TODAY, 12 April 2008
By Simon SC Tay
Riding it out involves open and frank cooperation
AMERICA’S unfolding financial woes continue to surprise. The impact on Asia has been limited thus far, and some think that Asia’s rise is irresistible.
But connections in finance, trade and investment can still bring the storm to Asia. Indeed, regional bourses and currencies have already felt shocks.
After all, Asia’s boom has coincided and benefited from growth in the United States, easy and abundant capital and low inflation.
Conditions on all three fronts have changed. The US economy has slowed and seems headed for recession. Inflation is rising sharply, especially in US dollar terms. The ready availability of credit is also under pressure with the uncertainties in the market.
If the American economy continues to worsen, are Asians ready for a storm?
Historically, what happens in America affects Asia. However, some now argue for a decoupling of the regions. Growing domestic demand in Asian markets, especially China, and greater intra-Asian trade, they say, will keep the region booming, even as America declines.
South-east Asian central banks’ governors expressed such optimism when they met in Jakarta in March. Their statement hoped “that intra-regional trade will provide some buffer against the likely slowing down of exports to the United States and Europe”.
But much of intra-Asian trade is in intermediate goods that, after assembly in China or elsewhere, are intended for final export to the US or Europe.
Concurrently, reports show that global trade is at a standstill. If more problems emerge in the US, this will affect the volume of Asian exports.
The fall in the US dollar compounds the situation. Asian producers are finding that, even as costs and the value of their currencies rise, they cannot increase US dollar prices without losing American customers. Even if sales and trade continues, profit margins are being squeezed or even end up in the red.
Domestically too, inflation in Asia will be tricky. This is more than just an economic issue. It affects the poorest and strains political stability, especially as the most basic Asian staple, rice, is affected.
In response, some states will continue and even increase subsidies for essential goods.
Such measures in Indonesia, for example, will strain public coffers, but are unlikely to be changed, especially with a presidential election due.
For states that hold up an ideal of social equity, there is pressure to dampen inflation, even if this erodes growth rates. Thus, in Vietnam, where inflation early this year hit a record 15.7 per cent, growth is predicted to slow to 5-6 per cent.
Thailand faces a similar challenge. After two years of slow growth under the military-backed government, the new government seems set on an expansionary fiscal policy and reopening the economy to foreign investment. But the appreciation of the baht against the US dollar may affect competitiveness.
In Singapore’s open economy, the last quarters have turned sluggish. Some help can be expected from close ties with India and China, and if sectors like pharmaceuticals pick up.
But the city state’s performance seems to verify the thinking of analysts such as Morgan Stanley who argue that Japan and other advanced Asian economies, instead of de-coupling, are re-coupling with the US economy.
Across Asia, financial systems will be tested by the challenge of delivering growth while dealing with inflation, and aligning currency exchange and interest rates.
Surges and swift falls in short term capital flows can unsettle and even swamp a country’s financial system. Unless well managed, domestic demand in Asian markets may fall victim.
The complexity of financial systems will make this challenging. This is especially for countries that may have banks and regulators who are less used to financial management in a global economy and may have less tools of influence.
There are dangers that have not been seen in the region since the crisis of 1997.
The danger of a black swan event — unexpected in nature and of severe consequence — should not be ruled out. But another crisis is not inevitable.
One key to avoid a crisis is to openly and frankly recognise the problems ahead. Too much talk of a decoupling between Asia and the US, in this regard, runs the danger of hubris that Asians are sheltered from the storm.
Another key is to increase exchanges among financial ministries and central bank regulators. Recall that the lack of transparency and coordination was a major contributor to the turmoil in Asia in 1997.
Hopefully, a decade on, the lesson has been learnt. The Chiang Mai initiative has set up currency swap agreements that can help shield Asia from short term surges in currency values.
Yet, many reforms have yet to be undertaken to strengthen domestic systems and create a closer economic community in the region.
Indeed, without a regional mechanism wider than the Chiang Mai initiative, Asia may again need to turn to the International Monetary Fund (IMF) for wider surveillance, despite the acrimonies after 1997.
Underlying this issue is political leadership. US economic turmoil may be turning into a global storm but American leadership is still focused on their own economy, and not the world.
As such, Asians should prepare to fend for themselves, coordinating more closely as a region. To do so, Asians will need to rise abovetheir domestic politics, and work towards regional resilience.
Fending off a potential crisis can bring the region closer together and provide, in this way, an opportunity as well as a danger.
About the contributor:
Simon Tay is chairman of the Singapore Institute of International Affairs and associate professor at the National University of Singapore.