BEIJING: Southeast Asian finance ministers meeting grappled with how to counter spillover effects from US monetary policy and volatile financial markets, while bolstering their faltering economies.
Central banks across the region, from Thailand to Indonesia, have cut interest rates this year to spur growth. Such monetary easing carries big risks, as the US Federal Reserve is moving in the opposite direction, preparing to raise short-term interest rates later this year.
The divergence in global monetary policy has caused outflows from the region’s stocks and bonds in recent months, weakening the currencies of many Asian economies that depend on short-term foreign financing.
“We cannot rule out volatile capital flows,” said David Lipton, the International Monetary Fund’s No. 2, in a speech to Southeast Asian finance ministers meeting in Malaysia. “Countries will have to be careful to think through how their monetary policy and exchange-rate policies work.”
Southeast Asia’s five biggest economies are expected to grow 5.2% this year, up from 2014 but unchanged from 2013 and below 6%-plus rates of recent years.
Weak global demand is hurting the region’s exports of electronics, commodities and other goods, while local demand remains subdued due to a large debt overhang and low inflation.
Many Southeast Asian central banks are worried that cutting interest rates too aggressively could spur capital flight and destabilize economies. But they are facing calls from business groups, and even from within their own governments, to loosen policy as growth slows.
Thai Finance Minister Sommai Phasee, in an interview on the sidelines of the Malaysia meeting, publicly chastised his country’s central bank for not cutting rates more quickly.
The Bank of Thailand cut its key interest rate to 1.75% last week, but has generally lagged behind other central banks, from India to China and South Korea, that have cut rates more than once in recent months.
The Thai central bank fears precipitous action could lead to volatility in the baht. For now, the currency has remained stable, rising 0.5% against the U.S. dollar this year, at a time when many Asian currencies are weakening against a resurgent greenback.
Some exporters and politicians have complained the restraint is hurting them, as other currencies fall more quickly, making those countries’ goods cheaper in global markets.
“I hope the Bank of Thailand will play a more active role in our economy, ” said Mr. Sommai. “Once you start to cut rates that means you think about restoring and boosting the economy, then you should not do only one … you have to do more.”
Some economists say lower interest rates are needed given falling inflation and high debt loads across the region. Others warn that a round of currency wars won’t help solve the overall problem of weak global demand, and countries should focus on productivity gains.
Indonesia’s policy makers also are worried about capital outflows if the U.S. raises interest rates. Indonesia runs a big current-account deficit, making it dependent on short-term capital inflows for financing. Just below 40% of outstanding rupiah-currency bonds are held by foreigners.
The central bank cut interest rates earlier this year to boost an economy which is slowing fast due to lower prices for its exports of commodities like palm oil and coal. But that action spooked investors, who began to pull capital out of the country in recent weeks.
Finance Minister Bambang Brodjonegoro, in an interview, said the country was working on reducing its dependence on foreign financing, including slashing foreigners’ holdings of bonds to 30%. One possibility, he added, was to rely more on loans from multilateral lenders.
Indonesia is also working to reduce its fiscal and current-account deficits, moves that would shore up investor confidence in the country, Mr. Brodjonegoro said.
