Investors are still scratching their heads over Indonesia's surprise rate cut on Tuesday, when the central bank lowered the reference rate 25 basis points to 7.5%. They're more likely to find an explanation in Frankfurt, Tokyo and Washington than in Jakarta.
At 6.96% inflation is outpacing 5% growth in Indonesia. Maybe Bank Indonesia Governor Agus Martowardojo is worried about mounting deflation pressures around the globe. More likely, he's recognising another dynamic at work: The boost that quantitative easing in advanced economies has delivered to emerging markets such as Indonesia may be coming to an end.
I'm not referring here to the possibility of an eventual Federal Reserve interest-rate hike, or even the Bank of Japan's failure to expand its monetary base today. There's growing evidence that emerging markets are simply benefiting less and less from existing QE programmes. What's more, the US is starting to attract much of the liquidity that those smaller countries have grown dependent upon. "For 2015, the story may be of surprisingly strong asset performance in the US combined with a continued poor performance in the emerging world," said Adam Slater of Oxford Economics in London.
The conventional wisdom still holds that developing-nation assets will gain from any additional stimulus from the euro zone and Japan. In a new report, however, Mr Slater warns that the shrinking of the differential in gross domestic product between advanced and developing economies — it's now the smallest since 1999 — might well drive liquidity out of Asia.
The growth gap in 2015 may be 1.2 percentage points, compared with about 4.5 percentage points between 2000 and 2014. In fact, excluding China, emerging-economy growth could be just 2.8% this year, not that much more than that of the Group of Seven nations.
Yield spreads also make riskier economies less appealing. While 10-year yields in, say, Indonesia are higher than in the US (7.07% versus 2.12%), real interest rates are becoming a turnoff. They're also either negligible or negative in Argentina, Mexico, South Africa, South Korea, Thailand and Turkey. Oxford's sample of 13 key emerging economies shows that real rates averaged 1% in 2014, compared with roughly 3% since 2000.
Not surprisingly, portfolio investment flows have decreased. On a six-month average basis, flows into emerging markets were just US$11.6 billion (377 billion baht) in January, roughly equivalent to lows seen in 2013 when talk of crisis was in the air from Jakarta to New Delhi.
The last two rounds of major QE injections — by the European Central Bank last month and the BOJ in October — resulted in only minor boosts to emerging markets relative to previous ones. Part of the problem is diminishing returns; too much liquidity chasing too few good investments. It also may be that, as the issuer of the reserve currency, the US has longer monetary coat tails than Japan or Europe. Or are emerging markets losing their appeal?
The answer to this question should worry officials in Asia and elsewhere. In a sense, the QE-fueled boom of recent years made things too easy for them. "It has funded abnormal growth globally, compared with the cycles of the previous century," says Marshall Mays, director of Emerging Alpha Advisers in Hong Kong.
The US resurgence has its benefits, of course. As America's 2.5% growth rate accelerates, US households will buy more Asian goods. But in the short run, Asia may run short on economic fuel. All that hot money, as I've written before, deadened the urgency for governments to upgrade their economies.
As data series across industries soared, leaders focused more on ribbon-cutting ceremonies for new skyscrapers and factories, rubber-stamping foreign direct-investment deals and basking in headlines about rising share prices than in stabilising economies and strengthening financial systems.
Now, as capital flows recede and China slows, governments face pressure to loosen fiscal policies, redouble efforts to create jobs and bolster their appeal as investment destinations. This is hard work they should have done when times were good. They'd be smart not to wait any longer than they already have. ©2015 Bloomberg View
William Pesek is a Bloomberg View columnist.