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Economy

Central bankers find their hands tied

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A teller handles U.S. dollars at a money changer in Jakarta on May 18. President Joko Widodo's government has banned the use of foreign currencies in domestic transactions.   © Reuters

BANGKOK -- In the wake of China's sell-offs, the former Thai general did not hide his fear. 

     "I am worried because all the economies are in the same chain," Prayuth Chan-ocha, who became Thailand's prime minister after leading a military coup last year, told the media July 9.

     Bank of Korea Gov. Lee Ju-Yeol that day predicted the market swoon would hinder Chinese consumption, affecting exports to the country. The South Korean central bank thus lowered its economic growth forecast for 2015 from 3.1% to 2.8%. 

     The previous day, Bank Indonesia Gov. Agus Martowardojo said his nation must brace itself "because China is the epicenter of economic growth in the region." He emphasized the risk of a further depreciation of the rupiah.

     Policymakers across Asia are scurrying to figure out ways to keep their economies chugging. They were already pondering how to cope once the U.S. starts raising interest rates. The recent troubles in Greece and the Chinese market collapse have only complicated matters. 

     A U.S. rate hike, widely expected to come later this year, could trigger capital outflows from emerging markets and preclude monetary easing.

     There are already troubling signs for the region's up-and-coming nations. The Malaysian ringgit and the Indonesian rupiah have dropped to their lowest levels since the Asian currency crisis in 1997. This is largely due to deteriorating trade balances, stemming from declines in the value of oil and other commodities. But there are other factors, too -- global uncertainty and nagging questions about authorities' ability to steer their economies.

     The administration of Indonesian President Joko Widodo has reacted to the rupiah's fall in an unusual way. On July 1, the government banned the use of foreign currencies in domestic transactions. This attempt to shore up the home currency has drawn criticism from economists and private businesses alike, denting the credibility of Widodo's economic policies. 

     In Malaysia, Thailand, Taiwan and India, household debt, corporate debt or both are already so high that there is little leverage to boost domestic demand. All things considered, central bankers in most emerging Asian economies have few cards left to play.

Contracting exports

External demand is unlikely to compensate. Export volumes from Asian economies excluding Japan have been shrinking in recent months, according to recent research by HSBC economists Frederic Neumann and Rupali Sarkar.

     Asian exports have only shrunk three times in the past two decades -- during the currency crisis, when the dot-com bubble burst in the early 2000s, and during the global financial crisis of 2008.

     Shipments to the U.S. and Europe are holding steady, the research shows, indicating that the current decline is attributable to the ongoing slowdown in China. The stock market dive heightens the risk of a further contraction in China's imports.

     Thai Finance Minister Sommai Phasee is preparing for that. He revealed July 9 his intention to increase the government's budget deficit to 4% of GDP for fiscal 2016, which starts in October, from the current 2-3% level. About 13% of Thailand's exports go to China.

     He may have the right idea. If tax money is effectively spent on infrastructure -- underdevelopment of which remains a huge structural hurdle for Asia's emerging economies -- it should improve both near-term domestic demand and medium-term growth potential. Reforms aimed at efficiency and fair distribution of wealth would enhance growth potential as well.

     Regardless of how the markets move in the coming weeks and months, emerging Asian nations cannot expect central bankers to solve their problems. The onus will be on governments to show sound policy judgment and execution.

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