Why phasing out QE in US can be good news for region
February 05, 2014 00:00
By David Mann
Now that the United States' super-easy monetary policy dubbed quantitative easing is coming to an end, some say the story on emerging markets' growth is over. We disagree.
In fact, the reasons QE is ending bode well for emerging markets, especially emerging Asia, the region most open to trade.
This is likely to be the first year of truly better growth for the world economy since the global financial crisis. We expect global gross domestic product to expand by 3.5 per cent, with growth of 6.6 per cent in emerging Asia, 1.3 per cent in Europe, 7.4 per cent in China and 2.4 per cent in the US.
For the first time in years, all major economies are set to grow at a reasonable rate. The world economy is at long last gaining a more solid footing, with multiple drivers of growth.
This is good news for growth in emerging Asian economies, which have increasingly used leverage to support domestic demand in the post-crisis years. While leverage has become stretched in pockets of some economies, there is little reason to expect this – or external events in 2014 – to lead to a crisis.
The region is not in a bubble, and there is no “miracle economy” anywhere. A new, more realistic and balanced view of Asia is emerging among global investors – one in which local markets do not outperform year after year, regardless of the risks, and one where prices can adjust downwards when excessive optimism has crept in.
Many commentators are worried about the impact of higher global interest rates and tighter financial conditions on emerging markets, which have hitherto benefited from large inflows and easy financing conditions (since 2009, emerging Asia has seen gross inflows of about US$630 billion).
The sell-off we saw in emerging markets last year – when investors were anticipating QE tapering – were just the beginning, these commentators argue.
At Standard Chartered, we agree that monetary-policy changes in the US are critical. By our estimates, they are twice as important for global liquidity as the next-most-important central bank, the European Central Bank, which is twice as important as the next central bank, the Bank of Japan, which in turn is twice as impactful as the People’s Bank of China.
At this point, however, unless inflation comes roaring back in the US, driven by a surge in credit growth – unlikely in our view – there is not a lot more left to be priced in for US rate-hike expectations. For this reason, we believe the stresses in emerging Asia should be less pronounced than in 2013. A key factor will be the timing of the rise in short-term interest rates – something more likely to be an issue in 2015 than in 2014.
While it is true that money is no longer flooding into emerging Asia indiscriminately, this does not mean that the structural story is over. In fact, clearer market signals will now be given to policy-makers around the region that good policy – driven by growth-enhancing reforms – will be rewarded, and that complacency will not. In other words, the fact that we are coming out of the phase of indiscriminate inflows is a good, cyclical adjustment, not a cause for panic.
Current-account balances, the net value of a country’s trade in goods and services with the rest of the world, should also start to stabilise in 2014, and this is another landmark point. The major reasons we do not foresee major problems for emerging Asia this year are that no country is likely to see a dramatic increase in inflation and few economies are afflicted with current-account deficits. In aggregate, we expect a rise in emerging Asia’s current account-balance during the year.
The three economies in emerging Asia with current-account deficits – India, Indonesia and Thailand – all happen to be holding elections this year. In Thailand, the outlook is unclear, and the longer the policy paralysis goes on, the less likely it is that growth targets can be achieved.
In India, coalition politics is the reality, and we will be watching closely to see how the reform agenda is prioritised after the elections.
Indonesia, meanwhile, has already demonstrated its ability to go through the political cycle without it disrupting the sound economic policies that have been in place since the post-crisis reforms of the early 2000s.
David Mann is regional head of research for Asia at Standard Chartered Bank.