Sunday, February 15, 2009

Report Card For Asia

    Impact of current crisis different from Asian crisis:
  • Since the 1997-98 crisis, most countries have current a/c surplus and above-adequacy level forex reserves, lower govt deficit and debt, higher savings rate; currency and maturity balance sheet mismatches among firms and banks have declined; stronger corporate balance sheets and banking system. Banking, capital market, corporate reforms have been adopted though risk management, supervision and prudential norms are still far from international standards in most countries
  • In spite of moving away from fixed exchange rates exchange rates, currencies are not yet fully flexible. Capital controls might contain risks of speculative attack on central banks have enough reserves to defend exchange rate and finance capital outflows and easing external balances. Some countries an also use excess reserves to finance counter-cyclical policies. As a result, forex reserve growth has been declining/reversing

    But Asia is still vulnerable:

  • Exposure to exports has risen from 36% of GDP in 1998 to 46.7% in 2007. export contribution to growth along with impact on industrial production, investment, employment and consume spending) has increased in most countries. Exports and manufacturing, investment, GDP growth will contract in 2009 in excess of contraction in 1998 or 2001 on G-7 recession, slowdown in EM, intra-Asian trade (from slowdown in domestic demand and final exports to G-7), correction in commodity prices and demand
  • Domestic demand is slowing as well and will not offset slump in external demand: Low share of consumer spending in GDP and consumption has been highly linked to recent external sector boom (exports, capital inflows). consumption is slowing (on job losses, slower income growth,high inflation and interest rates in 2008). Slowing industrial production and investment (high rates in 2008, global liquidity crunch, IPO slump)
  • In spite of low direct subprime exposure, contagion from global credit crisis is leading to liquidity squeeze and jump in short-term borrowing costs, bank panics and deposit withdrawals, external funding crunch and shrinking profit margins for banks and corporates, declining asset quality, high exposure to correction in domestic stock and real estate markets
  • Banks in Taiwan and South Korea have high leverage, growing instances of corporate and consumer default; thin regulation has also encouraged excessive risk-taking incl. short-term, foreign currency overseas investment (though much lower than in 1997), raising risks to external debt, currency; But stock of forex reserves and hedge against currency risk (lacking in 1997) this time will finance external liabilities in most countries
  • Correction in asset bubbles like real estate (Hong Kong, Singapore, India), equity markets, electronics and semi-conductor sectors. Worsening stock market slide in several countries led by foreign funds sell-off on global risk aversion, domestic macro risks; bank guarantees in developed countries and a few Asian countries might also cause outflows in those w/o guarantees
  • reliance on foreign capital (esp. short-term portfolio capital as a share of investment, stock market cap) has increased since 1997-98 crisis in most countries. Apart from capital flight from equity and bond markets, declining trade and current balance is leading to currency depreciation in most countries
  • Given internal and external vulnerability indicators, India and Thailand most vulnerable to external uncertainty; Vietnam and S.Korea most vulnerable to sudden stops of capital flows; Indonesia and South Korea most vulnerable to sudden reversal of capital flows
  • Trade and current account deficits rising in India, Vietnam, S.Korea, Indonesia, Pakistan on high oil import bill, slowing exports. Trade and current account balances easing in Singapore, Thailand, Malaysia, China and Taiwan
  • Fiscal: Worsening in India, Indonesia, Pakistan, Thailand, Philippines, Vietnam due to food and fuel subsidy bill, fiscal stimulus, pre-election spending; ADB: Crisis will raise cost and access to capital esp. to finance govt spending

  • Pro-active govt role: Fiscal stimulus for firms and households, govt spending on infrastructure; as a share of GDP stimulus has been large in China, Singapore. stock market regulation (halt on trading, ban on short-selling, stabilization fund). Central banks have been cutting interest rates, injecting liquidity, entering into swap agreements with Fed and other Asian central banks, selling forex reserves
  • Will need to improve safety-net (pensions, public services). Need to boost consumption by moving to labor-intensive manufacturing, service sector development to create jobs and higher wages. Credit access will reduce the need to save. Moving away from devalued currency (and eport growth model) will lead to cheaper imports for consumers. This will be helped by govt's rate cuts, infrastructure spending via fiscal stimulus, low public and household debt in most countries
  • Economist: But recovery will be faster due to room for rate cuts, fiscal stimulus in many countries, stronger fundamentals compared to 1998
p/s photos: Janine Zhang

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