During late August to early September 2013, emerging markets including Indonesia, India, Brazil, and Thailand, etc. have seen global fund withdrawals which were often at times rapid, and unforeseen as many investors are awaiting for the outcome of the interest rate decision from the US Federal Reserve Open Market Committee (FOMC) on September 17-18, 2013. The previous rush by the so-called ‘yield seeking’ investors into emerging markets as a result of the US Fed monthly bond purchases of approximately USD 87.0 billion a month, which caused global interest rates to decline, has now made up their minds to switch gears regardless of what the outcome of the interest rate decision is. As a reminder, the US Federal Reserve launched the Quantitative Easing or ‘QE’ Programme back in December 2008 to ease liquidity concerns among banks, consumers, and other various institutions, and to shore up capital markets. There have been three rounds of ‘QE’, and with the gradual improvement in various economic indicators, including the US unemployment rate, housing, consumer spending, industrial production, etc., US Fed Chairman, Ben Bernanke, has hinted the possibility of a gradual withdrawal or tapering of the QE programme as far back as May 22, 2013 during a US congressional testimony hearing on the state of US monetary policies.
The emerging nations including Indonesia and India have long enjoyed growing interest among international institutions interested in parking their funds in these markets. Some of the reasons cited include the search for higher yields, growing household populations as opposed to declining birth rates in the developed world, potential increase in household affordability as a result of favorable general economic conditions, etc. These markets offer great potential for pitching products, and services targeted at a broad spectrum of consumers, ranging from the low-end right to the upper echelons of the societies. India has enjoyed approximately 5.0% to 6.0% annualized GDP growth in the past, and Indonesia has also enjoyed high economic growth, as well as a recent upgrading of its credit outlook by the major credit rating agencies. However, in recent times, with the rapid withdrawals of global liquidity starting to become a reality, these emerging market economies have borne the brunt of such withdrawals with their currencies being hit as a result of such financial distortions taking place.
In a recent Bloomberg.com article dated September 06, 2013, it was quoted that the Indonesian Rupiah declined approximately 2.3 percent to 11,175 per dollar, after reaching an intraday low of 11,205 earlier. Malaysia’s Ringgit weakened to approximately 1.0 percent to 3.3170, the Thai Baht retreated approximately 0.9 percent to 32.425 and the Indian Rupee declined 0.6 percent to 66.0638. At the height of the currency crisis during late August 2013, the Indian Rupee declined to close to 70.0 per US dollar. As a close observer of the financial markets, I have also seen news reports citing migrant workers in Singapore remitting their monthly salaries back to their respective hometowns in Indonesia, India, and other regional countries as the Singapore (Sing) Dollar currency remains the bastion among the affected countries. Singaporeans are also taking advantage of the strength in the Sing Dollar by organising trips across the regional countries, including making day trips across the Causeway to Malaysia to buy groceries, dine, etc. It proves to be a bargain for many, but a pain for many of these policy makers in these emerging markets.
The has been a recent calm recently, especially in the case of India, where a new incoming Reserve Bank of India (RBI) governor was appointed on September 05, 2013. He is Dr. Raghuram Rajan, who used to be a professor at University of Chicago Booth School of Business, and was a renowned economist, who has experiences in monetary policies, and credentials such as having served as an economist for the International Monetary Fund (IMF). The first task he announced upon appointment was to assure investors that the RBI will take massive steps to reform the financial sector, and support the Indian Rupee. In a following statement after the close of the Indian stock markets, the RBI announced that it eased rules for some equity purchases by foreign investors, including the freeing up of foreign exchange swaps used by many Indian oil companies, plans to ease the foreign ownership rules in the local banking sector through the opening up of bank branches, and in the process encourage lending to the non-state sectors of the economy. According to a Bloomberg article dated September 06, 2013, it cited a Bank of America Merrill Lynch report that through the provision of swaps for banks’ foreign currency deposits, the nation’s reserves could potentially grow by approximately USD 10.0 billion. With the announcement of these reforms, the S&P BSE India Bankex of lenders jumped by the most since May 2009 on September 05, 2013.
The Deputy governor of Bank Indonesia (BI), Perry Warjiyo, has also came out to say that the central bank continues to stabilise the Indonesian Rupiah in the market, whereby on September 06, 2013, the institution has said that it was allowing the Indonesia Rupiah to find ‘new equilibrium’ even as it supports the currency to reduce volatility. This is in response to the rapid decline in the foreign reserves from USD 112.8 billion in December 2012 to approximately USD 93.0 billion in August 2013.
There are many lessons that could be learnt from the recent fallout of these emerging nation economies following the rapid declines being reflected across the board, including currencies, bonds, interest rates, etc., including undertaking massive fiscal, structural, and monetary reforms such as opening up the domestic sectors to foreign multinationals, undertaking major infrastructure projects essential to ensure that goods and services flow smoothly, eradicating corruption, and red tape, educational spending, etc. These moves have to be targeted at reducing the current account and fiscal deficits, including massive reductions in debt, etc. However, policy makers do need to monitor constantly on undertaking massive reforms, which could be seen as ‘pork barrel’ and avoid overenthusiasm in spending which might result in doing more harm to the economy than good. There is a need to reassure foreign investors that polices targeted at foreign investment flows must be investor-friendly, and to reduce barriers in conducting business transactions such as the liberalising of the foreign swaps markets by India.