If you think Federal Reserve Chair Janet Yellen is stressed, spare a thought for Agus Martowardojo. On Tuesday, the governor of Indonesia's central bank had to choose between cutting interest rates to support growth or hiking them to prop up his currency. He ultimately decided to split the difference and do nothing.
Martowardojo's dilemma is emblematic of the increasingly chaotic situation in the world's emerging markets.
Six months ago, the biggest fear for Martowardojo and his peers in emerging markets from Seoul to Brasilia was that Yellen would soon announce the first tightening of U.S. interest rates in a decade. Now, action by the Federal Reserve seems almost harmless by comparison with the threat posed by China's slowdown, currency devaluation and stock crash (stocks were down another 6.2 percent Tuesday).
What's more, the number of fragile emerging nations has expanded since 2013, when Martowardojo took the top monetary job in Jakarta. Back then, southeast Asia's biggest economy joined Brazil, India, South Africa and Turkey as a member of the Fragile Five, Morgan Stanley's list of emerging economies at risk of stagnation. Today, the bank's strategists are expressing worry about what could be termed the Troubled Ten. These include Asian economies Singapore, South Korea, Taiwan and Thailand along with Brazil, Chile, Colombia, Peru, Russia and South Africa.
But, of these countries, it's Beijing's neighbors who are most at risk. For years, China's 10 percent growth and voracious demand for commodities and manufactured goods boosted Asia's gross domestic product. That masked the inherent weaknesses in the region's financial systems and growth models, while taking pressure off politicians to push reforms -- until now.
Indonesia is Exhibit A for this chronic complacency. Since taking over the presidency last October, President Joko Widodo has been slow to take steps to reduce red tape, improve productivity or strengthen competiveness. Now, he's paying the price as China’s devaluation intensifies downward pressure on the rupiah, one of Asia’s worst-performing currencies this year. Exports fell 19.2 percent in July, while imports plunged 28.4 percent -- a sign that demand is weak both outside and inside the nation.
Or consider Malaysia, whose currency, the ringgit, is at levels last seen during the Asian financial crisis in 1998. Already battered by political scandals and falling commodity prices, Malaysia's capital flight is now accelerating as investors get more skittish about China's yuan. The same goes for the Thai baht, which had already been under pressure thanks to the clueless economic policies of the military junta ruling the nation (a mysterious explosion in Bangkok on Monday that killed at least 20 hasn't helped matters).
Korea's won is also sliding. Asia's fourth-biggest economy isn't just struggling to deal with the slowdown in China (which accounted for 30 percent of South Korea's exports in 2014), but Japan's renewed flirtation with recession. Japan contracted an annualized 1.6 percent in the second quarter, increasing the odds the Bank of Japan will seek to reduce the value of the yen. The last thing Korean President Park Geun Hye needs is a race to the bottom between high-tech Japan and low-cost China.
The cracks are starting to show in the cheery story Asia's officials and investors used to tell about the region's growth. For too long, that narrative, together with China's rapid expansion and central bankers' willingness to indulge in quantitative easing, sapped the urgency for painful structural upgrades to diversify sources of growth, lower trade barriers and reduce corruption. In years past, the region's central banks would have shored up growth by simply cutting interest rates. But China's slowdown is limiting Asia's options. Former Economist editor Bill Emmott described the situation in a Project Syndicate op-ed: "Although countries can ride waves of growth and exploit commodity cycles despite having dysfunctional political institutions, the real test comes when times turn less favorable and a country needs to change course." The region now faces that pressure amid declining investment returns, high local debt levels and skittish world markets.
This hardly means a return to the crisis days of 1997 and 1998. For all Asia's vulnerabilities, its financial systems, debt markets and central banks are plenty capable of fending off the current global turmoil.
But a decade of lazily riding China's coattails has left Asia ill-prepared for the slow-growth period that's to come. So great is the uncertainty about China that Yellen, too, will undoubtedly be factoring it into her decisions at the Federal Reserve. In that sense, she and Martowardojo have more in common than they might realize.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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