>ASIA AND THE GLOBAL ECONOMIC CRISIS (ECONOMIC RESEARCH)

Asia and the global economic crisis: Challenges and opportunities

Regional economic outlook
In recent years economic development in the emerging markets of Asia has been driven chiefly by booming exports. Between 2004 and 2008 real gross domestic product (GDP) in the region rose by an average of 8% per annum, catapulting Asia to what is by far the most dynamic region in the world. But now, with world trade languishing under the global financial and economic crisis, Asia is feeling the full brunt of its reliance on exports. Everywhere in the region shipments abroad are in free fall, triggering an economic slump the likes of which we last saw during the 1997/1998 Asian crisis. Region-wide we are forecasting economic growth of 2.7% for this year (against 6.3% in 2008), which is very modest by Asian standards; and that this has not turned negative is down to the heavyweights China and India. With the exception of Indonesia, all other major emerging markets are set to shrink this year, some of them substantially. But in all probability Asia will be spared a protracted period in the doldrums on the grounds of its relatively robust banking system, record currency reserves, low foreign debt and hefty current account surpluses in the past years. Of course, the Asian emerging markets are not a homogenous group of countries. Consequently the factors just mentioned apply more to one country and less to another. In South Korea, for example, the corporate sector has quite a high
level of foreign debt.

Capital flows to emerging markets collapse
What is striking about the current situation in Asia is the very marked gap in performance between the individual countries. Our growth forecasts for 2009 currently range between +6.5% for China and -6% for Singapore. Of course, wide national differentials also exist in other regions, but they generally refer to whether a country is looking at contraction of just 1% or as much as 10%. One Asian country really feeling the pain of the present crisis is South Korea. For this year we are penciling in GDP contraction of 3.5%. Following a dramatic slump in business activity in the fourth quarter of 2008, due mainly to a sharp downturn in investment and extremely anemic exports, the economy stagnated in the first quarter of this year. We do not expect it to pick up until the second half of 2009, when world trade also starts to claw its way back. The marked depreciation in the South Korean won versus the US dollar and Japanese yen should certainly be a help. Although in recent weeks the won has made up some of its previous losses, it is still trading a good 25% lower versus the Japanese currency than last summer. This naturally boosts the South Korean export industry’s competitiveness.

China: Worst already over
The Chinese economy lost a lot of steam in the course of last year. Whereas real GDP growth in the first quarter of 2008 was still powering ahead by 10.6% year-on-year, by the fourth quarter it had slowed to barely 6.8%, slipping further in Q1 2009 to 6.1%. The repercussions of this plunge are considerable, with an estimated 20 million migrant workers forced to return to their home provinces after losing their work in the former boomtown regions along China’s eastern seaboard and in the south of the country. The situation on the labor market in general is extremely tense with the current level of growth not enough to provide the jobs needed, particularly for the new entrants to the workforce. Oxford Analytica estimates that more than 60% of this year’s university graduates will be unable to find employment.

India: Relatively small export sector keeping economic fallout in check
The Indian economy is naturally also feeling the pinch of the global crisis. However, given that exports make up only around 20% of India’s gross domestic product, the collapse in world trade is denting its macroeconomic development far less severely than in other Asian emerging markets. The still-strong domestic focus is thus proving a comparative strength in the present situation.

Southeast Asia: Mixed picture
Central banks and governments in Southeast Asia are similarly trying to contain the impact of the global financial and economic crisis on their countries by loosening their monetary policy and launching national stimulus packages. This year, Indonesia will probably be the only of the three big ASEAN states (Indonesia, Malaysia and Thailand) to notch up positive economic growth. Domestic demand has proved fairly robust so far and, given the size of the home market, this is keeping the negative repercussions of slack foreign demand on economic growth in check. We are looking for real GDP growth this year of around 3.5% (2008: 6.1%).

Asian growth model set to change
Asia’s growth model is characterized by a strong focus on external trade. Its export success story can be explained largely by the availability of a huge potential labor force and considerable wage cost advantages vis-à-vis its international competitors. And it has been buoyed on the currency front. The Asian emerging markets’ currency relations with the US have frequently been dubbed the ‘Bretton Woods II’ system, harking back to the fixed exchange rates and massive foreign exchange market interventions for the major international currencies in the post- World War II years. But unlike the official Bretton Woods regime that lasted into the 1970s, Bretton Woods II is an informal, non-contractual arrangement featuring the US as the core country with the Asian emerging markets on the periphery. The Asian currencies are undervalued relative to the US dollar to facilitate exports by these countries and smooth their integration into the global economy. So far the Asian countries have used the resulting trade surpluses versus the US to purchase American securities. This, in turn, has maintained exchange rate relations and kept interest rates low for the United States.

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