By Cecilia Kok in Kuala Lumpur/The Star | ANN – Sat, Aug 13, 2011
Kuala Lumpur (The Star/ANN) – The panic that gripped global financial markets over the week served as a reminder of the weaknesses in western developed economies and their continuous impact on Asia’s growth.
At least two Asian economies have lowered their official growth forecasts amid the deepening debt challenges and deteriorating economic prospects of the United States as well as the euro region.
Singapore has narrowed its gross domestic product (GDP) forecast for this year to between 5% and 6% over the week from its earlier estimate of between 5% and 7%.
Japan is reportedly looking at reducing its 2011 GDP growth forecast to 0.5% from a previous estimate of 1.5%.
Many are still on a wait-and-see mode, as they acknowledge the heightened uncertainties surrounding their economies due to the escalating debt and economic problems in the western developed nations.
Policymakers in Malaysia have also begun to be more cautious in their outlook, with International Trade and Industry Minister Datuk Seri Mustapa Mohamed conceding over the week that the country’s growth forecast would need to be revised lower if troubles remained in the European and the US economies.
Malaysia’s official GDP growth target for this year is maintained at 5% to 6% on the back of the Economic Transformation Programme (ETP) projects and increasing dependence on regional economies. Some private-sector economists seem less optimistic about the numbers and believed that Malaysia’s GDP growth this year would not even exceed 5%.
Indonesia’s vice-president Boediono says: “Now is not the time for complacency.”
In his address at the 43rd Asean Economic Ministers’ Meeting in Manado, Indonesia, Boediono says: “We have to be vigilant and be prepared with national policy responses as well as regional responses and cooperation.”
Change of game plan?
Indeed, Standard and Poor’s recent downgrade of the US sovereign credit rating and the escalating debt crisis in the European economies might just have changed the game plan for policymakers in Asia, who are struggling to keep a lid on inflation.
“The risks of intolerably slow growth for the region have risen, while inflation remains high so, policy measures could quite a challenge over the short to medium term,” an economist tells StarBizWeek.
Growth momentum was not so much of a concern for Asia, as the region’s economies continued to expand at a reasonably healthy pace due to coordinated fiscal and monetary stimulus measures implemented during the onslaught of the 2008/09 global financial crisis.
Policymakers in the region were instead concerned about potential asset bubbles and rising consumer prices that accompanied the robust growth of their economies; hence, the focus was on gradual reversal of their expansionary monetary measures (such as increasing interest rates) to temper inflationary pressure and asset bubbles.
Comfort zone
While inflation is likely to have peaked in June for most countries in the region, it is expected to remain above the comfort zone of the respective countries at least until the end of this year.
But now that the global economic environment has changed and become increasingly unfavourable, there is an expectation that Asian policymakers would refocus on promoting growth momentum, and put a brake on the normalisation process of their monetary policies an effort that could potentially inhibit economic growth but might help to minimise inflationary pressure.
Downside risk
Manila-based Asian Development Bank (ADB) is of the view that the region’s central bankers will stop inflation-fighting measures at least until global market turmoil subsides.
“The region remains highly plugged into the global economy,” Morgan Stanley explains in its report, adding that weaker growth in the developed world will spell further downside risk to external demand in Asia where a number of economies are still driven by net exports.
Morgan Stanley argues that externally-oriented economies in the region such as Hong Kong, South Korea, Singapore and Taiwan will be affected by an economic downturn in the developed world, while countries with huge domestic markets such as China, India and Indonesia will be affected to a lesser extent.
“We believe a policy of measured fiscal expansion would be the real option to boost growth,” Morgan Stanley says, adding that it thinks China’s fiscal policy will be key, as the country still has fiscal room to respond in order to contain the downside risk to growth for the region.
It rules out India’s ability to implement fiscal measures, given the country’s high deficit and debt ratios. It states, however, India could focus on boosting private-sector confidence through policy reforms.
Higher deficit
As for Malaysia ,in the event of slowdown, economists at Morgan Stanley foresee fiscal consolidation being put on hold and deficit likely to edge higher than the 5% of GDP it expected for 2011. Malaysia already has among the highest fiscal deficit and debt ratios in the region.
Over the week, Mustapa said the Government had no plans for further stimulus spending, while it emphasised on the need to be mindful of the country’s deficit. Malaysia has targeted to reduce its fiscal deficit from 5.6% of GDP in 2010 to 5.4% of GDP this year.
Even so, the ADB in its recent Asia Capital Markets Monitor report argues that most economies in the region still have manageable levels of public debts and trade surpluses.
It points out that Asia’s solid economic fundamentals would attract foreign investors back to the region once the market turmoil subsides.
Foreign investors had left with their capital over the week in search of “safe haven” due to the heightened uncertainties in the global economy.
Abrupt changes
The steep losses of Asian capital markets over the week is proof that the region’s markets remain vulnerable to abrupt changes in global investor sentiment, says Iwan Azis, head of ADB’s Office of Regional Economic Integration.
Nevertheless, he maintains ADB’s report findings that the region’s strong fundamentals and wide interest rate differentials with advanced economies will encourage capital inflows to the region later this year.
The ADB report was written before the latest bout of financial turbulence erupted. It projected emerging Asia’s economy to slow to an average growth rate of 7.9% in 2011 and 7.8% in 2012, compared with 9.2% last year.
Source: Yahoo online 13 Aug 2011