Rising US interest rate, protectionism loom over global economy

Manufacturing hope: Bank Indonesia's (BI) senior deputy governor Mirza Adityaswara (third right) serves as one of the speakers alongside six central bankers and financial regulators in a session held on the first day of the 10th Asian Financial Forum on Monday in Hong Kong. The event will run until Tuesday. (Courtesy of the Hong Kong Trade Development Council)

Political and economic uncertainty was the most common theme expressed on Monday during the first four sessions of the Asian Financial Forum in Hong Kong.

The views come as the world faces a rising tide of populism, nationalism, antiglobalization and a backlash on free international trade, and the impact of Britain's exit from the European Union.

Even though renowned economists, central bankers, financial and business leaders from Asia, Europe, Russia and the Middle East gathered at the event believed that populists such as United States president-elect Donald Trump may not really mean what they say, most of the 2,000 participants at the two-day forum still seemed to be looking forward with a sense of trepidation.

Opinion polls conducted during a policy dialogue session also expressed pessimism on global economic prospects and cited the upcoming policy directions under Trump and steep rise in the US interest rate as the biggest risks to emerging economies.

"But the developments so far showed that Trump's antifree trade attitude had become less extreme. Instead his policy pronouncements on tax reform and deregulation are quite progrowth," noted Mohamed El-Erian, chairman of US President Obama's Global Development Council.

Asserting the vital importance of jobs, El-Erian said: "You can, to a certain extent, tolerate income inequality, but inequality of opportunity could cause anger and social conflict."

El-Erian said the US Federal Reserve's plan to raise its benchmark interest rate this year would attract more capital inflows to the US. But the downside risk is that if the dollar appreciates much faster than the economic fundamentals can support, thereby making American exports less competitive, protectionist sentiment may rise again.

The Fed said last month after nudging up its federal fund rate by a quarter of a percentage point to between 0.50 and 0.75 percent that it would again raise its benchmark short-term interest rate more quickly than previously projected amid signs of low unemployment and a pickup in economic rowth.

The market's consensus expectation is that the rate will be raised this year by 0.75 percentage points in three quarter moves to a range of 1.25 to 1.50 percent.

Jointly organized by the Government of The Hong Kong Special Administrative Region and Hong Kong Trade Development Council, the conference, which ends on Tuesday, addresses some of the downside risks that can affect economies and the corporate world, while offering guidelines on how to make the best of opportunities and move forward with optimism.

Bank Indonesia senior deputy governor Mirza Adityaswara told the forum that Indonesia was now financially much stronger and able to face uncertainty as its economic fundamentals had significantly strengthened as a result of the overall reforms made soon after the 1998 economic crisis.

"Our banking sector is fairly strong with an average CAR [capital adequacy ratio] of 22 percent, current account deficit at less than three percent of GDP [gross domestic product] and total foreign debts of the private sector and government at less than 35 percent of GDP," Mirza added.

Another positive sign, Mirza said, was that commodity prices were estimated to be more robust this year, thereby strengthening private consumption, while 15 economic reform packages launched over the past year would help reinvigorate private investment to generate economic growth of 5 to 5.4 percent.