As I write this column, Jakarta is coming to terms with the aftermath of a deadly battle between police and heavily armed militants outside a shopping mall in the Indonesian capital.
Comments reported from the Indonesian police suggest that Islamic State has taken responsibility for the attacks, which at the time of writing had claimed seven lives, including five suspected attackers. Seven explosions were reported by Reuters, with the attack beginning at a Starbucks outlet in the centre of Jakarta, and in the proximity of the United Nations office.
Whether indeed ISIS is responsible, or the home-grown Islamic terrorist group, Jemaah Islamiyah, an affiliate of al-Qaeda or one of Indonesia’s numerous separatist groups, the events in Jakarta serve as a reminder that Asia is as vulnerable to acts of terrorism as the West.
If ISIS – or Daesh as the French and David Cameron prefer to call them (an acronym that apparently annoys the grouping since it resembles the Arabic word for trampled) – claim responsibility for the Jakarta attacks, as I suspect they will, then the basket of risk factors for global capital markets just got rather heavier.
As a friend observed on Facebook as the attacks were unfolding: “Wondering how many country filters will soon be needed on our profile pictures this year.” Indeed. The events in Jakarta resonate not just in that global risk basket, but in the sense that they underline the malaise that is gripping Asia.
THE REGION’S CURRENCIES weakened as the attack unfolded, not just the Indonesian rupiah, but South-East Asia’s benchmark currency, the Singapore dollar, which declined from 1.43 to the US dollar to 1.45 as Jakarta went into lock-down.
I have written before in this column that if South-East Asia’s economic landscape is quintessentially about anything, it is about foreign exchange rates. As the region’s currencies have careered through numerous support levels over the past few years against the greenback, the euro and the pound, the obvious question arises of when and to what extent South-East Asia will import inflation.
If South-East Asia’s economic landscape is quintessentially about anything, it is about foreign exchange rates
A Singapore-based British friend of mine in the export-import business, who pays for his inventory out of Sing dollars against the US unit or euros or sterling, has told me he’s already passing on these added costs to his customers.
I’m sure the same dynamic is also playing out for other importers across the region. And perhaps as a measure of what might appear to be incipient inflationary pressure in the city state, the benchmark Singapore interbank rate (Sibor) has pushed up around 30bp in recent months.
The worst cycle the region could find itself caught in would be one in which declining currencies prompt imported inflationary pressure and a consequent need to raise interest rates just as the demand side of the equation is weakening. You might think that weaker demand and collapsed commodity prices would more than countervail any currency-induced inflationary pressure, but I wouldn’t bet on that.
And if we have a re-run of global financial turmoil in which the US dollar becomes the go-to safe haven of choice, the currency-induced inflationary pressure in South-East Asia would only increase.
BUT AGAINST THIS broad-brushstroke scenario, it seems that the risk call in South-East Asia for now is idiosyncratic. A regional syndicate head summed it up nicely: across various industry sectors in Asia there are the “haves” and the “have nots.” You will be having a white knuckle ride if you’re presiding over a REIT or an oil and gas services company or a coal mine. But services and retail are fine for now.
And the banks are flush with liquidity. Loan pricing has not ratcheted upwards in response to the increased global credit stress. And for this reason, this particular syndicate head thinks that regional borrowers will be content to muddle through with the help of bank lending and not be in a panic to term out to the back end of the yield curve, in the hope that bond market appetites return to healthier levels.
Indeed, were it not for the headline tail risk that looms everywhere at the moment – and increased with the events in Jakarta – it’s noticeable that deals that have been brought so far this year in the Asian primary debt markets have garnered solid book cover.
Whatever the attribution of the Jakarta attacks, it’s worth placing them in the context of the debt markets. Indonesian offshore sovereign debt widened by just 5bp as news of the attacks broke. Talk of Indonesia possibly looking to tap the global markets again soon after their foray last December might have caused this widening on its own, all things being equal.
And as an afterthought, if the sovereign finds the headline risk on its name an impediment in the light of the attacks, that pre-funding exercise last month – an attempt to lock in low rates ahead of Federal Reserve rate normalisation – looks to have been very smart indeed.
