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Asia likely to outperform other economies

Publication Date : 25-09-2012


Asia's economies will continue to outperform amid the global economic weakness as it will be sustained by its resilient domestic demand, according to CIMB Investment Bank Bhd.

“Asia is a place where growth will still be there despite the global economic slowdown,” CIMB Investment Bank regional head of economics Lee Heng Guie said during the Economic/FX Update session of the CIMB Asean SME Forum 2012.

Noting that Asia was now more resilient to external risks than they were during the onslaught of the 2008/09 global financial crisis, Lee said: “We think policymakers in the region are more prepared to deal with the potential slowdown in their economies as well as the risk of a sharp capital reversal.”

He pointed out that policymakers in the region still had some fiscal room to pump prime their economies in the worst-case scenario, although the fiscal capability varied across countries in the region.

In addition, Lee said: “Asia is becoming a prominent source of foreign direct investment.”

This, he said, would give rise to bigger intra-regional investment flow.

That Asia's exports and industrial output had not shown signs of mending, Lee said, showed that the region had not completely decoupled from the western developed economies. He noted that many Asian economies remained highly correlated to the Group of Three, or G3, which comprised the United States, Europe and Japan.

During his presentation, Lee highlighted five major risks, which he categorised as the five Cs, that would continue to cloud the global economic outlook. These are the ongoing crisis of sovereign debt in Europe; the fiscal cliff of the US economy; uncertainties in China's economy; capital flow volatility; the resurrection of food inflation risks that would impact consumer prices and spending.

“Permanent solutions to the eurozone debt crisis still appear far off,” Lee explained, while noting that the US fiscal cliff could result in budget cuts that would slash around 3 per cent to 4 per cent of the US gross domestic product.

“We expect global growth to remain moderate until there are convincing signs of turnaround in the eurozone and the United States,” Lee said.

As for the risk of China's slowdown on other Asian economies, Lee said, “If China catches a cold, Asian economies will catch a cold.”

On a positive note, he said although China had shown signs of slowing down, the country's economy would still expand at a rate that would remain supportive of Asian growth. The risk of a hard landing, Lee said, would be minimal as he believed China still had “ammunition” to sustain its economy.

Lee, however, remained concerned about the potential of capital flow volatility in the region, caused by higher global liquidity, especially after US policymakers decided to roll out the third round of quantitative easing (QE3).

He pointed out that capital flow reversals would cause asset prices volatility in Asia.

Lee noted that food inflation could rear its ugly head in the months to come due to severe weather conditions that had affected crop production. He believed global commodity prices would continue to trend upwards on the back of potential dollar weakness due to QE3.

“Policymakers have to prepare for a higher inflation outlook; there is a need to balance between growth and inflation risks in the medium term,” Lee added.

Meanwhile, Lee said Malaysia would likely achieve its targeted GDP growth rate of at least 5 per cent this year. The scenario would likely be more challenging next year, but CIMB's growth projection for Malaysia at present would still be at a strong 5.5 per cent for 2013.

In another development, CIMB Investment Bank regional rates/fx strategist Sureh Kumar Ramanathan, who held a contrarian view, said the outlook for the US dollar was “quite good”.

“I'm bullish about the US dollar; I think we've been bearish for far too long about the US currency,” he said during the Foreign Exchange/Currency Update session of the forum.

“I'm bearish about Asia,” he noted.

On QE3, Suresh said the market had been reading it wrongly. He explained that the so-called QE3, which involved the purchase of US$40 billion of mortgage-backed securities every month indefinitely, was a targeted policy to revive the housing market.

“There is no free flow of money,” he argued, adding that he therefore did not think QE3 would result in dollar weakness.


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