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After the rebound, the Rabbit brings adventure and caution

Updated On: Jan 28, 2011

This article featured in TODAY (Singapore) newspaper on January 28, 2010

The high growth of 2010 has lifted the outlook in Singapore and across almost all of Asia. From the giants of China and India to smaller economies like Cambodia and Bangladesh, a pan-Asian story of growth has bred a sense of confidence in sharp contrast to prospects in Europe and North America.
Looking ahead, deep pockets of money and easy access to credit are making the obvious bet to put money in Asia. Today, valuations for business investments and housing in many cities are higher than even before the crisis. It would be dangerous, however, to assume that Asia has returned to where it was before the global financial crisis, as if that crisis never happened.

There are reasons to properly see much of last year's results as a rebound, rather than a real recovery. Can this be sustained going into the new year of the Rabbit? There are issues which Asians ignore at their peril. Risks relate to both global systems which are in flux and challenges in key countries. Both can have adverse knock-on effects on the open Singapore economy.

One fundamental systemic question is about the demand to drive global growth. Demand in American markets is better than in 2009 but it has shrunk compared to the heady, pre-crisis years. Caution and higher savings are the prevailing sentiment at the household level. Federal government spending, despite hitting record levels, cannot replace this sustainably.

In a different way, and despite growth past 10 per cent last year, the Chinese state faces something of the same dilemma. Government stimulus and easy loans over the last two years have pumped up the economy leading to asset price inflation.

However, real consumer spending, though growing quickly, is still insufficient to displace corporate investment and infrastructure spending as the key driver of growth.

Currencies are the second systemic issue. The weakening US dollar and yuan are competing in a kind of monetary limbo-rock contest: How low can each go. Wedged between these two currencies, other governments may attempt to devalue their currencies to retain competitiveness. The Vietnamese dong has been deliberately devalued, even as other countries like Thailand have sharply appreciated against the US dollar.


A third set of systemic risks comes from the rise in prices for commodities and, especially, oil. There are real drivers for inflation, as demand has rebounded. Add to this the phenomenon of international investors entering Asian markets and driving up prices across the board.

Governments in Asia and other emerging markets are reacting differently and the risk of misstep and misalignment is real. So too are social and political consequences.

Take the price of oil. This has risen steeply in the last months and may go higher still on the back of demand from China and India. This creates a tension for much of emerging Asia which subsidises oil and energy.

As prices rise, governments face rocketing subsidy bills which can impact fiscal stability and the balance of trade. Yet if subsidies are withdrawn, social impacts can be severe and lead to political protests.

Inflation on food prices is also felt, on a diverse range of products. The baseline demand is outstripping supply and incidents caused by floods or other adverse conditions can lead to sharp hikes. Where societies have sharp divides between a rich elite and masses of poor, this can ripple widely and strongly.

International and regional coordination in each of these areas - finance, currency, and commodity prices - is weak. Sovereign governments retain the perogative to respond to circumstances in their own judgement without even informing others. Yet one country's policies can negatively impact its neighbours.

This is why so many are looking at China, on whom so much of the global and Asian economy now depends. As Beijing grapples with its own issues and an expected change of leadership, there are pressures from different directions.

Most believe that monetary tightening is needed to ease asset bubbles and the People's Bank of China has already raised interest rates several times in the past months. Many expect more such measures. Yet even as tightening is needed, it will be a fine balance to avoid a hard correction in such a large economy.

Nearer to Singapore and with less impact globally, Vietnam is facing severe pressures from inflation and imbalances in trade. Thailand is preparing for elections amid a tumultuous and divided politics that taints a robust economy.

After a good year, optimism and interest has grown greatly about Indonesia but it remains to be seen if good business conditions will continue.

The Rabbit is characterised by some as being both adventurous as well as cautious. The year ahead has elements to justify both. The rebound is over. We will see if the Rabbit has the legs to really run ahead or cowers timorously in a hole.

Simon Tay is chairman of the Singapore Institute of International Affairs.

Simon Tay