|By Rohit Bajoria
The Bounce Back of the
Initial responses to the financial turmoil, by developing Asia’s governments were efforts to safeguard the stability of banking and financial systems, particularly in light of the turmoil and loss of confidence after the collapse of major investment banks in the US. These responses included preventive measures against bank runs, such as increases in the maximum amounts covered by deposit insurance and blanket guarantees of the liabilities of deposit-taking institutions. Existing cooperation mechanisms in developing Asia, such as the Chiang Mai Initiative, were expanded and strengthened between PRC (People’s Republic of China), Japan, and Korea. These responses were largely successful in shoring up the public’s confidence that savings were secure. Panic was kept to a minimum (such episodes were rare, as in the case of run on the Hong Kong, China–based Bank of East Asia). These initial responses were followed up by proactive efforts by the region’s central banks to ensure adequate liquidity and to ease credit and monetary policy. Policy rates have been cut across the region.
Banks in the PRC have ramped up lending in recent months as fears of inflation have receded and commodity prices have cooled considerably. Indications reflect that lending in the 3 months by PRC banks is as large as over the preceding year. That would be a significant offset to the contraction in demand resulting from the drop in PRC exports.
The governments in developing Asia have implemented fiscal stimulus packages as a way to offset the severe contraction in external demand for their exports and to rebalance growth toward domestic demand.
In India, the Government raised its expenditure by $ 17 billion in the fiscal year ended March 2009, with an emphasis on infrastructure investment and a reduction in the valued-added tax. A substantial increase in expenditure was planned for the fiscal year ending March 2010, together with cuts in excise duties and service taxes.
Malaysia rolled out two stimulus packages totaling $18 billion to support employment and families, to fund infrastructure, and to encourage private investment.
Thailand was implementing a $3 billion stimulus package that includes tax cuts and cash assistance to low-income households. It planned to invest $56 billion mainly in infrastructure over 4 years.
These government policies to hold the economy together has resulted in the equity markets in the Asia and emerging markets sky high with a few stocks trading at historic highs with the Emerging market index growing at more than 60 % YTD vis-à-vis the world index being close to 20%. Few of the economies in Asia have doubled their index from the lower levels.
It is uncertain, however, that these conventional monetary policies and discretionary fiscal policies can continue to support demand until external demand recovers. Further, if the planned fiscal packages turn out to be ineffective or insufficient, many Asian economies will not have room to resort to additional fiscal packages. Prospects for GDP growth and contributing demand components in 2009 and 2010, are therefore, grim. Given the weak projections for US import demand in the next 2 years, merchandise exports from developing Asia are expected to contract sharply in 2009, by 10.2% on average, before growing relatively slowly in 2010.
The trade surplus of developing Asia will fall on average by 4.2% in 2009 before starting to grow again in 2010. Investment demand is unlikely to recover before 2010. Past experience suggests that inventory adjustment, which has just begun, will take more than 4 quarters, and capacity utilization is still low. As fixed capital investment has been strongly correlated with export demand in the region, the uncertainty in the timing of US recovery is forcing investors to adopt a wait-and-see stance. Investment will not kick in until external demand starts to recover next year. Overall, the current account surplus in developing Asia is projected to shrink by 2.6% in 2009 to a still significant $527 billion, of which the PRC accounts for about 80%.
Judging from the performance of emerging market equities in the third quarter of 2009, a global investor might think that:
1) the Great Recession has clearly ended;
2) the world economy has entered a durable recovery and will return next year to trend growth;
3) problems in the global banking system have by and large been solved, and credit markets will soon be functioning normally, and
4) the secular outlook for emerging markets equities is unambiguously superior to developed markets. ....
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