Prasarn Trairatvorakul struggled for balance as the ferry taking him across a Bangkok river pitched in choppy waters. “It’s a bit like the world economy these days,” the Bank of Thailand governor deadpanned as he plopped down next to me on a ferry deck chair. “Very hard to control.”
Prasarn would certainly know. Thailand may offer the best example of a curious phenomenon: how the Federal Reserve’s ultra-low interest rates are benefiting Asia more than America. Excess central-bank liquidity explains the disconnect. Asia is getting loads of it, American assets are getting little.
This hot money is making waves in Asia. It’s pumping up growth, real estate and stocks, and, according to many economists, breathing new life into the ‘Asia decoupling’ narrative. Asia hasn’t decoupled from the West so much as it has mutated into a giant net, catching money emanating from Washington, Frankfurt and Tokyo. The result may be huge bubbles, the next wave of which could be dodgy stock offerings.
“The average quality of new offerings is beginning to fray slightly around the edges,” says London-based hedge fund manager Jeff Coggshall of Tiburon Partners. “A number of deals have mysteriously been pulled forward,” he adds. “It will doubtless not be long before some genuinely frightening initial public offerings (IPOs) begin hitting our desks.”
If Fed chairman Ben Bernanke wants to know who is benefiting most from his policies, Bangkok is as good a place as any to look. Thai stocks are up a spectacular 52% this year, while the S&P500 is up 5%. Thailand, which is growing at a rate of 9.1% a year, isn’t alone. Singapore’s 10.3% growth is another case in point.
So are growth rates in Malaysia (8.9%), the Philippines (7.9%), South Korea (7.2%), and Hong Kong (6.5%). Stockmarkets are booming even as America’s gloom is deepening.
The reason? Investors know that any move by the Fed to ease monetary policy further means more liquidity is about to zoom Asia’s way. It’s ironic, really. America is desperate to aid its beleaguered export industry and all it’s doing is exporting the stimulus needed at home.
But it’s not as much fun as it sounds for Asian policy-makers. They are caught by the biggest economies flooding markets with money and warring over currencies. “I am concerned,” says Prasarn. “Thailand is not a large economy, but we are very open. The saying goes that when elephants fight, the grass is trampled.”
That’s quite a challenge for Prasarn, who took over as central bank head on 1 October. Asia has too much of a good thing on its hands as money gravitates this way. The trick is to make sure it is used productively and to avoid dangerous bubbles. The trick for Bernanke, meanwhile, is making sure that the US economy captures more of the Fed’s stimulus. How that can be accomplished is easier said than done. Capital controls? A tax on investment outflows?
I posed these questions to well-known economists Barry Eichengreen of the University of California, Takatoshi Ito of University of Tokyo and Eswar Prasad of Cornell University – all of whom were in Bangkok for a Bank of Thailand symposium. They agreed it’s unclear how America can adequately address its monetary-leakage problem.
The answer for Asia may be as simple as tightening fiscal policy. That, Eichengreen says, could take some of the heat out of economies being overwhelmed by hot money. Even so, there’s no getting around the fact that loose international monetary conditions are swamping domestic policy steps.
Sure, officials in Bangkok or Seoul could raise rates, but it would make little difference with the world’s main monetary authorities leaving the floodgates open. Also, higher borrowing costs could backfire, attracting even more capital as yield-hungry investors reach for better returns.
Asia’s initial public offering (IPO) activity is worth eyeing up in the months ahead. Recent surveys show the highest levels of investor sentiment in months. Will too much liquidity chasing too few good IPOs create demand for weaker ones? There’s lots of anecdotal evidence, Coggshall says: “investors’ positioning has swung sharply towards ‘risk on’, and while we too find it difficult to argue against the notion that unlimited liquidity trumps all else, the level of activity is just frothy enough to make us uncomfortable”.
The good news is that Asian policy-makers are fully aware that they are on the front lines of a monetary tsunami the likes of which the world has never seen. The bad news is that with the US, Japan and the eurozone holding rates at, or close to, zero, and China maintaining an undervalued currency, it’s all too easy for smaller economies to get overwhelmed. Thailand finds itself navigating the rough waters of today’s global markets. While they are doing a fine job staying afloat, Thai officials never know when and where the next giant wave of capital will crash. Frightening, indeed.
• This article was first published on Bloomberg