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SITTIN' ON THE DOCK OF A BAY
The Economist - November 20, 2008
Trade slows and gloom mounts. But Asiaâ€™s economic downturn will be milder than the one it endured a decade ago
Earlier this year most businessmen and investors hoped that Asiaâ€™s emerging economies could withstand the economic and financial turmoil in the developed world. Now, however, stockmarkets seem to be betting on a rerun of Asiaâ€™s deep recession after its own crisis in 1997-98. Share prices in the region have plunged by an average of two-thirds (in dollar terms) from their peak in 2007â€”almost as much as they fell during the Asian financial crisis. Is Asia really heading for such a painful economic slump?
The latest figures are certainly worrying. Japan is now in recession. Chinaâ€™s economy is slowing much more sharply than expected, with the 12-month growth in its industrial production falling from 18% to 8% over the past year. Indian spending is being squeezed by the credit crunch: commercial-vehicle sales fell by 36% in the year to October. Hong Kong and Singapore are already in recession, with GDP having fallen for two consecutive quarters.
Asia is more reliant on exports than is any other region, so it is bound to be hurt by the rich worldâ€™s worst recession since the 1930s. Chinaâ€™s exports have so far held up surprisingly well, growing by 19% in the 12 months to October. South Koreaâ€™s have increased by 10%. But in Singapore and Taiwan exports have plunged this year. An Indian official has said that exports in October were 15% lower than a year ago.
Asiaâ€™s foreign sales are being choked by the global credit squeeze as well as weak demand. Cargoes pile up on the dockside and ships wait empty because exporters cannot get letters of credit to secure payment on delivery. Robert Subbaraman, an economist at Nomura in Hong Kong, reckons that over the next year exports from Asia (excluding Japan) could fall by 20%â€”roughly the same drop as during the 2001 dotcom crash. Weaker exports will dent investment and consumer spending. Yet Mr Subbaraman reckons emerging Asia as a whole will see GDP growth of 5.6% in 2009. That would be well down on the 9% seen in 2007 and perhaps 7% this year, but it would be slightly faster than during the 2001 downturn and much stronger than the 2% average growth in 1998.
In 1998 Hong Kong, Indonesia, Malaysia, South Korea and Thailand all suffered slumps in GDP of more than 6%. Even the gloomiest forecasters do not expect anything so dire this time. A few, such as JPMorgan, expect GDP to decline next year in Hong Kong, and Hong Kongâ€™s chief executive, Donald Tsang, expects growth to be flat or negative in all the regionâ€™s â€śmatureâ€ť economies, including his own and Singapore. But everywhere else should see positive growth (see chart), and generally remain stronger than during the 2001 dotcom crash. Only Taiwan is likely to have a worse year in 2009 than in 1998.
Mr Subbaraman also believes that Asia will recover sooner than other parts of the world, because most governments have ample room to ease policy and their economies are in better shape than those elsewhere. China, India, South Korea, Singapore, Taiwan and Hong Kong have all cut interest rates in the past two months. Falling energy and food prices will push inflation lower, and so allow further rate cuts.
All the main Asian emerging economies, apart from Indiaâ€™s, have public debt-to-GDP ratios well below the average in rich economies, giving them room to boost public spending or cut taxes in order to spur domestic demand. China, Malaysia, South Korea, Taiwan and Thailand have already announced fiscal stimuli. Singapore is expected to fire its hefty fiscal ammunition soon. Hong Kongâ€™s Mr Tsang is â€śup to his eyeballs in contingency plansâ€ť.
In contrast to the late 1990s, most Asian economies are in relatively good shape, if not Pakistanâ€™s (see article). Elsewhere, foreign-exchange reserves exceed short-term foreign debts. Almost all the regionâ€™s countries have current-account surpluses, though India and South Korea have deficits, which explains why they have seen large currency depreciations this year.
Most Asian households and companies are also modest borrowers. The black sheep is South Korea, where households and firms are even more indebted than in America. But total domestic debt (private and public) fell to 143% of GDP in emerging Asia in 2007, compared with 251% of GDP in America. As its exports stumble, Asia faces a nasty cyclical downturn. But it is spared the deep structural problems, such as excessive debt, which could depress growth elsewhere for several years.
Tortoise or tiger?
All the Asian economies will slow sharply next year, but some more than others. As the most open economies that are also big financial centres, Singapore and Hong Kong have been hit hardest. India is the least dependent on exports, at only 22% of its GDP, compared with a regional average of over half. So, in theory, it should be the least affected by the global slump. But India has two disadvantages. First, it is more exposed to the global credit crunch as a result of its previous reliance on large capital inflows. The sudden reversal of capital has sharply increased the cost of borrowing, forcing firms to cut investmentâ€”an important driver of growth in recent years. The Reserve Bank of India has cut interest rates and pumped liquidity into the banking system, but borrowing rates remain high.
A second problem is that, unlike China, the Indian government has little room for a fiscal stimulus. Its budget deficit is running at an estimated 8% of GDP (including off-budget items). Whereas China is boosting infrastructure spending to prop up demand, Indiaâ€™s plans to build roads and power plants with the help of private money may be delayed by the credit squeeze. The finance minister, Palaniappan Chidambaram, declared this week that growth will â€śbounce backâ€ť to 9% next year. Many economists reckon it is likely to be closer to 6%, while Chinaâ€™s slows to 8%.
Among the South-East Asian economies, Indonesia seems to be holding up best, with GDP up by 6.1% in the year to the third quarter. As a big exporter of commodities it will be squeezed by falling prices. But Malaysia, which is much more dependent on foreign demand, will be hit harder. Its exports are equivalent to over 100% of its GDPâ€”proportionally, more than three times bigger than Indonesiaâ€™s. Thailand, where Asiaâ€™s financial crisis began in 1997, has learnt its lesson the hard way. Its foreign-exchange reserves are now four times as large as its short-term foreign debt, and it has a current-account surplus. It is not about to suffer another crisis. But as exports fall, business and consumer confidence remain depressed by political uncertainty. Thailand will remain one of Asiaâ€™s slowcoaches.
On the surface, the massive debts of South Koreaâ€™s households and firms might suggest serious trouble ahead. However, the government has been quick to bail out its banking system, and most economists reckon that a large fiscal boost and the cheaper won (down by 29% this year) will help to cushion the economy, resulting in modest growth, of around 3% next year.
In contrast, Taiwan is already in recession. Its GDP fell by 1% in the year to the third quarter, dragged down both by a collapse in exports and by weak domestic demand. Some economists forecast growth of only 1% next year. To lift consumer demand, the government this week said that it would give everybody NT$3,600 ($108) in shopping vouchers to spend in shops and restaurants.
Such measures are a far cry from 1997, when rather than urging households to spend, governments in Asia begged them to hand over their gold jewellery to be melted down to bolster official reserves. Times have changed. Asia is certainly not immune to the rich worldâ€™s recession, nor will its economies quickly regain their previous rapid growth trajectory. But the current gloom and doom among investors in the region might yet prove overdone.
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