India is holding its own at the moment. While fragilities remain, including Narendra Modi’s slow pace in raising New Delhi’s economic game, Asia’s No. 3 economy may be sitting this one out

Thu, May 31 2018

William Pesek

It’s feeling a bit like 2013 in Indonesia as a run on the rupiah brings back traumatic memories of the “taper tantrum.”

Five years ago, fears of Federal Reserve interest rate hikes savaged emerging markets. As yield spreads exploded and currencies tanked, Indonesia and India ended up on an unfortunate list: Morgan Stanley’s “Fragile Five,” along with Brazil, South Africa and Turkey.

Now, as Jakarta battles short sellers anew, even noted developing markets bulls like Templeton’s Mark Mobius are talking “contagion” risks. The question, of course, is how much should Asia investors worry? Steel yourself for some serious volatility, but don’t panic.

India, for example, is holding its own at the moment. While fragilities remain, including Narendra Modi’s slow pace in raising New Delhi’s economic game, Asia’s No. 3 economy may be sitting this one out. That owes to emergency measures taken since 2013 to strengthen the national balance sheet, increase tax receipts and address bad loans at banks.

Still, Indonesia’s return to the red in markets augurs caution for emerging Asia. Last month, the central bank was forced to raise interest rates to defend the currency. Billions of dollars of outflows from bond and stocks have the new Bank Indonesia governor, who took over 24 May, telegraphing his own tightening move.

The good news: for all the whiffs of 2013, this is far from the chaos Asia faced in 1997 and 1998. That period is worth remembering as South-East Asia’s biggest economy commemorates the 20th anniversary of the downfall of Suharto.

As the rupiah crashed and gross domestic product disappeared back then, violent street protests, epic in scale, ended Suharto’s 32-year reign of corruption. It’s hard to recall the sheer bedlam of that time without recognizing just how far Indonesia has travelled since then. Many feared the 17,000-island archipelago with duelling municipal governments was destined for a Soviet-like breakup.

Most of the credit for that turnaround goes to Susilo Bambang Yudhoyono. As president from 2004 to 2014, he righted the economy enough to secure investment-grade credit ratings. The former general surprised many by reducing the military’s outsized role in the economy, strengthening institutions and surrounding himself with competent technocrats. Essentially, his task was dismantling Suharto Inc.

When Yudhoyono began shining daylight on the kleptocracy Suharto left behind, Jakarta ranked 133rd on Transparency International’s corruption perceptions index, trailing Pakistan, Iraq and Congo. Today, it ranks 96th, trailing Colombia—and 15 rungs behind India. Still not a great place to be, but a far cry from where many investors thought Indonesia might be in 2018.

That progress owes, too, to Yudhoyono’s successor, Joko Widodo, who grabbed the reins in 2014. It’s taken Widodo, known as Jokowi, time to find his reformist mojo. But then his election was a mark of progress all its own. He’s the first president who didn’t come out of the military or hail from a dynastic family.

That’s given the former Jakarta governor an outsider’s chance to cleanse the economy. Jokowi has been an unsteady reformer, though. It’s grand that he’s implementing $350 billion worth of infrastructure upgrades, making the government more transparent and accountable and lobbying tycoons to bring more cash back to Indonesia. Jokowi must work faster to cut red tape, diversify the economy away from resources and morph a current-account deficit into a surplus. Jakarta’s deficit—2.2% —is wide enough to worry investors, who’ve driven the rupiah down more than 4% this year. That selling pressure is a wake-up call that Indonesia can’t rest on its laurels. That signal extends to Prime Minister Modi’s economy. If Morgan Stanley were to revise its Fragile Five, India would not be as obvious a candidate as it was in 2013.

In recent interviews, Mobius listed India along with China as emerging economies offering attractive opportunities from finance to technology. But New Delhi’s current-account deficit means neither Modi’s government nor Reserve Bank of India governor Urjit Patel can take stability for granted. India must batten down the hatches as the Fed tightens and US President Donald Trump threatens an all-out trade war.

That goes, too, for the Philippines, whose balance sheet has weakened under two years of Rodrigo Duterte. The same goes for Malaysia’s new (and former) Prime Minister Mahathir Mohamad. Euphoria following his startling election win last month is giving way to the daunting debt problems Mahathir inherited.

China should tread carefully, too. With its debt-to-GDP ratio hitting 260% well before China reaches middle-income status, Beijing could soon find itself a short-selling target. More generally, Harvard University’s Carmen Reinhart has been sounding alarm bells over a quadrupling of emerging-economy debt since 2008, the year Suharto died.

Asia has come a long, long way since the dark days of 1997. But as whiffs of 2013 return to Jakarta and beyond, policymakers must stay ahead of renewed turmoil.

William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of ‘Japanization: What the World Can Learn from Japan’s Lost Decades.’

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