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Asia is making the most of a bad year
Publication Date : 17-07-2012
The symptoms are many, and they are all pointing towards a worrying diagnosis: Asian economies, led by China and India, are rapidly losing steam.
Corporate bosses are worried about slowing Asian demand, some of which is already reflected in lacklustre company earnings.
Meanwhile, Europe continues to cast a shadow on global business sentiment. The recession in the euro zone could yet worsen, and that might make Asian exporters scramble for sales, especially if a much-awaited recovery in global electronics demand proves to be a tepid affair.
With China's Premier Wen Jiabao warning of continued economic hardship, there is also enough reason to worry about the country.
In the meantime, India's slowing economy is beset by a new challenge: inadequate rainfall. The sowing season is not going well. Any decline in farm output will mean sluggish rural incomes.
That will add to the woes of New Delhi's policymakers, who have been rightly criticised for allowing political sabre-rattling and bureaucratic hand-wringing to take a toll on investor sentiment.
While the two Asian giants do indeed have large challenges to overcome, some of the region's smaller economies - like the Philippines and Malaysia - are doing quite well, showing that much of the pain in China and India is self-inflicted and reversible with quick and sensible policy action.
Earlier this month, Standard & Poor's raised its rating on the Philippines' foreign currency sovereign debt. President Benigno Aquino is using his popularity to address graft and tax evasion. The government's budgetary vulnerabilities are receding. The Philippines may be on track to its first investment-grade credit rating in 12 to 18 months, Barclays says.
One may err by taking too gloomy a view of Asia's prospects for the remainder of the year. The region that has given the world more than half of its economic growth since the 2008 crisis may yet prove the naysayers wrong.
For one, it does help that policymakers in the region mostly have their pro-growth arsenal intact, unlike their Western counterparts who seem to have run out of both ammunition and ideas.
Another big difference with Western economies lies in the quality of sectoral balance sheets, which in Asia are fairly healthy.
For instance, in Singapore, where mortgage interest rates of 1 per cent a year have pushed property prices sky high, 92 per cent of people are using less than 30 per cent of their family income to service housing debt, a recent Credit Suisse survey showed.
Leverage is largely under control. And the region's authorities deserve credit for it. Since the sub-prime mortgage collapse in the US and the onset of the twin sovereign debt and banking crises in Europe, Asian policymakers have become more alert to any unseemly buildup of stress in the financial system - regardless of whose balance sheet the risks get piled up on.
The exceptions are China, where the 2009 credit binge went out of control; India, where state finances are overstretched; and South Korea, where high household debt is a source of fragility.
In today's risk-averse world, clean balance sheets are a prized possession. And it's a good thing that Asia has them in abundance.
As economic activity slows, the region's resilience is bound to get tested. And after last week's data releases, there is no doubt that growth in Asia is slowing.
The biggest surprise was the quarter-on-quarter contraction in Singapore's gross domestic product, even though the 1.1 per cent annualised decline probably overstates the pace at which the economy is losing momentum. Volatile biomedical output may be responsible for some of the contraction.
But signs of a slowdown are emerging even outside of manufacturing, of which pharma accounts for a bit less than a quarter. Construction faltered last quarter. A separate report last week showed retail sales all but stalled in May.
Yet, all we can infer from last week's data is that the year is living up to the government's already low expectations.
Unless the euro crisis takes a turn for the worse, it is unlikely that the official estimate of 1 per cent to 3 per cent GDP growth this year will be missed. Besides, Singapore's fiscal gunpowder is dry. It may not be needed, though. Not this year.
A lot will, of course, depend on China. The 7.6 per cent year-on- year growth in the Chinese economy was the weakest since the second quarter of 2009.
Still, there are signs that the worst for China is probably over.
Worst over for China?
The government is spending more, as is evident from the declining balances in the fiscal authorities' bank deposits. And lenders appear to be creating credit again, albeit more for short-term corporate financing needs than for longer-term investment projects.
The intensity of the slowdown seems to have taken the authorities in Beijing by surprise. The central bank, which recently cut interest rates in two quick moves, is expected to add more monetary stimulus to the economy. The government's 'window guidance' to banks, cajoling them to lend more to small businesses, is also likely to bear fruit in coming months.
Even as China looks set to turn the corner, India's listless economy may have more disappointment to offer to the world.
Animal spirits in India
Indian Prime Minister Manmohan Singh, who recently took over the finance portfolio, has vowed to revive 'animal spirits' in the Indian economy. Sharp cuts in interest rates may help. The central bank, though, is likely to tread cautiously. Inflation is cooling, but it is still uncomfortably high.
Since India imports most of the energy it needs, falling international oil prices will help narrow the country's current account deficit, which came in at an alarming 4.2 per cent of GDP in the financial year that ended in March.
Declining raw material prices could, however, spell bad news for Indonesia, which is a global supplier of palm oil and other commodities and has recorded two straight months of trade deficit. Add to it an outflow of foreign money from the country's bond market, and there are risks of a dollar squeeze.
The authorities, however, are not sitting idle. Bank Indonesia, the central bank, has begun accepting US dollar term deposits from lenders. The aim behind these deposits, which pay interest, is to prevent dollars from leaving the country.
While Indonesia has been crisis prone in the past, there doesn't appear to be much cause for alarm this year. The central bank expects GDP growth this year to range between 6.1 per cent and 6.5 per cent, down from a previous estimate of 6.3 per cent to 6.7 per cent. This will, by no means, be a bad outcome.
Sound footing in Malaysia
The economy is on an even sounder footing in Malaysia, where the central bank has kept interest rates on hold for the last seven months. In the absence of a big external shock to exports, economists expect Bank Negara Malaysia to leave the policy rate unchanged at 3 per cent this year.
The central bank doesn't need to act. Malaysia's economy is in a 'Goldilocks'-type sweet spot: It's neither too hot (inflation is benign), nor too cold (consumption and investment are holding up).
Although the trade balance is also deteriorating for Malaysia - and upcoming elections could accelerate government spending - bond investors aren't losing sleep.
Indebtedness in S. Korea
South Korea is the other Asian economy that is doing quite well - under the circumstances.
It has a competitive currency, strong foreign exchange reserves and brands that are gaining in prominence worldwide. Korean banks are not as starved for liquidity as they were in early 2008.
It's the over-indebted households in Korea that present a challenge to a sustained pick-up in consumption. In the first quarter of this year, Koreans spent 8.6 per cent of their disposable income on paying interest. This debt-service burden needs to fall below 8 per cent for consumption to recover, Morgan Stanley says.
It may be wrong to view Bank of Korea's surprise quarter-percentage-point rate cut last week as the harbinger of a gathering storm. Yes, the private job market did sputter in June, but the weakness is unlikely to persist.
In the final analysis, Asian nations may not look back at 2012 with anything resembling relish or satisfaction. But will the year go down as 'annus horribilis'? The evidence doesn't suggest so.