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Asia-PacificJune 1 2016

Cautious optimism prevails at 2016 Asian Development Bank meeting

After a turbulent 2015, faith in Asia’s economies was strong at the Asian Development Bank annual meeting in Frankfurt, despite falling exchange rates and capital outflows. Stefania Palma reports.
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GET-Takehiko Nakao

Market participants at the Asian Development Bank (ADB) annual meeting in May broadly agreed that Asia was hit by a perfect storm in 2015. The region had to contend with expectations of a US Federal Reserve interest rate hike, the surprise devaluation of the renminbi, fear of China’s economic slowdown leading to a hard landing, and the drop in oil and commodity prices.

While this mix led to severe currency depreciation against the US dollar and capital outflows in some Asian economies – the first in almost three decades – excessive pessimism was unjustified and a recovery is already underway, said market participants. 

Mitsuhiro Furusawa, deputy managing director of the International Monetary Fund, said Asia’s economies have managed capital outflows well. “Foreign direct investment remains stable and capital outflow has been mostly in the form of equities and not bonds, which is different,” he said. 

Paul Gruenwald, chief Asia-Pacific economist at ratings agency Standard & Poor’s, pointed out that Asian economies remained resilient because most of them run a current account surplus. “[These] volatile capital flows are almost a second-order issue… [as most Asian economies are] able to fund their current account,” he said. “They are insulated from this turbulence.”

Healthy currency moves

Marios Maratheftis, chief economist at Standard Chartered, went so far as to say that currency moves in 2015 were inevitable and even a sign of market development in Asia. 

“If you have a shock, you need something to absorb it,” Mr Maratheftis told an ADB seminar. “[Last year] Asia’s currencies were hit. In the 1990s, many Asian countries had fixed exchange rates; currencies could not absorb shocks and therefore we had the Asian financial crisis [in 1997]. Look at what happened in Nigeria this year. It kept a fixed exchange rate and there was a shortage of foreign exchange on the ground.” 

Nigeria is Africa’s largest oil producer, hence when oil prices plummeted to less than $40 a barrel in 2015, the naira came under strong downward pressure. On the parallel market, the naira reached values of up to N390 to the dollar, while the official interbank rate remained at N199.50 to the dollar, according to Reuters.

ADB president Takehiko Nakao agreed that flexible exchange rates in Asia today help navigate volatility. “Asia needs to be mindful about capital outflows, but countries have more flexible exchange rates now,” he said, adding that the impact of advanced economies’ monetary policy on Asia has been overstated. “What is more important is to pursue sound macroeconomic policies, invest more in infrastructure, education and so on, have better governance and maintain open trade and investment regimes in Asia,” he said. “We should pay attention to advanced economies’ monetary policy but Asian countries have their own pace of growth.” However, Mr Nakao stressed that a country such as China does not need to rush into liberalising its capital account. 

The hardest hit

Indeed, China’s capital outflows in 2015 – amounting to as much as $1000bn – accounted for 90% of emerging markets’ total capital outflows. Economies such as Malaysia and Indonesia, heavily reliant on the oil and gas sectors, were also vulnerable. As commodity prices nosedived in 2015, the ringgit and rupiah lost more than 15% against the US dollar. 

“When commodity prices [dropped] and there was uncertainty about the [US] Fed rate hike, the ministry of finance and the central bank prioritised macroeconomic stabilisation,” said Indonesian finance minister Bambang Brodjonegoro. “The central bank [made] sure the exchange rate was the buffer for [volatility] in the market. At the same time, we witnessed capital outflow. But from the government side we have done our best to attract inflows, especially through government bonds.”

In March, Indonesia printed a record-breaking $2.5bn dual-tranche sukuk. In order to lock in low rates ahead of the US Fed rate hike last year, the sovereign also issued a chunky $3.5bn bond earlier than usual in December 2015.

Despite these shocks, market participants believed financial crises in Malaysia and Indonesia are unlikely. “You have a problem when the currency moves and you also have an asset-liability mismatch,” said Mr Maratheftis at Standard Chartered. “In Indonesia’s case, there has been a big increase in foreign currency debt but the maturity profile is very long-term. In Malaysia’s case, most of the debt is in local currency so it is less of a problem.” 

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