By Shamim Adam/Bloomberg
Singapore: Asia’s economies, in “much better shape” since a region-wide financial crisis struck a decade ago, still aren’t sheltered from the threat of a global slowdown and capital outflows, according to Lehman Brothers Inc.
Weaker US growth spreading to Europe and Japan is one of the risks facing Asia’s export-reliant markets, which are twice as dependent on sales abroad as the rest of the world, Lehman economists, led by Robert Subbaraman, said in an 18 May report.
“We do not share the view that the region has decoupled from global growth,” said Subbaraman, Lehman’s Hong Kong-based chief economist for Asia ex-Japan.
“A sharp downturn in global demand would have major ripple effects on Asia ex-Japan’s cross-country supply chain. Economies that are very open or have weak domestic demand would seem most vulnerable.” Those include Singapore, Hong Kong, Thailand, Taiwan and South Korea, the report said. Lehman estimates growth in Asia, excluding Japan, to slow to 8% this year from 8.4% in 2006, before accelerating to 8.2% next year.
Asia is approaching the 10th anniversary of the 2 July 1997 devaluation of the Thai baht, when an exodus of capital spread to the region’s other markets, triggering a crisis that pummelled their economies. Lehman says threats now include a rise in global risk aversion from “very low levels” currently and fund inflows which are driving foreign exchange gains.
A crash in China’s stock market may make investors more wary of speculative bets on assets, sparking a flight in such funds, the report said. Emerging markets in Asia received net private capital flows of $197.3 billion (Rs8,08,930 crore) last year, the ADB said in March.
China’s benchmark CSI 300 Index plunged a record 9.2% on 27 February, setting off a five-day rout that wiped more than $3.3 trillion from the market value of equitiesworldwide.
People’s Bank of China governor Zhou Xiaochuan on 6 May expressed concern share prices may be rising to unjustified levels.
Less than a week later, Goldman Sachs Group Inc., warned the rally, which has made China’s stocks the most expensive among the world’s major markets, may face a “correction” as valuations exceeded earnings prospects. An unwinding of the yen carry trade may also spur fund outflows, Lehman said.
Foreign investors borrow yen and invest in higher yielding assets elsewhere, a so-called carry trade that has pushed the value of the currency to a record low against the euro.
“Economies with high-yielding currencies, fixed exchange rates or relatively weak fundamentals would seem among the most exposed to this risk,” Subbaraman wrote, citing Indonesia, India, Hong Kong and the Philippines as examples. Still, Asia’s record holdings of foreign-exchange reserves since the crisis will enable central banks to defend their currencies should capital flight occur, Lehman said.
Total Asian reserves have risen from $485 billion in 1997 to $3.39 trillion now. China’s foreign-currency holdings grew by $1 million a minute in the first quarter to $1.2 trillion. South Korea’s reserves burgeoned to $247 billion in April from $7 billion in November 1997. With inflation “well under control”, central banks have room to cut interest rates, should risks to growth emerge, Lehman said. Asian policy makers raised rates more than 25 times last year to curb inflation, control lending and stem money from overseas that were creating asset bubbles. The increase in funds also steered currency gains, boosting concern a stronger exchange rate will make exports more expensive. Thailand imposed controls on foreign investments in December after previous efforts failed to reduce inflows and keep the baht from rising.
Central banks may sell their currencies to slow appreciation and retain competitiveness on goods for overseas markets, Lehman said. “The danger is that Asian central banks lose some autonomy in setting interest rates and controlling monetary conditions, with the negative consequences of the economy overheating, fanning asset price bubbles and inflation,” Subbaraman said.