Tuesday, 27 January 2009
Some Asian Predictions for the Year of the Ox
2008 has been a tumultuous year in Asia marked by the deterioration of exports and a collapse in many regional asset markets as the global recession worsened and leveraged investors withdrew. Hopes that Asia would “decouple” were, as we feared at the start of 2008, overly optimistic, as Asia’s domestic demand remains strongly correlated with exports and global liquidity. Growth and industrial production are now slowing sharply in many Asian economies and we fear the outlook will worsen in the first half of 2009.
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Some Asian Predictions for the Year of the Ox
2008 has been a tumultuous year in Asia marked by the deterioration of exports and a collapse in many regional asset markets as the global recession worsened and leveraged investors withdrew. Hopes that Asia would “decouple” were, as we feared at the start of 2008, overly optimistic, as Asia’s domestic demand remains strongly correlated with exports and global liquidity. Growth and industrial production are now slowing sharply in many Asian economies and we fear the outlook will worsen in the first half of 2009.
However, many Asian economies have responded promptly to the global slowdown with fiscal and monetary measures to support liquidity and try to cushion domestic economies from the global recession. Yet, political and security concerns could complicate the mix. Political uncertainty and security threats in Thailand, India, China, Indonesia and Pakistan could exacerbate the economic crisis, making it harder to attract investment. The risk of social unrest remains a significant concern and will challenge governments across the region to maintain stability without reverting to hard-line tactics that could further inflame the situation.
Guiding their countries through this difficult period is particularly difficult for Asia’s policy makers because of the unprecedented nature of the economic crisis. The collapse of financial markets and the rapid pace at which this contagion has spread has shocked authorities. Asia’s financial institutions, due in part to their relative lack of sophistication, maintained a healthy distance from the most toxic financial products. Their balances sheets are generally healthy and non-performing loans, with some exceptions, remain under control impairments. Even so, Asia now finds itself on the firing line of the global recession. The following are a few predictions for the new year.
1. 2009 growth will be lower than in the 2001 recession
AXJ growth will slow to the 5% range during 2009, and with a prolonged global slowdown more likely now, Asian exports and domestic demand will have a sluggish recovery in demand starting late in 2009 or more likely in 2010.
2. Expect increased volatility and weakness for most Asian currencies
Asian currencies will lose further ground to the dollar, as deleveraging drags on into H1 2009 despite some brief respites from government intervention. Yet, in the second half, US public debt expansion could trigger a sustained turnaround in some of the region’s currencies.
3. Property will no longer be a safe haven
The credit crisis is taking regional property markets through a tough patch in the latest boom and bust cycle, despite the respite of lower interest rates and the persistent long-term uptrend. Commercial property in Hong Kong and Singapore will suffer from financial sector retrenchment.
4. Do not expect equities to rebound to pre-crisis levels anytime soon
Despite government stimulus, equity values will remain pale reflections of pre-crisis years. Falling earnings estimates will begin to line up with rapidly deteriorating economies, particularly as long as deflation threatens, leading to near-term bottoms.
5. Exports will remain weak
Export volumes collapsed in Q4 2008 as the slowdown spread to all emerging markets including commodity exporters and the availability of trade credit disappeared. Exports will remain weak and are unlikely to revive until the latter part of 2009.
6. Monetary easing will continue in the face of low inflation
Consumer and producer price inflation will slow to low single-digits for low inflation countries and high single-digits for double-digit countries, clearing room for more rate cuts from those countries who are already easing and allowing the Philippines and Pakistan to start.
7. Social unrest will increase
Asian governments will face increased social unrest as the economic crisis deepens. A difficult balance between fiscal prudence and countercyclical spending will have to be found. More coordinated efforts between governments can help share the burden and also provide some indirect suasion in the event that repression becomes the tool of choice for quelling unrest.
8. Asian banks will weather 2009 in better shape than their Western peers
As the financial crisis turns into a proper economic recession, Asian banks will see lower profits and higher defaults. However, they will avoid the catastrophic losses and corresponding collapses that have plagued their Western peers. Further consolidation will follow as weaker institutions find their viability challenged.
While the warning signs have been evident for several months, it appears that many Asian countries were unprepared for and even complacent about the severity of the economic crisis. In some quarters, it was felt this was a financial markets crisis and limited to a handful of foolhardy investment banks and hedge funds. This view has rapidly shifted and Asian policy makers are now responding aggressively. Yet, with deleveraging far from over, Asian asset markets may continue to be under threat, especially as macro indicators will likely get worse before they get better.
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