The SIIA’s first tête-à-tête of 2010 featured a discussion on “The Year Ahead” with Mr Joseph Tan, Asian Chief Economist, Credit Suisse, and Mr Manu Bhaskaran, Partner/Head, Economic Research, Centennial Asia Advisors Pte Ltd.
Presentation by Mr Manu Bhaskaran, Partner/Head, Economic Research, Centennial Asia Advisors Pte Ltd.
The recovery is underway but patchy, and the first half of 2010 will be stronger than the second half. Those were the broad views of Mr Manu Bhaskaran. There are changes and challenges in store, and Asia must adapt and be cautious. But there is potential for the region to outperform.
Mr Bhaskaran said the “double-dip” recession now predicted by many is unlikely. There is huge liquidity and stimulus while and many indicators are strengthening. Many appear to have overreacted to the crisis with cuts that were very deep and overdone. Everyone’s survival instincts were to transfer to cash and cut inventory. But this has increased liquidity and left room to grow. Regarding stimulus, policy support is essential for now, but unsustainable in the long-run as it will it will lead to inflation and more public debt. For the short term, in an environment of liquidity and loose policy, hiccups can be managed.
The performance of the US in 2010 will have perhaps the greatest effect on the world economy. Unfortunately, says Mr Bhaskaran, despite a more positive outlook, the world’s largest economy is not yet out of the woods. Although retail sales and investment appear to have bottomed, and the labor market is stabilizing, there are strong headwinds. These include rising oil prices and the exposure of second tier banks to commercial property loans, which pose a threat to financial markets. There are downsides to America’s loose policy, such as the potential for both inflation and currency turmoil.
Globally, Mr Bhaskaran expects slower growth as oil prices increase along with savings and tax rates. Fiscal tightening will occur. There remain the lurking threats of protectionism and climate change. Along with slower global growth, Mr Bhaskaran predicts structural changes in the global economic system. The value and role of the Chinese yuan is increasing, and at some point it must be revalued. The question of when, however, remains unanswered. Meanwhile, fluctuating currencies in Asia are changing the competitiveness of Asian economies.
On the whole, Asian economies will grow in 2010 thanks to a combination of export growth (due to recovering G3 economies) and loose monetary conditions. One challenge is that inflows of capital in shallow Asian markets may be destabilizing, as there are no policy structures to handle them yet. Another challenge will be that China will begin to tighten its monetary policy to combat inflation. Policy changes in China will ripple throughout the region. But lead indicators in Asia are all up, and so there is optimism.
Mr Bhaskaran addressed the question of whether China can “save” other Asian economies. It has had the strongest economic recovery so far. But, says Mr Bhaskaran, it panicked and overdid its stimulus package. Loan growth is out of control. Local governments have seen an estimated influx of 20 trillion RMB (2.9 trillion USD). Going forward there is a need to be tougher. China must rein in its spending or else its economy will overheat. Although domestic demand is booming- some areas are even facing labor shortages- the idea of Chinese consumers replacing American or European ones may be misleading. In China, private domestic consumption makes up around 37% of GDP in 2008, compared to over 70% in the United States. There are many obstacles to raising consumption in China, such as creating and improving social safety nets. Even with slower consumption growth, says Mr Bhaskaran, there is an opportunity for Southeast Asia to step up as a platform for exports to China.
Elsewhere in Asia, India has been very resilient and Mr. Bhaskaran expects 8.5% growth in 2010. Consumer spending is up. The 2009 elections boosted confidence, and consumption is holding up as the salaries and spending of average Indians, especially in rural areas, continue to rise. Challenges include rising food prices and increasingly populist policies.
Mr Bhaskaran turned his focus to Southeast Asia. In Indonesia, President Susilo Bambang Yudhoyono’s provides the best opportunity to restore growth. Increased political stability will decrease barriers to investment. In Malaysia, the Najib government is focused and reforms are being implemented. But there are political problems fueling fundamental political degradation, and a danger that economic issues will fall by the wayside. In Thailand, there is a political struggle for the soul of the country, which will take a minimum of 2-3 years to resolve. However, the government is effective by Thai standards and the short term outlook is good. Singapore will continue to recover in 2010. There is a confluence of good projects, such as in manufacturing, and accommodating policy. But the post-crisis world will be different, and changes must be made. The Philippines, says Bhaskaran, is not exciting. There will be neither fundamental change nor renewed growth prospects. Vietnam, on the other hand, “could grow 8% for 30 years.” Market forces are being unleashed. There are excellent demographics and human capital. Yet there are vulnerabilities, financial – small banks and a weak system – and political – a potential conservative backlash.
Mr Bhaskaran concluded that the global financial crisis is over. But there will be delayed hits and more stresses.
Presentation by Mr Joseph Tan, Asian Chief Economist, Credit Suisse
Mr Tan identified three trends with significant implications for the global economy in 2010. First, the US dollar is structurally weak. Second, inflation will rise, and Asian governments will tighten fiscal and monetary policy. Third, emerging markets will contribute to most of world growth.
In the United States, on top of the weak dollar, many expect the Federal Reserve to tighten monetary policy. Mr Tan cautioned that this may not happen. The government must combat joblessness and a weak housing market. The weak job and housing markets will reduce wealth and income effects and decrease consumer spending. As 2/3 of the US economy is driven by consumer-spending, there is a major need to counter such negative effects.
Worldwide, Mr Tan agrees there will be a rebound in the first half of 2010. The export recovery will continue, especially for Asian economies, where Mr Tan says it is best to be a small exporter. But there is a risk that governments will tighten monetary policy too early because of the risk of asset bubbles, such as in real estate.
Mr Tan argues that although China is still short of a traditional bubble, there is still too much liquidity. It must tighten on loans and allow the yuan to appreciate. There will be shifts in China in 2010. It is rising in the value chain. It is getting rid of hidden subsidies through the process of cost-normalization. Concurrently, Chinese industries are moving to areas traditionally dominated by Singapore and Hong Kong. But there will be opportunities for Cambodia, Vietnam to fill the space created lower on the value chain.
In 2010, Mr Tan concluded, the main risk is related to tightening. The risk in China is that there will be too little tightening, while the risk in the USA is that there will be too much.