Hopes Hinge on G20 Summit
Feb. 25, 2016
Finance ministers and central bank governors have gathered in Shanghai for the G20 Summit tomorrow, as policymakers struggle to come up with ways to handle the recent turmoil on world markets.
The G20 is made up of the G7 countries as well as 13 emerging economies including China, India, Indonesia and Saudi Arabia.
In the past, expectations ahead of G20 meetings have been limited. That's because of conflicting interests among member states, and their inability to find common ground.
But things are different this time. Since the start of the year, there has been great uncertainty over the global economy, as well as market volatility. So investors are looking to the G20 policymakers for some relief measures.
There are two major factors that are overshadowing prospects that things will improve soon.
One is China. In 2008, the government responded to the global financial crisis with a massive stimulus package. It worked, in the short term.
The Chinese economy recovered quicker than many others. China also helped stimulate emerging economies by importing huge amounts of iron ore and other resources.
But it didn't last. The economic spurt driven by public spending slowed. China soon found itself struggling with a huge oversupply.
Now, Chinese companies are cutting back on production, leading to fewer imports and causing a slump in the price of crude oil and other resources.
The second factor is the reverse in US monetary policy. In 2008, the US Federal Reserve adopted quantitative easing -- injecting enormous amounts of funding into the markets -- in a bid to revive the economy.
The money spilled over to emerging economies. Then, at the end of 2015, the Fed announced it would discontinue the measure. The global flow of money reversed itself.
Investors are now predicting the FED will move to raise interest rates. So they're pulling funds out of emerging economies and are redirecting them to the US.
The sluggish Chinese economy and the change in US policy have been affecting people in Asia. One country that's been especially hard hit is Malaysia.
Falling oil prices have also dealt a blow to Malaysia as a key oil exporter in the region.
Oil is so vital to Malaysia that analysts say about 40 percent of the country's revenue comes from dividends and taxes paid by the state-owned oil company, Petronas.
In January, the government was forced to reduce its budget for fiscal 2016 by more than 3 percent.
Another drag on the Malaysian economy is the depreciation of its currency, the ringgit. Since the Fed's policy change, the ringgit fell about 30 percent against the dollar.
Ethnic Chinese account for 30 percent of Malaysia's population. During the Chinese New Year, shops sell seasonal goods imported from China. This year, the weaker value of the ringgit drove prices up nearly 20 percent. That's because imports are paid in dollars.
"The weaker ringgit and the higher dollar have greatly undermined our business. Sales are sluggish. Things get tougher each year," says one shop owner in the country.
The weaker ringgit is also affecting foreign laborers who support the country's economy. Many of them send a large portion of their pay to their families back home. But the weaker ringgit means much less is being received in their home currencies.
Muhammad Ali Ahmad is from Bangladesh, and he has spent the last 9 years in Malaysia working for a construction company. His salary in terms of the Bangladeshi currency fell by 20 percent over the past 2 years. The weaker ringgit means that his cost of living has also gone up.
"My wife complained that I am sending less money," Ahmad says. "The weaker ringgit is to blame, and there's nothing I can do."
One staffing agency has seen a huge drop in the number of foreign laborers. The agency used to dispatch about 1,500 workers to companies every year. This year they expect the number to be under 300.
That drop has company managers worried about a serious worker shortage.
"Some companies will have to maybe give some kind of allowance to at least make it a little bit easier for them, to be able to continue to work," says Azman Shah, President of the Malaysian Employers Federation. "It is not an easy solution for the time being. Until such time ringgit will get original power."
As economies around the world began to lose steam, investors saw the United States as the only bright spot. That's because US monetary authorities would only raise rates if the economy was picking up. But now, people are beginning to doubt that as well.
US Federal Reserve Chair Janet Yellen hinted at adopting negative interest rates -- a policy taken when central banks want to drastically prop up the economy.
"In light of the experience of European countries and others that have gone to negative rates, we're taking a look at them again because we would want to be prepared in the event that we needed to add accommodation," Yellen said recently.
Investors responded to that remark by fleeing to safe assets, as they see the economies of China, Europe, Japan and now the US dragging their feet.
People are closely watching to see what G20 policymakers will be able to achieve during their two-day meeting in China -- one of the epicenters of the crisis.
Takako Masai, an executive at Japan's Shinsei Bank, joined NHK World's Yuko Fukushima, and anchors Sho Beppu and Aki Shibuya in the studio.
Fukushima: What do investors hope to hear from G20 policymakers that would provide some relief on the course of the global economy?
Masai: I think the market would like to hear that those policymakers share the same concerns with the markets, and to see their willingness to tackle those issues and hopefully they could prove it.
Fukushima: What exactly do the market participants want the policymakers to say?
Masai: There are two things -- China and oil prices.
Fukushima: Let's start with China, since it's the host country. What are people concerned about China and what do they want to hear from China?
Masai: Currently, I think the market is concerned with two things. One is the financial market in China. But the other is the real economy in China. And the first one, the financial market concern is specifically the internationalization of the renminbi. And the point is officials are not able to find out where is the exact position the renminbi should take in the global market. This is the concern. But it will take a little bit of time to sort it out. And secondly, the real economy, as you mentioned there is oversupply, overinvestment and overcapacity, all those issues. If we could hear any hints at the G20, you know, China is ready to tackle those issues of structural reform, that would be a good sign and it would be taken by the market very positively.
Beppu: Ms. Masai about the second point as the oil prices. We do know major producers such as Saudi Arabia, Russia and Iran met, but looking at the prices not much has changed. What can the G20 ministers do in the face of this situation?
Masai: I do agree there is sticky oversupply and less-demand issues. However, just looking at the bright side, if we look back to earlier this year, why was there global concern about oil price and oil markets? Because of the political tensions between Saudi Arabia and Iran, which is, they stopped talking to each other. No communication can't solve anything, there is no progress. But at least in the middle of this month they started talking and put aside the conflict between them. So this is a good sign if the G20 can show there is some effort to keep the communication, that would be a good sign. And hopefully the market might find some bottom price.
Fukushima: All the major oil-producing countries are at the G20. Now a lot of attention is focused on this G20 meeting because people are worried about the course of the global economy. What is your view on the prospects?
Masai: I wouldn't say they are rootless or unfounded concerns. There are always risks. However, in the current market pricing, particularly in the US market, it's probably too pessimistic, I think.
Fukushima: So we could see some drift in the market?
Masai: Yes, if the market starts to regain confidence in the US economy, and the oil producers, the political talking, then we will see the bottom, and also calm down the markets, and then also think about the positive side.