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Delay of tapering not good for Asia in long term
Publication Date : 20-09-2013
Markets in Asia woke up in a jubilant mood on Thursday, following the unexpected news overnight that the United States central bank had decided to delay a widely-anticipated withdrawal of its monetary stimulus.
The pullback, or tapering, of the US Federal Reserve's bond-buying programme would have been the first step towards getting the economy back to normal monetary conditions.
Singapore's Straits Times Index (STI) jumped 1.9 per cent when the market opened, while other markets across Asia were also seen surging on news of the Fed's closely-watched decision.
But all this glee is misplaced.
No doubt the Federal Reserve's decision to continue buying US$85 billion in bonds each month to spur lending and spending will give some immediate kindling for markets.
But in the longer term, it has three negative implications for Asia. First, it shows that America's economic recovery is far from strong.
The Fed had been expected to start dialling back its stimulus policy this month on the back of its relatively robust estimates of US growth. But after a two-day meeting that ended on Wednesday, it cut its forecast for US growth for both this year and next.
It now expects the world's largest economy to grow 2 per cent to 2.3 per cent this year, down from 2.3 per cent to 2.6 per cent previously. This is coupled with an estimation of 2.9 per cent to 3.1 per cent next year, down from an earlier 3 per cent to 3.5 per cent.
This means that Asia's exporters, who had been relying on a pickup in US demand as soon as this year, may have to wait a bit longer for any significant improvement in business.
Whether continued bond-buying will give any significant boost to economic growth is also by no means assured.
While easy monetary conditions likely would not hurt the economy - especially in the light of a looming political skirmish over US fiscal policy - how much they will help is debatable.
The second problem was the stunned reaction by markets Thursday, reflecting a breakdown in the central bank's communication channel and a possible loss of confidence in its signals.
This is likely to lead to increased unpredictability, especially in Asian emerging markets, which had been hit hard in recent months by the uncertainty leading to this week's Fed meeting.
Some believe that the fault of miscommunication lies with the Fed: that chairman Ben Bernanke, who had spoken in May of a plan to taper stimulus this year, lost his nerve after his speech sent markets into a tailspin.
His "flip-flop on this issue of 'tapering' since May not only damages his credibility, but also fuels much market anxiety", said UOB economists in a report.
Others blame markets for "ignoring" the Fed's repeated signal that any tapering decision would depend on the data.
With figures showing a job market that is still fragile, the decision on Wednesday makes sense, they argue.
But the bottom line is that previously hard-won clarity over the exit of Fed stimulus has now been shattered, with more damaging volatility expected over the next few months as markets second- guess the central bank.
With uncertainty over the Fed's economic thresholds for tapering, the implied slower rate of tightening and the "niggling concern that the Fed's confidence in its forecasts may not be as firm as previously thought", asset prices and volatility will be affected, said Citi economist Mark Schofield.
Lastly, there is a concern that the relief surging back into emerging markets following the Fed decision will paper over the reforms that countries such as Indonesia and India need for long-term growth.
Stocks and currencies in these two countries jumped Thursday, regaining some of their losses since last month after investors decided that the two economies' fundamentals were deteriorating too much to withstand the removal of US stimulus cash.
"One worry is that this window of respite will cause ongoing fiscal and monetary adjustment to be delayed or postponed... which will simply push difficulties out to next year," said Deutsche Bank economist Taimur Baig.
He said the rally in asset prices might bring back imbalances owing to overborrowing that "had just begun to correct in many parts of Asia". If commodity prices spike, that could lift inflation.
Even as markets celebrate the no-show that was "Septaper", chatter is already surfacing about "Octaper" or, more likely, "Dectaper" and "Jantaper".
Bernanke may have granted a reprieve, but tapering is inevitable - and policymakers and investors alike should use this chance to get their houses in order.