The impact of postponement of Fed tapering on Asian currencies – is it enough for Asian economies to cheer about?

On September 18, 2013, the US Federal Reserve (US Fed) ended its highly anticipated two-day Federal Open Markets Committee (FOMC) with a press conference led by Fed Chairman Ben Bernanke where he announced that the US Fed will continue with its USD 85.0 billion a month quantitative easing (QE) programme, bringing much relief to many global financial markets with major stock indices spiking upwards, and the US Dollar weakens. The September 2013 FOMC meeting has long been a closely watched event by many investors as the QE programme has been a significant boost to their asset values, providing ample liquidity to the markets, ‘juicing’ up the markets, brought about continued boom in the US housing markets, bringing down mortgage loan rates, etc. The holding off of the so-called Fed ‘tapering’ has also brought about much relief to several Asian currencies, namely the Indonesian Rupiah (IDR), and the Indian Rupee (INR), as these two currencies bore the worst brunt of the emerging markets (EM) sell-offs during the weeks leading up to the September 18 US Fed announcement. Both currencies saw massive declines prior to the US Fed announcement due to the concerns over both countries’ current account deficits, and the pace of fiscal reforms that are essential in stabilising the rate of capital outflows from these two countries.

In this article, I shall examine the impacts of the post September 18 US Fed announcement have on Asian currencies, and whether it is going to be bring about some form of reprieve for most Asian currencies that saw their capital markets heading to near collapse, similar to the one experienced during the 1997-98 Asian Financial Crisis. One of the largest Southeast Asia countries, Indonesia, did experience some relief on the pace of capital flight out of the country, with the IDR advancing approximately 0.5 percent following the September 18 US Fed announcement. However, in a news article dated September 24, 2013, approximately a week post US Fed announcement, it appeared that the rise in the value of IDR was only temporary, as Bloomberg News reported that there was some speculation that several domestic firms increased their dollar purchases in order to take advantage of a weakened US Dollar currency. The news also reported that on September 24, 2013, the IDR fell by approximately 0.4 percent to 11,488 per US Dollar, after reaching 11,586 earlier. It was touted to be the weakest level since April 02, 2009 based on the price quotes obtained from the banks. In addition, in the Over-The-Counter (OTC) trading, there were indications of a price decline with the one-month non-deliverable forwards (NDF) falling by approximately 0.5 percent to 11,360. The contracts were reportedly to be approximately 1.1 percent stronger than the spot rate, after trading on average 1.9 percent weaker than in the past month.

The continued declines in Indonesian Rupiah (IDR) do not come as much surprise to many investors, including myself. Indonesia is one of the largest consumer and producer of diesel oil. Although they are members of the Organisation of Petroleum Exporting Countries or OPEC, the country continues to import crude oil elsewhere in order to sustain its economic growth. The US Fed’s QE programme has provided tremendous economic growth as a result of the massive amounts of capital inflows to emerging markets, and Indonesia has been one of the main beneficiaries of such capital inflows that helped fuelled the mining industry, commodities including palm oil, coal, etc. However, fuel subsidies pre Sept 18 were still being implemented to finance major capital expenditures, however, the ending of the fuel subsidies during the first half of 2013 ended in several protests on the street calling the Indonesian government to halt its discontinuation plan of fuel subsidies, as most households will have to bear the upfront costs of fuel hikes, bringing about lower real wage growth, coupled with a rampant rise in inflation rates, as the central bank, Bank Indonesia (BI) moved to tighten interest rates. According to the September 24, 2013 news article, Indonesia’s current account deficit surged to a record of approximately USD 2.3 billion in July, which has continued to be in the red for the seventh quarter in a row through June. The August trade data is expected to be released on October 01, 2013.

With India’s case, it remains quite uncertain as well, but there appears to be some signs of investor confidence in the ability of its newly appointed Governor of Reserve Bank of India (RBI), Dr. Raghuram Rajan, a prominent University of Chicago Booth School of Business tenured professor, and a former long-time International Monetary Fund (IMF) economist. In a news article dated September 26, 2013, it reported that the Indian Rupee (INR) gained by approximately 0.3 percent to 62.28 per dollar as of 1012 hrs Mumbai time. According to the September 26 news article, the INR has rebounded by approximately 5.5 percent in September, and was touted as one of the best performing currencies among Asia’s 11 most-traded currencies, paring its loss for the year to approximately 12.0 percent. The revival of the INR came at a time when Governor Rajan has vowed to stem the tide of capital outflows through the boosting up of the local supply of US Dollars using swaps, and allowing commercial lenders to double their overseas borrowings to 100.0 percent of core capital. The minimum maturity was cut to one year for such loans compared to three years before. According to an analyst quoted in the September 26 news article, he indicated that many investors were now seeing the renewed confidence in the ability of RBI to build up its foreign currency reserves and there should be an orderly watch over any speculative capital flows that have threatened the INR in the past. The RBI’s current repurchase rate stands at 7.5 percent from 7.25 percent on September 04 when Governor Rajan took over the helm.

However, with all the monetary reforms that are just starting to take place under the new leadership at RBI, there are still many fiscal policy uncertainties as India heads to the election polls next year, and policy uncertainties are expected to follow through as a result of a weakened Congress Party coalition led by Prime Minister Mahmohan Singh.

Given the contrast in the fortunes of both India and Indonesia following the September 18 US Fed announcement, it does pose some questions on how willing policy makers in Asia, in general, adopt tough austerity moves in order to avoid the repeat of the 1997-98 Asian style financial crisis. Is there concerted approach on the part of these policy makers to do more to adopt sound monetary and fiscal reforms that will shore up the foreign currency reserves, boost trade and investments through the easing of local and foreign entry into previously protected industries, removal of fuel subsidies that have caused much of the current account deficits experienced by several Asian economies, etc.? The threat of a US Fed tapering is not too far from sight, as many analysts have pointed to a December 2013 start of the tapering policies. Given this backdrop and uncertainties ahead of an expected eventual ending to the QE programme, I believe that Asian policy makers should not halt their continuing economic reforms, and should strive on and maintain the willingness to adopt measures that will hopefully lighten the impact of a massive capital flight to quality which had brought about market instabilities previously, and to a point of hopelessness in some countries, namely India, and Indonesia. This, I believe, should not happen again, as the next credit event, such as a pullout of capital flows might result in more uncertainties and turmoil to an already battered state that is barely recovering from the previous round of capital outflows.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc