The new normal

Emerging Markets World Bank editions, October 2009

We’re over the worst. Good news. But now the next issue arises: when does all the stimulus get taken back out of the system? It’s a question vexing economists globally, and Southeast Asia is no different. “We all find ourselves pondering the risk that the economic stimulus provided by fiscal and monetary policy makers might be withdrawn,” says UBS economist Edward Teather in Singapore.

While nowhere has yet had the brassiness to actually pull stimulus, several governments are already signalling that it’s on its way. “The scale of the economic shock over the last 18 months should mean the removal of stimulus will be tentative, cautious and halting,” Teather says. But outside of Malaysia, he expects to see “some tentative removal of accommodation” starting in the second quarter of 2010 across the rest of the Asean economies.

There is a long way to go before any of these economies get back to what you might call normalised policy rates. As elsewhere is the world, Asean nations eased monetary and fiscal policy aggressively from the first quarter of 2009 – in Malaysia’s case, for example, a 75 basis point cut in a single hit. Most of these nations rely heavily on exports and they saw, correctly, major headwinds as G3 economies fell into recession. Singapore, Malaysia and Thailand eased most on the fiscal side, and Thailand and the Philippines in terms of monetary conditions; Indonesia, which was already fairly loose and which fared much better in the financial crisis because of the strength of domestic demand (gross exports account for only 30% of GDP and net exports barely 1%, compared to over 60% in Malaysia) eased least. Also as elsewhere, Asean economies also provided subsidised credit and increased government spending, and it appears to have worked, keeping some semblance of business confidence afloat. It’s hard to say what exactly did the trick: as Teather points out, “it’s hard to know how much of the credit easing merely replaced lending that would have happened anyway.” But the mood in Asean nations is now more positive.

“We see improvements,” says Dr Zeti Akhtar Aziz, governor of Bank Negara Malaysia, the country’s central bank. “The declines are moderating and if we compare quarter on quarter we see positive growth. For us, what is most encouraging is the improvement in domestic demand: it has benefited from the stimulus but more importantly the continued access to financing has supported it.” She says Malaysia has continued to experience loan growth, has no large scale unemployment, low inflation, and is also assisted by rising commodity prices. “In addition exports decline has moderated.”

Three Asean countries have already put out estimates for the balance of government finances in 2010, and for all of them – Indonesia, the Philippines and Thailand – they project a lesser deficit than in 2009, which suggests less stimulus. Malaysia has not been so specific but is believed to be heading in the same direction. In terms of monetary policy, nobody is expecting any further easing and almost all central bank rhetoric suggests the important question is how long it takes for them to start rising again.

Singapore, as Teather points out, is under less pressure over debt sustainability because it has a very large net asset position, but the next monetary policy review in October will be closely watched. Last October it shifted to a zero appreciation of its policy band. The managing director of the Monetary Authority of Singapore, Heng Swee Kiat, said in July that “notwithstanding the sharp rebound in the economy in Q2 2009, growth remains below trend and inflationary pressures continue to be muted. We assess that the current policy stance remains appropriate to support the economic recovery and ensure medium-term price stability, which in turn underpins confidence in the Singapore dollar.”

“As always, central bankers’ decisions will be driven by their policy goals,” says Teather. This, he says, will always be a combination of trying to maximise employment in the economy, preserve the value of money and keep stability in the financial system. “Judging these criteria and the relative weight that should be attached to each is part of the art and science of central banking.” UBS’s calls: in Singapore, a possible tightening move in April 2010; Indonesia, a rate hike in the second quarter of 2010 with policy rates by to 8% by the end of that year; the Philippines, 50 basis points of rises in 2010 starting in the second quarter; Thailand, a raise from 1.25 to 1.75% in the second quarter; and Malaysia, no change through 2010.

While Teather’s views are fairly representative of economists in Asia, they are not universally held, and some take a different view. “It has become fashionable to argue that Asia’s monetary conditions are too lose and that too much domestic liquidity is creating asset price bubbles,” says Cem Karacadag, an economist at Credit Suisse in Singapore. He disagrees. “The entire region is being painted with a China brush, which does not wholly apply.”

Cem’s view is that Asian monetary conditions outside of China are “accommodative to be sure, and with good reason: domestic and external demand are still fragile and money and credit growth are still sluggish. Central banks are certainly not printing money because of foreign exchange inflows.” He doesn’t see it as obvious or inevitable that liquidity in Asia will spill into the real economy or asset markets – instead it’s sentiment that has driven up property prices in places like Hong Kong and Singapore rather than liquidity – and he doesn’t think capital flows are gushing in. “All told, we think monetary and exchange rate policies across Asia will remain defensive over the next year.”

“Put yourself in the shoes of policymakers,” he adds. Data out of Europe and the US are encouraging but still uncertain; exports and industrial production in Asia, while improved, are below previous peaks; capacity utilization is low so it will be a while before investment demand recovers; and “central banks certainly don’t want to tighten policy through currency appreciation, given that export sectors are the weak spot in their economies.”

Even so, Karacadag has been upgrading his real GDP forecasts across Asia; where recently he was calling -3.9% in 2009 and 4.4% for 2010 in Singapore, he now expects -2.4% and 5.7% respectively. He also expects import demand in G3 economies to climb in the next few quarters, helping Asian exports. It’s just that he doesn’t think these improvements are enough of a reason for central banks to start tightening in the near future.

Still, things have improved enough for central bankers to be talking about things other than the crisis. Zeti, for example, talks about longer-term visions for Malaysia’s entire economic model. “Our concern is mainly structural,” she says. “We want to make the economic transformation towards a higher performing economy, towards new areas of growth, higher value-added activity where we have a higher level of productivity and efficiency, and a more innovative industrial and services sector.”

For example, she speaks of how Malaysia’s banks have transformed themselves since the 1990s into useful agents for corporate finance, alongside the development of the bond market. “Now, they need to transition to be able to provide financing for the services sector, for knowledge-based activities,” she says. “The challenge for us it to have the skills to transform ourselves to that next level of economic performance and development.”Transforming economies is no mean feat, but it is at least positive to hear central bankers talking in those terms instead of the fire-fighting many have had to focus on for 18 months.

See this article as it ran: SE Asia story