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November 30, 2008

Global crisis hits Asia's tiger economies

Asia's tiger economies took a bigger hit from the global slowdown sooner than expected as South Korea's industrial output fell sharply in October and Thailand posted its slowest export growth in six years, reported Reuters.

The economic crisis that has gripped the developed world has started to bite in what had been one of the world's fastest-growing regions and a rise in political risk in Thailand and India could exacerbate the growing economic problems.

Although Indian annual economic growth between July and September came in stronger than expected in a Reuters poll at 7.6 percent, data on Friday showed, it marked the slowest pace of expansion in almost four years.

Malaysia's economy grew at 4.7 percent in the third quarter from a year ago, above analysts expectations, but far slower than the 6.7 percent pace of the second quarter and its slowest pace since mid-2005.

"People are beginning to realise the extent to which the unprecedented financial crisis in the West is having an impact on many Asian economies. The picture is looking ugly though Asia should, on the whole, still outperform the rest of the world," said Alvin Pontoh, economist at Capital Economics in London.

He forecasts that Asia, excluding Japan, will grow by 5 percent next year compared with an average of 8 percent over the past five years, which would mark the biggest slowdown since the region's financial crisis in 1997-98.

Indonesia, South Korea and India have been been caught in the credit crunch due to large external corporate indebtedness. Falling foreign exchange reserves in South Korea and a swelling current account deficit in Thailand only add to financial vulnerabilities as they increase exposure to external shocks.

"We know Asian economies would be caught in the direct headlight of two oncoming trains; the global credit freeze and the weak global demand," investment bank UBS said in a report issued on Friday.

"While these aren't unexpected factors, what has surprised us was the extent and speed at which these shocks have hurt what we still maintain were/are strong Asian fundamentals as the credit storm approached," the investment bank said.

In Thailand, exports grew 4.7 percent on an annual basis in October, way below the 5.5 percent forecast in a Reuters poll.

Thailand's current account deficit widened to $1.13 billion, increasing the country's dependence on external financing and the October trade deficit surged to $964 million versus a $142 million surplus in September as imports rose 23.5 percent from a year ago, more than expected.

In the wake of the Asian financial crisis a decade ago, countries in the region built huge foreign exchange reserves to protect themselves from a repeat.

But those buffers are being eroded and data earlier this month showed South Korean reserves had fallen by $52 billion to $212.25 billion between the end of March and the end of October.

In Malaysia, the latest data shows that foreign currency reserves fell to $99.7 billion by mid-November, down from $122.6 billion at end-September.

Policymakers across Asia have scrambled to cut interest rates to unfreeze credit lines and boost domestic demand at a time when demand for exports is slowing.

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