Analysis: Asian governments to central banks: it's our mess, you fix it

Tue Feb 4, 2014 4:10pm EST
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By Tomasz Janowski and Rieka Rahadiana

TOKYO/JAKARTA (Reuters) - Asia's central bankers are being forced to juggle their day jobs with what their governments have failed to do - steeling their economies for the hard times.

Critics say many governments have done too little to remove barriers to domestic and foreign business investment, cut red tape, upgrade infrastructure and develop deep, well-functioning financial markets when the region was flush with cheap money.

Now that economic rocks are emerging as the tide of the Fed's easy cash recedes, central banks are having to step in, detouring from their price and financial stability mandates, to shore up weak economies.

India and Indonesia were first in the firing line of investors last year when the Fed's plans to scale back its $85 billion in monthly cash injections started to take shape. Both took emergency steps, intervened in markets and raised interest rates to shore up battered currencies.

Since then the Fed has started winding down its stimulus in earnest, putting emerging markets on the back foot once again as investors look to target the most vulnerable economies.

Indonesian and Indian authorities have improved their defenses against rapid outflows but their governments have failed to tackle supply bottlenecks and market rigidities that fuel inflation and limit room for policy maneuver, economists say. Both face national elections this year that could lead to populist measures and further delay reforms.

In Thailand, months of political turmoil have paralyzed government, leaving the central bank as the mainstay of economic support.

"Government and monetary policies should be fairly balanced," says Rob Subbaraman, chief Asia economist at Nomura in Singapore.   Continued...

A view shows the Bank Indonesia building in central Jakarta July 11, 2013. REUTERS/Enny Nuraheni