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Chalongphob Sussangkarn knows a thing or two about
volatile currency markets.
Until
February, he was the finance minister of Thailand,
which, over the last decade, saw its currency plunge too
low and surge too high. Yesterday I bumped into
Chalongphob at a
Madrid
hotel as he grappled anew with the vagaries of exchange
rates—this time as a consumer exchanging dollars.
“I
should just get rid of these dollars before they fall
even more,” joked the president of the Thailand
Development Research Institute, as we exchanged US
currency for euros.
Thailand’s
currency, the baht, has risen 16 percent against the
dollar over the past 18 months, part of an Asia-wide
trend. Hastening the dollar’s slide is a Federal Reserve
set on avoiding recession at all costs. On April 30 the
Fed lowered its benchmark interest rate by a quarter
point to 2 percent, the seventh cut since September.
While
the Fed hinted it may be ready to pause, the amount of
monetary stimulus in the pipeline is a growing threat to
Asia. One immediate side effect is rising currencies, which poses
challenges for
Asia’s
export-dependent economies.
The
bigger issue is that easy money is fueling global
inflation.
“With
inflation running very high in most countries, the
ability of central banks to reduce interest rates to
offset the impact of the US slowdown is going to be
constrained,” says Subir Gokarn, Tokyo-based
Asia-Pacific chief economist at Standard & Poor’s.
Fed up
Fed
Chairman Ben Bernanke acts in the US’ interest. Yet, the
Fed’s cuts are adding ever more liquidity to global
markets. While bad weather and the increased use of
biofuels explain part of the run-up in food prices,
rising oil costs are as much a consequence of liquidity
as demand.
Asia is
on the frontlines of the phenomenon, especially with
investors like Mark Mobius betting on more rate cuts.
Mobius, who oversees $47 billion in emerging-market
equities at Templeton Asset Management Ltd., says
Bernanke may cut rates to 1 percent as US housing
foreclosures worsen.
Central
bankers in Asia could be excused for feeling a bit,
well, fed up by sliding US rates. Their concern is over
“hot money” flows of the kind that wreaked havoc in
Asia a decade ago. Investors who had poured in amid rapid growth
fled even faster at the first sign of trouble. Large
amounts of the liquidity created by the Fed are heading
Asia’s way to tap its rapid economic growth.
Too much
money
The
meltdown at Bear Stearns Cos. in March raised the stakes
as the Fed stepped up its campaign of rate cuts.
Asia was already awash in money thanks to the Bank of Japan (BOJ).
Even though
Japan
has been growing steadily since 2002, the BOJ’s key
lending rate is still a mere 0.5 percent.
Excess
liquidity is dovetailing with
Asia’s record buildup of currency reserves.
China,
Japan, Taiwan, South Korea and India hold a combined
$3.5 trillion of reserves. There’s increasing evidence
Asia’s currency holdings are seeping into the money supply,
adding to inflationary pressures.
In a
perfect world, economists would be predicting aggressive
rate increases in Asia. Yet, with more that two-thirds
of the world’s poor living in the region, central banks
may be reluctant to slam on the brakes.
The real
risk
Officials in
Indonesia, the
Philippines and Thailand may raise interest rates as
higher oil and commodity prices feed into inflation, say
economists such as Beng Ong at JPMorgan Chase & Co. in
Singapore. It’s unclear, though, how aggressive central
banks will be even as crude oil, rice, corn, wheat and
soybean prices reach unprecedented levels.
Timidity
might be a mistake. Inflation is the real risk to Asia’s
long-term prosperity, not slowing US growth. China’s
inflation has quickened to the fastest pace in 11 years,
and consumer prices rises in Sri Lanka and Vietnam have
exceeded 20 percent. Singapore’s consumer-price gains
have reached levels not seen since 1982.
There
can be little doubt inflation concerns will dominate the
Asian Development Bank’s (ADB) annual meeting, which
begins this weekend in Madrid. The ADB predicts
inflation in Asia will reach a decade high this year
even as economic growth cools.
Paying
the price
“It’s
hard to exaggerate how much of a problem rising
inflation is to Asia’s short-term stability and
longer-term prosperity,” ADB chief economist Ifzal Ali
told me in Tokyo last month. “It really is THE issue.”
Some
Asian policymakers sympathize with Bernanke’s plight. As
Philippine central bank Deputy Governor Diwa Guinigundo
sees it, the Fed is pursuing a “first-things-first
approach.” The trouble is, low rates are treating the
symptoms of the US’ problems, not the underlying
sickness.
What
ails the
United States
is too much consumption, too much debt, too little
household savings and a financial system that’s more
vulnerable than once thought. Fixing these imbalances
will require strong action from lawmakers and economic
officials—not more liquidity.
Japan
squandered a decade believing low rates would restore
its economy to greatness. The longer it takes the United
States to heed those lessons, the more Asia may pay the
price. |
