is, of course, bad news for export-dependent economies such as Malaysia.