The Federal Reserve is not the only central bank in the world that is having a hard time deciding on interest rates. On Tuesday, Indonesia’s central bank governor Agus Martowardojo had to choose between increasing interest rates to boost the country’s currency or slashing them in order to stimulate growth. In the end, the central bank official decided not to do anything.
The dilemma of Indonesia’s central bank represents the ongoing turmoil in emerging markets that is getting increasingly worse.
Half a year ago, the greatest fear of central bank officials in emerging economies is that Fed Chair Janet Yellen would soon announce that the US central bank will hike interest rates for the first time in about a decade. However, now, it appears like this is nothing compared to the threat brought about by the economic slowdown, stock-market crash and China's currency devaluation.
Among these emerging countries, it is China’s neighbors that are prone to greater risk. For several years, China's 10 percent growth and the extremely high demand for manufactured goods and commodities of the Asian country propped up Asia’s GDP. This covered the deeply rooted weaknesses in the financial system and economic growth models in the region and has lifted off the pressure on government officials to push for necessary reforms.
Growth within the region, coupled with the rapid expansion of China and the willingness of central banks to implement quantitative easing, reduced the urgency for difficult structural improvements to fight corruption, diversify sources of economic growth, and reduce trade barriers.
In the previous years, central banks would have boosted growth just by cutting interest rates. However, the slowdown in China is limiting the choices of Asian countries. The cracks are starting to show and the region is now experiencing high levels of local debt, diminishing investment returns and edgy global markets.
Financial systems and central banks in Asia are highly capable of surviving the ongoing global financial crisis. Yet, years of riding the coattails of China has made emerging economies in Asia not ready for a period of slow economic growth.