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Greg Fager - A lost opportunity for Indonesia
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De-leveraging on sub-prime risk
17-07-2008
MADRID – De-leveraging of banks in the wake of the US sub-prime mortgage crisis will be extended, according to Greg Fager, Director of the Institute of International Finance (IIF).
Fager says: "If everything goes smoothly, the period of adjustment will take one or two years, but we don't expect a depression or a financial collapse."
The US will grow at below its long-term potential of two to three per cent for a "long time", he says. That said, he adds: "The US is still growing positively. It is forecast to grow at 1.6 per cent this year, picking up later this year to grow at two per cent next year.
"We have resilience. We have flexibility. And the official side has taken safeguards to financial systems." The industry is looking at ways to deal with best practices for the banking sector in future – to prevent this kind of thing from happening again. "Out of the ashes will come recovery," he says reassuringly.
"One reason I don't think this is going to be such a severe problem is because corporate balance sheets are so much stronger now. Despite all these years of credit, top companies have been building up their balance sheets. They have not been credit-dependent."
Fager says there was concern that credit availability would lead to asset problems, but it turns out that the top 1,000 multinational corporations are not excessively dependent on credit. "All the national accounts statistics point to a very strong corporate sector. We actually fall back on that as one of the factors which will keep this becoming such a severe crisis."
Asia has stood up well since the crisis unfolded, he says. “In fact, the first-run fallout on the region has been beneficial. It has dampened capital inflows, which, ironically, have been too ample." The question is how quickly the US and Europe get over the financial strain, so that it doesn't weigh on growth too long. "Because now matter how well Asia is positioned, it is still part of the global economy, so it can't grow and do well on its own. It needs its global trading partners to continue to do well."
In its latest forecast for the region, the IIF expects across-the-board growth of eight per cent – one per cent down on 2006 and 2007.
The region can deal with the current global difficulties. Even Indonesia has the wherewi-thal to deal with an uncertain and less favourable global situation, Fager says.
But he argues that countries in the region should have taken the opportunity to appreciate their currencies. "They should move on their exchange rates,” he says. “You can't talk about capital inflows and then talk about constant exchange rates. This is the new world now.
"They are moving a little. We have seen generally more movement. But you can still see the imbalances. There is still this bias towards the export sector. And they are still accumulating reserves, and, as long as these are under-valued, there is an imbalance.
"They are moving slowly away. In every country I go to, I say ‘you should move your exchange rate’, but they say ‘our exports will be under-cut’.
"You can't set your macro-economic policy solely for your export sector. It is time to move beyond that. When you move the exchange rate, new industries will emerge."
Fager says other Asian countries should follow the example of China, which wants consumption to generate growth. "China’s real retail sales are rising 15-16 per cent. They can't consume faster than they are consuming now – imports are up 30 per cent."
Bejoy Das Gupta, IIF's Deputy Director, Asia Pacific, says Thailand and India both saw large appreciations against the US dollar (of 10-12 per cent) last year. Yet both performed strongly, with exports holding up. Inflation is the most serious challenge the region faces today, he says, but he expects it to ease next year.
The IIF, in particular, has some critical words for Indonesia. "When any country starts subsidising any commodity, such as oil or fuel, which is under upward pressure, it is an open-ended subsidy and, essentially, it costs more than you plan – which is exactly what happened in Indonesia. “It is a bit troubling that they control the price of oil (through subsidies), and yet inflation is still going up. Such policies are risky. They appear to be fostering stability now, but, over time, that is just not the case.”
Indonesia in May moved to reduce its oil subsidies (see report page 17). But Fager says it is not just a question of subsidies and budget deficits. The issue is about lost opportunity.
“Oil production in Indonesia has been falling – it shouldn't fall like that,” says Fager. (Indonesia) has tremendous reserves (but) it hasn't finished exploiting – there has been a tremendous delay in investing in their natural resources. It is symptomatic of the under-investment in Indonesia.
"We are not looking at a financial crisis, we are looking at an opportunity lost."
Gupta says Indonesia's current account surplus was US$2 billion in 1995, and today is running at $10-US$12 billion. This is giving Indonesia an opportunity to make policy mistakes. He adds: "Inflation is also behind the curve on the monetary side. It is a combination of subsidies as well as its market policy. (Inflation) reflects the policies of the country.”
Copyright ©, ATI Magazine, June/July 2008
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