Asian Development Bank

Fed's Liftoff 'Will Free Asian Tigers'

Vietnam is one of the Asia's new booming powerhouses. Source: Corbis.
Vietnam is one of the Asia's new booming powerhouses.
  • Why it matters

    Why it matters

    Mr. Wei doesn’t share the fears of many economists that Asian growth will suffer when the U.S. Federal Reserve eventually raises interest rates.

  • Facts

    Facts

    • The Federal Reserve set its benchmark interest rate close to zero nearly seven years ago.
    • But with the U.S. economy firmly in a recovery, many expect a rate hike by the end of the year.
    • The last time the Fed raised interest rates was in 2006. Many expect the raise to have far-reaching effects.
  • Audio

    Audio

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These are uncertain times for Asia. China’s growth is slowing, while the specter of an interest-rate increase by the U.S. Federal Reserve has many worried that investors could begin to limit funds flowing into Asian nations.

Shang-Jin Wei is not worried by the prospect of a U.S. interest rate hike and rejects predictions of a second Asian crisis when the time comes. On the contrary, the chief economist of the Asian Development Bank told Handelsblatt the rate change will kick-start a recovery in the region.

Handelsblatt: Mr. Wei, the world economy faces an imminent rise in interest rates in the United States, cooling off in China and insecure growth prospects in industrial countries. Despite this, in the coming year you expect growth to accelerate again in the emerging markets. Why?

Shang-Jin Wei: In some countries we see positive structural reforms. Take Indonesia, for example, the biggest economy in Southeast Asia: The government‘s initiatives to expand infrastructure should slowly but surely generate growth. We also think that the downward pressure on the Chinese economy is decreasing. One of the reasons for this is that demand in the industrial states is coming back.

“It would be good for Asia if the Fed did increase rates. ”

Shang-Jin Wei, Chief Economist, Asian Development Bank

But isn’t it the other way round? Industrial nations fear China will pull them down with it.

I see no danger of that. The industrial countries are generally less dependent on emerging markets than vice versa. For example, only about 10 percent of U.S. exports go to China.

Is the Asian continent ready for an imminent interest rate hike in the United States?

An interest rate hike doesn’t have to be such a threat for Asia: The U.S. central bank will increase interest rates because the U.S. economy is in good shape again.

That is, first and foremost, good news for many Asian states, which are very dependent on exports to the United States. And if interest rates in the U.S. rise, Asian currencies become weaker in comparison with the U.S. dollar and that can only be a further boost to their exports.

Other economists fear that financing conditions in emerging markets could deteriorate drastically.

For individual companies which have taken on too much dollar debt, it could indeed become difficult to repay their foreign debts. But I don’t see a high probability in any country of a rate increase in the United States leading to a real crisis. But of course it is important to keep a close eye on the level of foreign indebtedness.

At the moment it looks as if the U.S. central bank, the Fed, might not actually increase rates this year. How do you see this?

That would have course provide relief for those who have taken on too much debt in dollars. But in principle it would be good for Asia if the Fed did increase rates. The risks for the financial system will only increase if interest rates remain so low.

 

Frederic Spohr is Handelsblatt’s Southeast Asia and India correspondent. To contact the author: f.spohr@vhb.de 

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