Economy

India's Economic Woes Spread to Southeast Asia


Shoppers walk through Siam Square in Bangkok

Photograph by Brent Lewin/Bloomberg

Shoppers walk through Siam Square in Bangkok

For anyone following the economic turmoil in India, the combination is depressingly familiar: A record high current-account deficit. A weakening currency. A spike in inflation. A fall in the stock market.

The same recipe that is creating India’s worst economic crisis in decades is now afflicting Indonesia, too. Consumer prices jumped 8.6 percent last month, the Jakarta government announced last week. Thanks to the slowdown in China, demand for Indonesian coal, palm oil, and other exports is falling, hurting the country’s trade balance. Indonesia has been running a current account deficit for the past seven quarters, and the central bank on Aug. 16 announced the current-account deficit had hit $9.8 billion. That’s the largest deficit ever and amounts to 4.4 percent of Indonesian GDP.

Investors in the Southeast Asian country’s stock market are worried about the parallels with India. Like India’s rupee, the Indonesian rupiah is suffering from a loss of confidence. The rupiah today fell to 10,500 against the dollar, a four-year low. The benchmark Jakarta Composite Index plunged 5.6 percent today, with volume more than 30 percent higher than the past month’s average, and has lost 8 percent of its value in the past two days. Since the start of July, the market is down more than 10 percent, making it the worst performer among the 94 global indexes tracked by Bloomberg.

In Southeast Asia, it’s not just Indonesia that’s in trouble. More bad news today came from Bangkok, with the latest economic numbers from Thailand showing that country has fallen into a recession. Thailand’s GDP contracted 0.3 percent in the second quarter compared with the first three months of the year. That’s the second quarterly contraction in a row for Thailand, which like its neighbors has suffered from a slowdown in Chinese demand.

The Asian economies are suffering as global investors prepare for the end of the Federal Reserve’s quantitative easing policy. While it’s unclear how much tapering we’ll see from the Fed and when, emerging markets such as India and Indonesia are already feeling the pressure as investors begin shifting their money back to the U.S. “Among the region’s economies, Indonesia and India are bearing the brunt of the reversal of capital flows in anticipation of QE tapering, exacerbated by domestic factors,” economists Stephen Schwartz, Weiwei Liu, and George Xu of BBVA Research (BBVA) wrote in a report published today.

While the Indian government and central bank have unveiled measures to support the rupee, investors are unimpressed, with the rupee today falling to a new low of 62.8 against the greenback. “Looking ahead,” the BBVA team wrote, “bolder structural reforms, including greater fuel price liberalization, land acquisition reforms, and higher foreign investment limits in insurance, pension management and the pharmaceuticals industry are crucial to regain investor confidence and shore up the rupee.”

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Einhorn is Asia regional editor in Bloomberg Businessweek’s Hong Kong bureau. Follow him on Twitter @BruceEinhorn.

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