Quantum easing could be “pleasin”?

When America sneezes, some countries shake it off, some catch a cold, some pneumonia, and some say typhoon "gloom and doom" will be reaching our shores so start boarding the windows and buying groceries!

(Some of the same economists in these countries have also predicted the last "9 of the 5" recessions!)

Conversely, when America is on the road to recovery, will she be the locomotive the "pulls" trade-linked countries' to higher GDP growth due to increased exports via stronger (US) dollar? Or, will the assumed increased exports to America be offset by pull back of funds (back) to America as higher interest rates attract yield hungry/sensitive money combined with increased confidence for the recovery in world's largest economy?

Financial Crisis & Monetary Management

The "one-two" punch of the US sub-prime (to the head) and Eurozone sovereign debt (to the body) created a systemic risk to the world economy, and, through central bank monetary courage/coordination and wise country leadership, we are now seeing a light (and not an on-coming train) at the end of the economic tunnel.

In the post crisis period, the US Federal Reserve, to kick start the stalled/sideways moving US economy, has been buying US$85-90 billion worth of bonds per month (for many months) to keep interest rates low whilst giving companies reasons for growing their business (in theory). The low US interest rates, implying low returns, resulted in money moving into the riskier emerging markets, like Asean and BRICS countries, to capture higher returns.

Thus, the silver lining, for the emerging markets, was the near zero percent interest rates in US flooded their markets with hot money and/or patient capital. No, it has nothing to do with US Federal Reserve or Bank of Japan adopting Islamic finance with the prohibition against interest. Although, some cheerleaders of Islamic finance have made comments connecting "zero interest rate to Islamic finance" influence.

(An article for an Islamic economy, whatever that means, is for another day, but there is the Global Islamic Economy Summit (GEIS at www.globalislamiceconomy.com), under patronage of Sh Mohammad Bin Rashid Al Maktoum, Ruler of Dubai and UAE vice-president and prime minister, in November in Dubai, UAE).

The Federal Reserve Chairman, Ben Bernanke, according to Reuters, stated in May that the Fed may buy less bonds towards the end of the year.  But there is some disagreement within the Federal Reserve, where president of Federal Reserve of Atlanta, Dennis Lockhart, suggested he was aligned to pull back somewhat on the bond buying, whilst the president of the St. Louis Fed, James Bullard, articulated that it might be too early (as economy remains uncertain ) to reduce purchasing of bonds.

(At the recent annual economics conference in Jackson Hole, Wyoming, sponsored by the Kansas City Federal Reserve Bank, the IMF Managing Director, Christine Lagarde, said "... Unconventional monetary policy (read; stimulative policies) is still needed in all places it is being used, albeit longer for some than for others... Push ahead with deeper reforms to lay the foundation for durable and lasting growth ... Do not waste the space provided by unconventional monetary policies.")

The Fed looking at domestic economic indicators, like unemployment claims/benefits at a six year low, has implied recently that the 'easy money spigot' is about to be tightened, and the net result has been downward pressure on currencies in some of the emerging markets, like Rupee (India), Rupiah (Indonesia), Ringgit (Malaysia), etc. Thus, there has been some 'massive' buying in spot and forward markets to support the currencies in some of countries (like India and Indonesia), and, in case of Turkey, a rise in interest rates.

Increasing Exports & Importing Inflation

Obviously, a weaker currency encourages exports, but it also means more expensive imports, adding to domestic inflationary pressures, which becomes problematic in an election year, like in Turkey next year. Mercifully, the Malaysian elections are over, but opposition economist could have raised the issue as the Ringgit was beginning to slide.

Food security has become a national security issue in many Muslim countries, like the GCC, because they are net importers of (halal) food. But the six GCC country currencies are pegged to the dollar or a currency basket (with large dollar weighting), hence, "manageable" inflation. No, it's not the same food price inflation during Ramadan that is often reported in the GCC and Malaysia?

The emerging market countries, which are all Muslim countries, which have not pegged to the dollar suffer when their currency declines as they wind up importing inflation, and issue becomes acute when there is no cost of living adjustments (COLA) in wages.

Stock Market & Remittances

Furthermore, a weaker currency also results in foreign money pulling out, including from the stock market, as the currency exchange rates favor, say, the US dollar versus Ringgit.

For example, this past week saw the Indonesian stock market declined, hence, emerging market with dependence on foreign capital (to address current account deficit) are usually hit hard in such situations, unlike situation in Malaysia (with high level of reserves worth 10 months of imports). But, that also presents a buying opportunity for [domestic] investors, as fundamentals of local companies have not changed overnight with such capital flight.

Finally, remittances from overseas residents/workers increase because of the falling home currency, hence, a windfall for banks and money transfer entities (second silver lining?).

It would be interesting to know the number of Malaysian overseas workers and total amount of remittances. For example, there are over 25 million Indian overseas workers, non-resident Indians (NRI), and they sent $70 billion in remittances in 2012 back home.

Malaysia

For 2013, according to Bank Negara's forecast, the Malaysian growth has been revised downward to 4.5% to 5%, from 5-6%, due to weak external environment. It's aligned to IMF world growth figures also being revised from 3.3% to 3.1%.  Malaysian growth will be led by domestic demand comprising of consumption (stable labor market and wage growth) and private investment (infrastructure projects).

Now, does this remain foreign direct investment will remain in place for 2103, as the MSCI Malaysia index is down 4.38% on year to date (YTD) basis (Aug 23), which is better than  MSCI Emerging Market down 11.6% YTD, and Southeast Asia down 9.04% YTD. Finally, will the Ringgit continue its slide, so far about 7%, for the year?

Governor Zeti recently stated at a media briefing, "...When there is any selling of Malaysian government securities and where there is significant presence of non-residents in the market, these are absorbed by our own institutional investors ... We had coped with it in a more destabilising condition and we will be able to cope with it now."

Finally, with US interest rates expected to rise, will this mean Sukuk issuance will become more expensive to issue to attract, say, hard currency investors? If so, will issuers pull back or will they fast track issuance before interest rates rise?

Conclusion

In today's flat hyper-connected world, actions, actual or projected, have immediate consequences, which may not be a good thing, much like de-stabilizing hyper-trading (read; flash crashes) in the equity markets. The US Federal Reserve signalling the period of quantum easing may be over based upon favourable economic indicators may just be the rising tide that lifts all boats, hence, the heat under the half full glass is not causing the water to evaporate, but, rather rise to the top (as teh tarik)!

The external shocks, "cold/flu" of the US and "pneumonia" of  Eurozone, did not result in a global nuclear economic meltdown. The emerging markets have acted as a counter-balance, and their new found voice will have an influence on the quantum easing.

As John Kenneth Galbraith said, "Economics is extremely useful as a form of employment for economist". - August 26, 2013.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.