Today: Fed tapering ‘will not be a bad thing’ for ASEAN

SINGAPORE — The current bout of uncertainty in financial markets underscores the need for the United States Federal Reserve to scale back its stimulus measures in a gradual and carefully managed process, but the so-called tapering will not be a bad thing, Deputy Prime Minister Tharman Shanmugaratnam said yesterday.

While market volatility will likely recur from time to time, members of the Association of South-east Asian Nations (ASEAN) are in a good position to weather large amounts of capital outflow as growth in the region is supported by solid fundamentals, he added.

“The tapering of quantitative easing and tightening of US monetary policy, when it eventually occurs, will not be a bad thing for the region’s economies. It is not in anyone’s interest, including emerging economies, for very low global interest rates to continue indefinitely. Low or negative interest rates have inevitably led to a search for yield, and a build-up of financial imbalances in Asia,” Mr Tharman said at the inaugural Network ASEAN Forum here.

“The (winding-down) of QE would also take place together with a recovery in the US, and is not in itself a negative for ASEAN countries. Growth among ASEAN countries has stronger structural underpinnings than in most other regions,” he said.

Mr Tharman also noted that the ASEAN countries had come a long way since the 1997 Asian financial crisis, when the region was hit by large-scale capital flight that sent many economies into a tailspin.

“Foreign currency debt levels are now much lower, and official foreign reserves much higher. Most ASEAN countries have shifted towards more flexible exchange-rate regimes, which has reduced the risk of overvalued currencies and a sudden re-pricing of foreign currency debt. Financial regulatory and supervisory regimes are also now more robust, and banks’ capital buffers are adequate.”

Earlier this week, shares in the region plummeted on worries that the US Federal Reserve would start winding down its US$85 billion (S$109 billion)-a-month bond buying programme as early as next month. On Tuesday, the Straits Times Index fell into the red for the year to date, while the Jakarta Composite Index plunged to its lowest in almost a year.

But while the advanced economies recover, relatively low growth in ASEAN’s main trading partners such as the US and euro zone means that external factors will be less supportive than before and will likely stay so in the next five years or more, Mr Tharman warned.

Meanwhile, China’s economic restructuring may pose greater competition for some ASEAN countries.

“China’s rebalancing from investment-oriented to consumption-led growth also heralds the end of the commodity ‘super-cycle’. The end of the boom in commodity prices increased the need to diversify our economies in ASEAN,” said Mr Tharman.

However, China’s evolving economy also offers opportunities. Rising income levels and an expanding middle class in the country will create greater demand for higher-value and more sophisticated products, which some countries can tap for growth.