Federal Reserve

How US tapering and politics will shape growing Asia

Simon Tay and Nicholas Fang assess the challenges for Asia and consider how politics, both domestic and foreign, will shape the buoyant economies of a region on the rise

PUBLISHED : Wednesday, 08 January, 2014, 12:11pm
UPDATED : Wednesday, 19 April, 2017, 6:16am

In the aftermath of the 2008 global financial crisis, two key phrases that conveyed the essence of the recovery strategy were "unconventional monetary policy" and "the new normal". The developed world would pump up credit and lower interest rates to try to resuscitate failing companies and their economies. These measures would ease off once things stabilised, but there would be no return to prior years of heady growth.

After five long years, it seems that future has now arrived.

The biggest transition in the global economy today is the US Federal Reserve "tapering". The good news is that this comes on the back of improvements in the American economy, including job figures and a show of confidence among corporations and consumers. The not-so-good news is that the growth will not be strong by pre-2008 standards.

There is also potentially negative news on how this plays out for the rest of the world. Policy stability in the US cannot be taken for granted, especially after the world has seen how dysfunctional beltway politics shut down Washington. Remember mid-2013? Rumours of the tapering sent markets tumbling - especially in India and Indonesia.

As America shifts, emerging and Asian markets must adjust. They outperformed the West throughout much of the crisis years, but most have now stumbled and may be mired in a middle-income trap unless they reform and upgrade. China is doing better than others and, even so, its future is of slowing, single-digit growth.

The US tapering is, moreover, not the only major transition. Asia's two largest economies are also going through complex changes that can have outsized implications for others.

There are possibilities for countries in the region to adapt and gain from these transitions

China is deliberating tightening the spigot of capital and credit that indiscriminately flooded the economy after 2008. But, on the other hand, Beijing must also not cause an artificial drought. Finer calibration will, moreover, be difficult given the close relationship of state-owned enterprises, and an ongoing battle against corruption involving powerful cliques.

Japan is one year into Abenomics, a massive loosening of yen-based credit to revive its economy. Stock markets and corporations are up, while the yen is down vis-à-vis the dollar and most major currencies. But so far there's been little progress on deeper reform and political focus has wavered.

In large part, the Abe administration is shifting focus to politics and security because of tensions with China over the Senkaku/Diaoyu islands. Given the historical context, misunderstandings and even a skirmish at sea or in the disputed air space cannot be ruled out. This, even more than the disputes in the South China Sea, has the potential to disrupt stability and growth across the region.

The news that China is considering reorganising its military regions, with a view to counteracting a US-Japan alliance, cannot be reassuring for Asia. The revamp is likely to enhance Beijing's ability to launch attacks in the disputed territories in the South and East China seas, which would not contribute to easing tensions.

Yet even if the worst is avoided, Beijing and Tokyo seem in no mood to discuss - let alone co-ordinate - their financial and economic interdependencies, and the implications for the rest of Asia. Without this, co-operation will be stunted, no matter what the Association of Southeast Asian Nations - which sits at the hub of the region - tries.

Asean outperformed for most of last year. But 2014 will bring challenges, and not only in the economic sphere. Politics is returning to the region with a vengeance.

Indonesia is now digesting the rupiah's abrupt depreciation and trying to boost exports and investment to minimise trade and other deficits. A further crisis can be prevented, but it seems unlikely that rapid growth will return. The demand for resources that propelled Indonesian growth has eased. Worse, with the presidential election due, there is increased political infighting. A sense of policy drift is fuelling concerns that difficult but necessary reforms will be put off.

In Bangkok, after a period of truce, politics is very visibly denting the otherwise robust Thai economy. At this stage, a slowdown in exports and a fall in the baht don't seem critical. But if no political solution is found and trade and other deficits widen, this could combine negatively with market reaction to the US tapering.

For Myanmar, this past year was something of a honeymoon, as international attention from foreign governments and investors gave attention to the once pariah state. But harder questions may well emerge this year. The country's chairmanship of Asean and fast-approaching 2015 elections will bring greater and possibly more critical focus - especially if the restive situation with minorities in the Rakhine state and elsewhere is not stabilised.

While these bring considerable and complex challenges, there are also possibilities for countries in the region to adapt and gain from these transitions.

A renewed domestic economy can bolster the American corporate involvement in the region. This is especially if and when the Trans-Pacific Partnership agreement pushed by the Obama administration is finalised to integrate the economies of the countries in the negotiations.

In the security realm, the rationale for a continuing American presence has been reinforced by Sino-Japanese tensions as well as the rapid humanitarian assistance provided to the Philippines after Typhoon Haiyan.

While it remains to be seen whether Abenomics will be successful, the short-term boost to the Japanese presence is palpable. Southeast Asia, especially, witnessed the upsurge of investment.

Nor will China be left behind. While the disputes in the South China Sea remain, the promise to negotiate a code of conduct has ushered in a kind of truce. China has also softened its rhetoric on the maritime disputes, bringing hope for more peaceful discussions. More broadly, Beijing has promised to deepen ties with a number of Southeast Asian countries, with trade and also investment likely to go up.

Asean can help itself by moving ahead steadfastly with its commitments to create a single community by 2015. Especially important will be the Economic Community pledges to create a single marketplace and production base.

How the region copes with this period of transition will determine whether the years ahead will really see a resurgent and dominant Asia.

Simon Tay and Nicholas Fang are, respectively, chairman and executive director of the Singapore Institute of International Affairs. This article first appeared in Singapore's Today newspaper