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Trade war

Trump's moves complicate Asia's adjustment to higher rates

Trade war and fiscal stimulus add to market stress, says chief of central bank group

U.S. President Donald Trump at Beijing Airport in 2017   ¬© AP

HONG KONG -- Governments around Asia and the world are facing a greater challenge than expected from the normalization of U.S. interest rates because of Washington's trade war with Beijing and its soaring budget deficit, according to the head of a global grouping of central bankers.

Speaking to the Nikkei Asian Review, Agustin Carstens, general manager of the Bank for International Settlements, called on the U.S. to refrain from further tariff hikes.

Markets in Asian nations including Indonesia and India have come under pressure in recent months as investors have sold assets to move funds to the U.S. Rising American interest rates have made investors less willing to take on risks in emerging markets. The Indian rupee has fallen to an all-time low against the dollar, while the Indonesian rupiah is weaker than it has been in 20 years.

"It was to be anticipated that once the normalization of monetary policy started, this would generate a reversal of some (capital) flows," Carstens said. "This has been happening already."

However, the outflow has been aggravated by two unexpected factors, he said, citing firstly the U.S.-China trade war.

Agustin Carstens, general manager of the Bank for International Settlements, said Asian economies are better prepared for financial shocks than before. (Photo by Takeshi Kihara)

"A very expansive fiscal policy that the U.S. is embarking on and that is starting to have its impact on the economy [is also] accentuating the upward pressure on interest rates," said Carstens, who was governor of the Mexican central bank until moving to the Basel, Switzerland-based Bank for International Settlements last year.

The Trump administration's tax cuts last year have caused the U.S. budget deficit to swell and government borrowings to rise in turn. The reduced tax take has also freed up cash into an American economy that was already running hot, with unemployment at a 49-year low. Seeing rising risks from higher inflation, the U.S. Federal Reserve last month raised its benchmark interest rate for the third time this year.

According to the most recent data from the Bank for International Settlements, outstanding dollar loans and bonds for non-banks in emerging Asia totaled $1.41 trillion as of the end of March, up 8.7% from a year before.

Finance officials complained to their U.S. counterparts about risks from the trade war during the meetings of the International Monetary Fund and World Bank in Bali, Indonesia earlier this month.

"The U.S. heard the overwhelming voice of the rest of the world that it was in the interests of everybody to have a renewed framework to conduct trade and not to escalate something that already has generated concern, which is this process of imposing tariffs," said Carstens at his bank's Hong Kong office.

"It is already having an impact on some important economic decisions," he said. "There are still major issues at stake that could affect the growth of the world economy and even the stability of some countries."

Fortunately for Asia, most regional economies are in better shape to absorb financial shocks than they were at the time of the Asian financial crisis two decades ago.

"Since then, good measures have been undertaken," Carstens said. He highlighted the shift toward floating currencies, the growth in local currency bond markets and higher foreign reserves. "Asian economies are much better prepared now," he said.

Turkey and Argentina have borne the brunt of investors' loss of confidence in emerging markets so far. Within Asia, Pakistan formally requested aid from the IMF on Oct. 11. Its foreign reserves have dwindled to just $8.09 billion. Sri Lanka and Mongolia have already been receiving IMF support. (While the Bank for International Settlements has 12 Asia-Pacific members, the three states getting IMF help are not among them.)

"It is of the essence that sovereigns, mostly in emerging markets, pay particular attention to their fundamentals," Carstens said. "Stability starts by keeping your house in order... The countries which have been suffering the most are the ones that have had intrinsic vulnerabilities."

While companies and governments around Asia have racked up large dollar-denominated borrowings, as was the case 20 years ago, this time much of the debt relates to trade finance, Carstens said. Such debt is usually seen as relatively low risk but the trade war is causing some to rethink traditional assumptions.

"If the trade regime is not very clear in the future, that might start affecting trade financing," Carstens said.

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