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Fed’s QE3 May Be Preferred Over QE2 for Asia in Export Slump

U.S. Federal Reserve Chairman Ben S. Bernanke
Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Joshua Roberts/Bloomberg

Jan. 27 (Bloomberg) -- U.S. monetary stimulus, blamed in 2010 for spurring speculative capital flows to emerging markets, may find less opposition this time round in Asia as the region’s focus shifts to supporting economic growth.

Fed Chairman Ben S. Bernanke laid the groundwork for a third round of quantitative easing through asset purchases, a so-called QE3, saying two days ago the Fed is prepared for further “accommodation.” Officials from China to South Korea were among those who criticized QE2, when they were raising interest rates in part to stem property and stock price surges.

This time, exports are slowing and Asian currencies have fallen, with the International Monetary Fund predicting growth in developing Asia at 7.3 percent this year, compared with 9.5 percent in 2010. The difference means there may be less need for measures to limit capital inflows, after nations from Thailand to Indonesia took such steps last time.

“We’ve gone from a situation where Asian economies were doing well and we were dealing with too much money to one where growth is slowing and inflows are becoming more balanced,” said Sanjay Mathur, Singapore-based head of research and strategy for non-Japan Asia at Royal Bank of Scotland Group Plc. “The voices against quantitative easing from Asia won’t be so loud and it won’t draw as much resistance this time around.”

Currency Slump

Europe’s debt crisis, and the concern that Greece will enter a disorderly default, tempered investors’ appetite for emerging-market assets in 2011. During the week of Sept. 19, Asian currencies tumbled the most since the region’s financial crisis in 1998, prompting nations to deploy some of their currency reserves in defense.

The Indian rupee has declined about 11 percent in the past six months, followed by a 6.5 percent drop in the South Korean won and a 5.5 percent depreciation in the Indonesian rupiah. The MSCI Asia Pacific Index of stocks slumped about 17 percent last year, halting a two-year rally in equities.

A slowdown in Asia may be spreading with economists predicting Taiwan will report weaker growth when it releases gross domestic product figures on Jan. 31. Taiwan’s GDP increased 2.8 percent in the fourth quarter, the slowest pace in more than two years, according to the median estimate in a Bloomberg News survey.

Korea Slowdown

South Korea’s economy grew the least in two years last quarter as exports sank 1.5 percent from the previous three-month period, the central bank said yesterday.

The Philippines may say its economy expanded 3.8 percent in the fourth quarter from a year earlier after growing 3.2 percent in the previous three months, another survey showed ahead of figures due Jan. 30. The Philippine economy probably grew 3.7 percent in 2011, less than half the 7.3 percent pace reported in 2010, according to a separate survey.

“If there is a QE3 in the near term, we think it would be less problematic for Asian policy makers this time around,” said Paul Gruenwald, chief Asia economist at Australia & New Zealand Banking Group Ltd. in Singapore. “Inflation pressures are falling and the policy bias is clearly to cut rates. So a bit of additional stimulus from the Fed would be helpful.”

Malaysia’s central bank may give clues about its readiness to lower borrowing costs next week, when it’s likely to keep its benchmark rate unchanged for a fourth straight meeting, according to economists surveyed by Bloomberg.

Balancing Risks

“The current rates continue to be accommodative,” Bank Negara Malaysia Governor Zeti Akhtar Aziz told reporters today. “We will make an assessment of the degree of accommodation that is important for our economy to sustain growth and employment. We have to balance the risk to growth with the risk to inflation.”

The Fed bought $1.7 trillion worth of Treasury and mortgage debt between December 2008 and March 2010. As the Fed announced its next round of purchases in November 2010, China’s Vice Foreign Minister Cui Tiankai said the U.S. “owes us some explanation on their decision.” Chinese central bank adviser Xia Bin called it “uncontrolled” money printing and then-Japanese Prime Minister Naoto Kan cited the U.S. pursuing a “weak-dollar policy.”

Asia’s foreign reserves grew “significantly faster than any time in history” between April 2009 and September 2010 as the region attracted about $2 billion of capital inflows daily, according to DBS Group Holdings. About $600 billion in foreign capital flowed into Asia in the year through June 2010, Singapore’s central bank said.

Monitoring Flows

Any signs of resurgent capital inflows may still spark criticism from Asian officials, said Tim Condon, chief Asia economist at ING Financial Markets.

“If there were to be QE, and by that I mean a significant easing of U.S. monetary policy, there would be a significant depreciation of the U.S. dollar and Asian currencies would be on the other side of that trade,” Singapore-based Condon said. “Central banks may initially be less hostile but they will be receiving the flows and in some cases they would react the same way” as they did during QE2, he said.

The South Korean won and Malaysian ringgit may be among the biggest beneficiaries of another round of Fed quantitative easing, Mathur of RBS said. He also recommends the dollar debt of the Philippines and Indonesia.

Shift in Tone

So far, the tone from policy makers has been different.

“The Fed move affirms some policy certainty from that part of the world, which is important for anchoring global investor action and which could translate to providing emerging market economies, including the Philippines some policy breather to concentrate on improving domestic demand,” Philippine Governor Amando Tetangco said yesterday. “To the extent that the Fed action sustains the positive growth outlook in the U.S., this should also be positive for our own trade prospects.”

By contrast, Philippine officials had said that QE2 would add to global liquidity and that they were prepared to address capital inflows through a “menu” of measures.

Bank of Thailand Governor Prasarn Trairatvorakul said yesterday the Fed’s decision to keep low rates until 2014 is “necessary to facilitate the economic recovery.”

To contact the reporters on this story: Shamim Adam in Singapore at; Karl Lester M. Yap in Manila at

To contact the editor responsible for this story: Shamim Adam at

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