Integrity Legal

30th August 2013

In a recent article from The Telegraph author Ambrose Evans-Pritchard analyzed how Federal Reserve policies impact emerging markets. It is a very interesting article for anyone (especially expatriates living abroad) interested in understanding how Fed policy reverberates in markets outside of the United States. Of particular interest to expats living overseas was the analysis of the disproportionate impact Fed policy has on foreign nationals residing in other countries. Although the aforementioned article would seem primarily targeted  at a British audience, as an American expatriate living in the Kingdom of Thailand, I found this information compelling. Evans-Pritchard cited an assertion from Mirza Baig of BNP Paribas noting that foreign nationals bear significant currency risks in some of the nations in Southeast Asia. In Thailand, it appears that foreigners bear currency risks of 81%, while those expatriates living in Malaysia and India bear 90% and 74% risk, respectively. I have  dealt with the vicissitudes of currency fluctuation many times during my tenure in Thailand as the exchange rate between the Thai Baht and the US Dollar was around 39-1 when I first arrived in the Kingdom. Since then, I have seen the exchange rate fall (or rise depending upon your perspective) to around 27-1 and re-stabilize around 30-1. As of the time of this writing, the Baht-Dollar exchange rate stands at approximately 31-1. However, many are speculating that the Baht will lose value against the dollar in the coming months. This would likely be due to the perception that the Fed may begin to implement a kind of belt tightening after years of promoting liquidity.

Unlike times past, the actions of the Fed have increasingly serious implications in emerging markets. As the article noted, in the past when the Federal Reserve Chairman Paul Volcker tightened up his belt, there were substantial ramifications in South America and elsewhere. The negative aspects of those policies on South American economies was containable. However, this was at a time when China was virtually isolated, and the Soviet Union did not really factor into the any analysis of the economic interactions between countries in the “Free World”. Meanwhile in the 1990′s Federal Reserve policies could negatively impact global economics more than before that period, such negative implications were still containable since there was a “power ratio” of around 1:2 between the United States economy and the emerging markets. This is no longer the case as the relationship has basically equalized. Should Fed policies have a substantial negative impact on the emerging markets, then the problem may not be contained within those markets and the economic problems could easily (and quickly, if there is anything to be learned from the financial crashes of the past decade) spill over into Western Europe and America.

In American politics, one cannot read articles and information regarding the United States’ stance on Southeast Asia without seeing the words “pivot”. The Obama administration has consistently noted that the U.S. wishes to see American foreign policy “pivot” to a more solid relationship with the nations in the Asia-Pacific region and those comprising the Association of Southeast Asian Nations (ASEAN). In fact the P-word has been cited in connection to the visit to Southeast Asia by the American Secretary of Defense. However, in light of recent events in the economic sphere it would appear that ASEAN countries and Thailand specifically may be “pivoting” themselves. For example, at the recent meeting between the Foreign Ministers of ASEAN and the Foreign Minister of China it was noted that Sino-ASEAN trade increased five times compared to ten years ago. As of 2012, trade between China and ASEAN stood at approximately $400 billion. Clearly, China is becoming an increasingly important trading partner and in light of the fact that ASEAN and Thailand may not wish to be at the mercy of the Fed’s whims, further solidifying this relationship may prove to be an effective method for ASEAN nations to mitigate negative side effects caused by economic policies of both China and the United States.

In a recent interview, the Prime Minister of Thailand, Yingluck Shinawatra, articulated a desire to see further investment in Thailand from China and supported such an investment due to Thailand’s position as the “strategic center” of ASEAN. “Thailand will be spending about 66 billion U.S. dollars in infrastructure. Especially, we will need the technology that China has, like high speed train,” Mrs. Yingluck stated. “And we know that the high-speed railway connecting Thailand and China will run from Thailand through Laos to China. So it will be an important part of Chinese investment in Thailand”. As the deadline for ASEAN integration comes ever closer it seems logical to assume that Thailand, the ASEAN jurisdictions, and China will all see a closer economic relationship begin to blossom. How this relationship will impact both diplomatic and trade relations with the United States remains to be seen, but American economic policy makers should be aware that the era of America being able to set economic and monetary policy with little thought to the implications in emerging Asian markets has passed.

 


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