Emerging Market Central Banks Show Power in Beating Back Attacks

LAGOS (Capitla Markets in Africa) – Emerging-market central banks are boosting investors’ confidence in their ability to withstand shocks by pursuing orthodox economic policies and ignoring political pressures.

As the economic crisis in Turkey this week threatened to roil markets in developing nations, policy makers from Jakarta to Buenos Aires reacted with a steady hand. Their response — raising interest rates, selling reserves or just providing reassurance that they’re paying attention — stands in stark contrast to Turkey’s refusal to follow convention and raise interest rates to defend a currency that earlier this week appeared to be in free fall.

The result of all the textbook governance is that what could have been a full-blown crisis set off by contagion has instead been largely taken in stride, with an index of emerging-market currencies only about 2 percent over the past week. Investors are saying central banks across emerging markets are now much stronger than they were 10 or 20 years ago.

Central banks “are better, in general” at dealing with a crisis, said Mike Moran, the chief economist for the Americas at Standard Chartered Bank in New York. He pointed out that moves by countries such as Argentina, Thailand and Indonesia to scrap fixed exchange rates since their last economic crises, as well as deeper pockets of foreign-currency reserves, has created plenty of buffer against sudden market pressures.

Here’s a summary of actions taken this week:
Argentina: After Argentina’s government dictated monetary policy for more than a decade, the new administration of President Mauricio Macri has allowed the central bank to fix an inflation target and move borrowing costs accordingly.

The bank jacked up its already highest-in-the-world interest rate by 5 percentage points to 45 percent Monday, and offered $500 million to support the peso. The move was welcomed by analysts and investors, who said it showed a commitment to defending the currency.

The central bank also said it plans to phase out 1 trillion pesos ($33.2 billion) of short-term notes, called Lebacs, by December in an effort to limit the currency volatility that often popped up when the securities were rolled over.

“The reaction of Argentina, with bold and appropriate measures on both the monetary and fiscal front, is encouraging,” said Mauro Roca, the managing director of emerging markets at TCW Group In Los Angeles. “It shows that it has reflexes and maneuvering room to respond to the external shocks.”

Indonesia: The rupiah slide has also pressured Indonesia’s government and central bank into action. The bank has sold billions of dollars from its reserves to halt the slide in the currency and raised the key interest rate this week for a fourth time since mid-May to 5.5 percent.

This week, authorities also announced a plan to restrict imports of capital and consumer goods and accelerate the use of biofuel to cut crude oil purchases, pushing for import substitution wherever possible.

While Indonesia has been particularly hard-hit by the emerging market selloff due to its widening current-account deficit, the quick response from the authorities has eased concern over parallels with the 1997-98 Asian crisis. Two decades ago, the Indonesian rupiah crashed while the nation’s debt-to-GDP ratio soared to 170 percent.

Thailand: Bank of Thailand has chosen to stay on hold so far, while assuring markets it is monitoring any spillovers from the Turkish crisis. The central bank’s assistant governor Chantavarn Sucharitakul said this week that policy makers will follow up on the Turkey rout impact with other countries.

Last week, the central bank left its policy rate unchanged, maintaining the view that there’s a decreasing need for monetary policy support to the economy and remaining firm on defending its independence. The Finance Ministry had tried to push the bank to cut borrowing costs last year, but policy makers have kept the key rate at 1.5 percent since 2015.

Although the country’s military took power in a coup in 2014, Bank of Thailand has been adamant in keeping its monetary policy independent.

South Africa: South Africa’s Reserve Bank went the same path as Thailand and limited its actions to verbal interventions. Deputy Governor Daniele Mminele said they will only wade into the market if its orderly functioning is threatened. For now, he said the rand’s decline to its weakest level in more than two years is just “an overshoot” tied to contagion from the Turkish crisis.

The Monetary Policy Committee will only respond to currency weakness if it feeds through to the wider economy, Mminele said. The inflation rate has been inside the target range for more than a year and is forecast to stay within the goal through 2020.

Mminele has also emphasized the need for monetary authorities to have independence, which he says is “sacrosanct”.

Philippines: The Philippine central bank has raised its benchmark rate 1 percentage point this year to curb soaring prices and help stabilize the peso, among the worst performers in Asia. It’s also been forced to sell some reserves, which have now fallen to the lowest since 2012.

While political pressure is rising with the president and the house speaker voicing their worries about faster inflation, Governor Nestor Espenilla has said the central bank is driven by its mandate of price stability and decisions are based on data.

The governor said this week the nation has several buffers that cushion it against external shocks, including strong economic growth, low debt and a flexible exchange rate.

India: While the Indian rupee dropped to a record low this week, the government has said it isn’t worried as long as the move is in line with other currencies. Central bank action won’t help much, Subhash Chandra Garg, the Finance Ministry’s economic affairs secretary, has said.

The monetary policy committee led by Governor Urjit Patel has increased interest rates twice since June to curb price pressures, while the central bank used foreign reserves to check currency volatility.

Source: Bloomberg Business News