Asia–Pacific Faces “Heightened Uncertainty” Over Credit Crunch, US slowdown
Bangkok (UN Information Services) – The Asia-Pacific region has entered a “phase of heightened uncertainty,” amid financial turmoil due to fall-out from the sub-prime credit crisis, the threat from rising inflation and a major slowdown in the United States economy, the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) reports in its latest regional survey.
In the Economic and Social Survey of Asia and the Pacific 2008, ESCAP says that after having enjoyed their fastest growth in a decade, the developing economies in the Asia-Pacific region will see growth moderating to 7.7 per cent in 2008, down from 8.2 per cent in 2007. Developed economies in the region are expected to grow at 1.6 per cent in 2008, slipping from two per cent in 2007.
But the Survey warns that the broader impact of the sub-prime crisis on the United States is “yet to be seen.”
“The region is entering a phase of heightened uncertainty in 2008. The sub-prime crisis in the United States is still unravelling, and a significant slowdown of the United States economy and further turmoil in financial markets cannot be ruled out,” the Survey says.
The Survey notes that under a worst case scenario with the US falling into recession and a deeper depreciation of the dollar, “the impact on much of the region will be harsh.” The Survey points to Taiwan Province of China, Singapore, and the Republic of Korea facing the greatest impact in falling exports from a United States downturn.
A sharp downturn in the US would also hit exports from Indonesia, Thailand the Philippines and Malaysia – although to lesser degree. But China will remain resilient, as strong domestic demand should partly cushion the external shock. In emerging Asia, India will feel the least impact.
Asia’s Strong Economies a buffer to US downturn
The Survey says that the Asia-Pacific region’s strong macro-economic fundamentals and underlying regional domestic demand will act as a vital buffer to any significant United States downturn.
The region’s resilience lies mainly in its healthy macroeconomic fundamentals, enabling countries to adopt supportive fiscal and monetary policies. Government budget deficits have gradually declined and, in some countries, have turned to surpluses.
There have been no signs of excessive current account deficits, as in the prelude to 1997. Countries have reduced their dependence on bank financing, addressed currency mismatches and improved the health of banking sectors. Large foreign reserves have added to the region’s underlying economic strength.
China and India, the region’s locomotives, are forecast to grow at a brisk pace in 2008, boosting the rest of the region. Commodity- and energy-exporting countries, particularly the Russian Federation, will add to the region’s momentum.
But the export-dependent economies in East and South-East Asia will see exports contribute less to growth, while China’s on-going expansion will continue to offer opportunities, the Survey says.
North and Central Asia will continue to benefit from consumption and construction, thanks to income from high energy prices. With economies traditionally driven by domestic demand, South and South-West Asia will benefit from strong private consumption and investment – and from expansionary fiscal policy in some countries.
For least developed countries in Asia growth is forecast at 6.4 per cent in 2008 – little changed from their 2007 level. “Asian and Pacific least developed countries have been largely unaffected by the United States sub-prime meltdown because they have little exposure to the global financial system,” the Survey says adding that for some least developed countries such as Afghanistan, “peace and stability will be the keys to economic growth and development.”
Inflation dampens but food price rises higher
Inflation in the developing economies of the region is projected at 4.6 per cent in 2008, down from 5.1 per cent the previous year, with currency appreciation cushioning the impact of high oil and food prices. The Survey warns of the potential consequences of shortfalls in food supply as a result of the rising global demand for biofuels.
“Food prices are likely to remain high,” the Survey says. “With grains and oil seeds the key feedstuffs for biofuels, the oil price rise exerted a strong push on agricultural commodity prices in 2007, which enjoyed their best performance for almost 30 years.”
In Asia and the Pacific, food accounts for a high proportion of consumer spending. In India it accounts for 46 per cent of the consumer price index (CPI), in Indonesia, 42 per cent, and in China 33 per cent. “Food price inflation hits low-income households, so governments may need to target the poor with food stamps and cash,” the Survey notes.
Asia’s investors growing role points to “power shift” in financial power
While the major downside risk for the Asia-Pacific economies lies in the downturn in the United States housing market, the region’s corporations are largely resilient to the unfolding credit crunch in the United States. “At present, Asia-Pacific economies remain relatively immune to the credit crunch in the United States and European Union,” the Survey notes. It adds that Asia’s corporations are generally “cash rich and not highly leveraged.”
The Survey says Asia Pacific corporations were more conservative as borrowers having learnt the lessons from the Asian financial crisis of a decade ago. The region’s central banks are also “well armed to supply liquidity to the financial sector”.
Indeed, Asia-Pacific investors are playing a key role in supporting developed countries during the current financial turmoil. “Sovereign wealth funds and State investment institutions from the region have bolstered weakened banking sectors in the United States and Europe,” the Survey says. Banks are looking to Asian funds to “shore up their depleted capital bases.”
This also highlights a “shifting balance of financial power” evident in the dramatic rise in the overseas investments of the Asia–Pacific corporate sector. The Survey notes that rising outward investment from the region has generated opposition from target countries. To make target countries “more welcoming to investments and to prevent a protectionist backlash,” the Survey recommends sovereign wealth funds take proactive measures to foster disclosure and transparency.
Investment decisions in developed countries threaten financial disruption in developing countries, both in Asia and the Pacific and in other regions,” the Survey says.
“The subprime crisis has opened eyes to the failure of the international financial architecture to address the risks of new financial instruments,” it adds. These include a call for more information to regulators on structured-finance-instrument holdings and on the concentration of risk, for major central banks to cooperate more closely in dealing with liquidity shocks, and for investment banks to clarify complex structured products.
Growth raises infrastructure demand, pollution concerns
In the fast growing economies of India and China, the Survey notes that infrastructure shortfalls and growth’s impact on the environment will also have their impact on the economic outlook. “India needs to spend $320-$410 million in 2007-2012 to finance infrastructure needs,” the Survey says.
In China, the Survey warns that the “destabilizing effect of growth on the environment is become more apparent.” It adds that air pollution, especially in large cities, is increasing the incidence of lung diseases, and that water pollution is also leading to higher rates of cancer, and diarrhoea among children.
As the region's most comprehensive annual review of economic and social developments, ESCAP's Economic and Social Survey of Asia and the Pacific provides the only independent source of analysis covering all countries in this vast and diverse region, and considers both the social and economic spheres of development. The 2008 Survey, entitled “Sustaining Growth and Sharing Prosperity”, looks at the most critical issues, challenges and risks our region faces in the months ahead.
Headquartered in Bangkok, Thailand, ESCAP is the largest of the UN's five Regional Commissions in terms of membership, population served and area covered. The only inter-governmental forum covering the entire Asia-Pacific region, it aims to promote economic and social progress.