Emerging Markets Vulnerabilities Amid Policy Normalization
Could this Diverged World to Sustain Any Longer?
It is clear that Covid-19 pandemic shock has triggered global fiscalmonetary coordination. Global central banks eased their monetary policy through namely QE and cutting interest rates. On the fiscal side, government took an extra miles measures by letting their budget deficit to widen. However such accommodative macro-policy measures have different impact across the globe. In advanced economies, gradual reopening supported by aggressive vaccination program have shown not only supporting recovery but also rising inflationary pressure. In contrast, emerging market recovery tend to be slow so far, yet some part of the world also facing challenge in price stability.
EM Currency Risk and Vulnerability
In anticipation of Fed policy rate hikes and in some way to control domestic inflation, some of G20 emerging economies have started their tightening cycle. Brazil central bank came with the most aggressive measure by raising interest rates 725bps, followed by Turkey and Russia by increasing policy rate of 575bps and 450bps respectively (Exhibit 2) since the pandemic low. Even with the rate hikes, the country’s currencies still saw a depreciation against USD as of year to date and only Brazilian Real that successfully managed to strengthen during the same period. However, compared to the last 6 months period, those currencies have weakened against USD with Turkey’s Lira dropped more than 50% (Exhibit 3). Despite the net rate hikes taken by Turkey’s central bank, Lira started to depreciated since Oct-21 after the interest rate was cut in Sep-21. In total Turkey’s central bank has cut 500 bps from 3Q21. Lack of Turkey central bank credibility has put their currency in pressure.
How Vulnerable is Indonesia?
In response to recent development, Bank Indonesia took an anticipative policy response through liquidity normalization. In Jan-22 RDG meeting, BI decided to gradually increased rupiah statutory reserves for commercial bank from 3.5% to 6.5% throughout this year. The increase in rupiah statutory reserves will be started in Mar-21 by 150 bps to 5%. BI estimated this policy to sap out IDR200tn banking liquidity, without influencing banks capability to lend given the industry still have ample liquidity so far.
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