Exit the year of the unpredictable Rat; enter the year of the earthy Ox, hopefully bringing with it its characteristic stability, conservatism and harmony.
The changeover in the lunar almanac aptly reflects the mood in the world economy. For the first time since World War II the US, Europe and Japan are simultaneously in recession. After the turmoil of last year, the world is now yearning for a period of relative calm, trying to avoid a drastic downturn.
Yet, amidst all the gloom, the dourest estimates for China and India indicate that the two fastest growing major economies of the 21st century expanded by more than 7 percent last year and are expected to grow by 5 percent to 7 percent this year. While a shock that will present challenges for these high-flying economies, it’s still good growth.
This is instructive because, while investors have focused on the sharp global downturn following the bursting of the housing bubbles in the West and the resulting financial upheaval, they have largely overlooked the relative resilience of the growth engines of recent years in the East.
The year of the Ox could well turn out to be the year when the world wakes up to the changing balance of economic power between West and East.
Without doubt China, India and other developing markets of Asia, Africa and the Middle East are witnessing a marked slowdown. Exports of manufactured goods, raw materials and services, major drivers for these economies, are slowing significantly as Western consumers cut down their debt levels and start saving again. By the end of last year, every country in Asia had seen its exports contract. Unlike previous financial setbacks, Asia can’t rely this time on exports to the West.
The abrupt reversal in the growth momentum, which will particularly impact Asia’s more open economies such as Hong Kong, Singapore, Taiwan and Malaysia, is a reminder that the region has not decoupled from the West. How could it when almost a third of developing Asia’s US$3.3 trillion of export orders originated from the US and the EU in 2007?
Capital markets from Mumbai to Seoul depend significantly — sometimes up to 40 percent of their total capitalization — on Western institutional investors for continued liquidity. No wonder then that stocks and currencies across Asia plummeted through the second half of last year — with the South Korean won and Indian rupee suffering some of the biggest reversals — as US and European portfolio investors pulled out from the region.
The sudden contraction in US dollar liquidity, together with the freezing of trade finance and heightened risk aversion among local banks, has caused severe distress among many small and medium-sized enterprises.
But the best way to describe the reversal in fortunes would be by using the economists’ lexicon and term it as a cyclical downturn as opposed to the West’s ongoing structural slowdown which is likely to last for several quarters if not years.
Calculations by Standard Chartered’s economist Nicholas Kwan show that even if developing Asia’s exports to the US, Europe and Japan drop by 30 percent this year, a bigger decline than that seen during the 2001 to 2002 downturn, it would shave off about 1.5 percent from the region’s combined GDP. That is nowhere near the GDP slide seen in the Asian financial crisis of 1997 to 1998.
Then there are the variations within the region in terms of exposure to overseas demand — inward looking economies such as India and Indonesia and even export powerhouses, South Korea and China, are much more dependent on domestic demand for their growth than their export-oriented neighbors such as Taiwan, Hong Kong and Singapore.
The region is in fact well prepared to withstand such deceleration in growth. That is because the numbers hide another trend that has developed its own momentum over the past decade or so. The ever-growing middle class of emerging Asia —– a group which has saved prodigiously during the boom times — will need to pick up some of the slack left by the withdrawal of Western consumers.
The middle class in Asia, excluding Japan, comprise of more than 250 million people. This is the segment which is increasingly willing to pare down savings and take on debt to go on overseas holidays, buy homes and cars, eat out at restaurants and continue to buy luxury goods.
Add to that some 1 billion Chinese and Indians who are increasingly getting wealthy enough to buy motorcycles, TVs and refrigerators, and you have an emerging consumer base that could soon surpass that in the US, the EU and Japan put together. And this base has been growing faster than any other region in the world for the past two decades.
Because of the high savings history of this group, the consumption-to-GDP ratio in Asia has traditionally been much lower than those in the West. In China, for instance, private consumption-to-GDP ratio is a mere 35 percent, compared with more than 70 percent in the US. Governments and central banks in the region are now trying to stoke consumption by cutting taxes and interest rates, encouraging these savers to spend more.
Asian governments are in better shape than those in the West to provide these incentives because of their strong fiscal positions, low debt levels, large foreign exchange reserves, resilient financial systems and falling inflation. Asian financial institutions’ negligible exposure to the West’s toxic assets also means that governments are not under duress to shore up their banking systems.
The region’s record foreign exchange reserves and inter-governmental foreign currency swap lines established before the crises unfolded have in fact enabled authorities to counter an acute shortage of dollar liquidity amid heightened risk aversion and as US institutional investors repatriated funds to redeem customers back home.
Moreover, economies in the region are today much more integrated thanks to multiple free-trade agreements signed between governments over the past few years, making the region lot less susceptible to the developed economies in West than a decade ago.
AMMUNITION
China’s recent announcement that it will spend almost US$600 billion on public works programs and similar, though less ambitious, public spending plans announced by South Korea, India and the governments across Southeast Asia, are reminders of the ammunition Asian authorities have in store to counter the emerging downturn. They are boosting expenditure on roads, bridges, schools and hospitals to create jobs and so put money in the hands of the consumers.
Here again there will be regional variations in spending. India, for instance, has among Asia’s highest fiscal deficit and government debt ratios, which will constrain the government’s response to the slowdown and stymie infrastructure spending. Some of the pressures on the Indian budget and on Indian manufacturers and consumers are likely to be alleviated by the sharp drop in oil and metal prices plus prompt policy response.
There is a long way to go before the region achieves its aspiration of becoming one common market of more than 3 billion consumers. Much more can and should be done across the region in terms of increasing access to finance to a wider range of consumers, streamlining property rights, speeding up labor reforms and cleaning up the legal system.
Indeed, the current downturn and the lack of investment opportunities in the West is an opportunity for the governments of China, Japan, South Korea, Singapore, Hong Kong and Taiwan to invest their surplus capital within the region. Building basic infrastructure in India — from power plants to roads, ports and water and sewage treatment plants — alone will require trillions of dollars over the next decade.
At the same time, the recipient governments will have to build the necessary capital markets infrastructure — by establishing active bond markets, consolidating the region’s fragmented stock markets and speeding up insurance and pension reforms — in order for these developing economies to harness and absorb such large-scale, long-term capital from within the region.
Many people wonder whether Asia will turn back the clock on financial reforms in the wake of the current turmoil. In fact, Asia has brought in greater sophistication, transparency and depth to its stock, bond and currency markets since the 1997 to 1998 financial crisis. It is unlikely to proceed differently this time round.
If anything, regulators in these markets are likely to play the role of enablers of change as they come together to introduce legislative measures and accounting rules that promote prudence at financial institutions and make them more consistent and transparent for investors and other stakeholders across the region.
The region’s regulators will continue to make sure that the banks have enough capital to undertake the risks on their books. Asian banks have been better prepared to deal with the current crisis compared with their Western counterparts partly because of the lessons learned from the 1997 crisis.
OVERSIGHT
A lot of work still remains. For example, the setting up of credit bureaus and establishing proper oversight over lending practices at consumer finance companies will go a long way in preventing a repeat of the West’s sub-prime crisis. At the same time, such a move will help expand the reach and depth of the consumer finance industry into Asia’s smaller towns and rural societies, benefiting millions of customers who have no other transparent means of accessing finance.
Indeed, authorities in emerging financial centers such as Shanghai, Mumbai and Dubai, together with the more established Hong Kong and Singapore, should grasp the emerging opportunity to be at the forefront of the change in the global financial architecture.
These emerging financial centers have the advantage of learning from the West’s mistakes as they refine their market infrastructure.
With some deft handling on the part of the administrators and a little bit of luck on the socio-political front, these Asian centers can join the ranks of New York, London, Frankfurt and Tokyo as equals in a new world order once the dust settles from the ongoing financial turmoil. This year might just mark that turning point in history.
Jaspal Bindra is chief executive, Asia for Standard Chartered Bank.
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