September 3, 2013 7:50 pm

US warned over recovery as QE3 uncertainty risks EM slowdown

Chatib Basri©Bloomberg

Chatib Basri

The big global economies risk a blowback from a slowdown in emerging markets if the US Federal Reserve does not provide more clarity on its moves towards reducing its support for financial markets, Indonesia’s finance minister has warned.

In the latest sign of rising alarm in emerging markets over the Fed’s plan to “taper” financial asset purchases, Chatib Basri told the Financial Times that the ongoing uncertainty over US monetary policy could become a further drag on economies like Brazil, India and Indonesia, which are becoming ever more important contributors to global growth.

Speaking ahead of the two-day G20 leaders’ summit that starts in Russia on Thursday, he criticised the lack of “transparency about the process” of the US slowing its easy monetary policy. “We are living in an interdependent world, that’s why this issue needs to be discussed in a better way,” he said.

Emerging markets from Indonesia to Brazil have suffered a sharp sell-off triggered by expectations that the Fed will soon begin to wind down a quantitative easing programme that has inflated the price of global assets, particularly in high-yielding, riskier emerging economies, and reduced their borrowing costs.

Mr Basri said the uncertainty made it “rather difficult” for southeast Asia’s largest economy to formulate policy in the current volatile environment.

“I don’t think any country in the world has enough clear information about the plan for [US] quantitative easing,” said Mr Basri. “People are guessing that the Fed will do the tapering in September. But we’re not very sure. We don’t know about the mechanism or what will be the impact. Everyone’s guessing.”

Mr Basri’s comments add to a growing chorus of concerns over tapering expressed by policy makers from key developing economies including South Africa and Brazil as they struggle to stem the swift declines in their currencies, rising inflation and widening current account deficits.

Christine Lagarde, head of the International Monetary Fund, said last month that the Fund was ready to offer support if needed during the Fed’s exit.

“Now we are facing new turbulence in the financial markets caused by the Fed, which has caused serious problems not only in Brazil but around the world,” Guido Mantega, Brazil’s finance minister, said during a speech in São Paulo last Thursday. “The Fed went over the top in its dose of monetary stimulus and now it is in the process of deactivating it – but this must be done with a lot of care so as not to damage other countries.”

The Organisation for Economic Co-operation and Development, an organisation of advanced economies, also warned that the renewed weaknesses in emerging markets were one of two major risks to the early-stage global recovery, alongside the persistent banking problems in the eurozone.

“The recent financial market tensions and weak momentum [in some emerging economies] suggest both a reappraisal of trend growth and deterioration in cyclical conditions,” the OECD said.

While several emerging market governments have pointed the finger of blame for their recent woes at Ben Bernanke, the Fed chairman, analysts say that many of their problems are homegrown.

Those countries that have seen the deepest sell-offs – including Brazil, India, Indonesia, Turkey and South Africa – all suffer from either large current account or fiscal deficits, or both, and critics argue that the pace of economic and political reform has slowed amid complacency among those governments.

Mr Basri accepts that if Indonesia is to arrest the slide in its currency and restore confidence, it must convince investors that it is serious about tackling the widening current account deficit in the short term and accelerating investor-friendly reforms in the medium term.

The 48-year-old Australian-trained economist has enjoyed a rapid rise over the past 15 months from an outsider who was one of the sharpest critics of government policy to one of the G20’s youngest finance ministers.

Before he joined the government as head of the investment co-ordination agency in June last year, and was then promoted to finance minister in May, Mr Basri used to tell foreign investors warily that “the good times make for bad policy”.

Now, by pushing for the government to roll back a series of damaging protectionist measures and introduce incentives to attract long-term investors, he is trying to demonstrate that the “bad times make for good policy”.

With additional reporting by Samantha Pearson in São Paulo

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Letter in response to this report:

Blaming Fed for current turmoil does not help the dialogue / From Dr Paola Subacchi

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