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Asia on its own Feet?

Updated On: Oct 28, 2008

IN MANILA last week, opening a conference at which I spoke, Philippine President Gloria Arroyo said the World Bank would pledge US$10 billion ($15 billion) to bail out banks in Asia. The next day, the World Bank and Asian governments said they knew nothing of such a plan.

Did the President speak in error, or just too early? Should Asian governments act in concert? If so, what exactly should they do and how?

Asean leaders meet this weekend in Beijing for an Asia-Europe meeting. They will discuss the crisis and the example set by Europe to recapitalise banks might inspire Asia to act. But the models of response seen in Europe and the United States may be neither possible nor called for.

Present assessments are that direct impacts are relatively contained in Asia. Regional banks have not been highly exposed to “toxic” securities. After the Asian crisis, a decade earlier, most have cleaned up their books. Some, such as DBS and Bank of China, will lose money. So too will individual investors, such as the 10,000 in Singapore who have bought Lehman Brothers minibonds.

But while painful, even tragic if investors were misled, such losses will not upend the economy. Systemic risks for Asia are not from the direct impacts. Indirect effects, however, can hurt. Credit, currency and future growth are three key factors.

Lending even between banks has gone dry. When lending resumes, the easy terms and low rates of the recent past are unlikely to return. Smaller banks and those which do not have a strong deposit base and relied on short-term funds are finding trouble getting fresh funds, as have those in South Korea. Where there are other difficulties, such as inflation and deficits in Vietnam, smaller banks could go under.

Government guarantees for their banks, already issued by Singapore, Hong Kong and others, can help stem nervousness.

IMPACT ON THE REAL ECONOMY

Currency fluctuations are a second factor. The Korean won has already experienced a sharp plunge as Korean banks scrambled to secure US dollars to pay off short-term financing. Other currencies may come under pressure. This bears watching.

Currency devaluation was the trigger for the 1997 regional crisis. In response, Asian governments created the Chiang Mai Initiative, a bilateral arrangement of swaps to help deal with short-term fluctuations.

In May, there was some agreement to increase the fund to some US$80 billion. This now needs to be made ready for activation. The third and most challenging factor is that financial woes have started to impact the real economy. The US is already in recession. Predictions vary but some think the downturn could last two to three years.

This will affect Asia. Deteriorating consumer confidence this Christmas in American malls will mean poorer yearend profits for Asian producers. Although the Asian Development Bank predicts a still healthy average of 7 per cent across the region, most economies will shave 2 to 3 per cent in growth because of problems elsewhere. This will trigger job losses, affecting many workers and families, on top of falls in property and market values, and tightening credit.

The billions lost on the stock exchanges will also have an effect. Asian companies that are highly leveraged will be pressed to meet their commitments or secure fresh funds, such as the Bakrie group in Indonesia. So too may newer companies and small and medium-sized enterprises, even if their fundamental businesses seem sound.

Some advise the region to be its own engine of consumption and growth, and “decouple” from the US economy. This, however, is easier said than done.

The habit of saving is quite ingrained among most Asian governments and citizens. Consumer spending will prove difficult to encourage when market portfolios have fallen and difficult times loom ahead. Moreover, while Asian governments have high rates of saving and substantial reserves, there is no ready instrument or pipeline to get Asian savings directly to Asian borrowers. This is notwithstanding efforts by the Asian Development Bank and others to create Asian bonds.

This gap explains the odd arrangement in recent years whereby Asians produce, export and save, while Americans spend, import and borrow. Trillions of Asian savings have then gone into the United States as capital, whether long term or in treasury bonds and other instruments.

The present crisis must prod a search for an alternative, for Asians to harness their savings to fund necessary investments in Asia itself. Boosting Asian demand can make growth in the region more self sustaining. One way would be to fund infrastructure development in the region, and thus increase consumption.

But even if we best begin work on it now, this is for the long term. For now, Asian governments would do best to be prepared but not anxious. The habit of saving is quite ingrained among most Asian governments and citizens. Consumer spending will prove difficult to encourage when market portfolios have fallen and difficult times loom ahead.

Moreover, while Asian governments have high rates of saving and substantial reserves, there is no ready instrument or pipeline to get Asian savings directly to Asian borrowers. This is notwithstanding efforts by the Asian Development Bank and others to create Asian bonds.

This gap explains the odd arrangement in recent years whereby Asians produce, export and save, while Americans spend, import and borrow. Trillions of Asian savings have then gone into the United States as capital, whether long term or in treasury bonds and other instruments.

The present crisis must prod a search for an alternative, for Asians to harness their savings to fund necessary investments in Asia itself. Boosting Asian demand can make growth in the region more self sustaining. One way would be to fund infrastructure development in the region, and thus increase consumption.

But even if we best begin work on it now, this is for the long term. For now, Asian governments would do best to be prepared but not anxious.

Author: 
Simon Tay
About the author: 

The author is the Chairman of the Singapore Institute of International Affairs.




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