Abandon ship?

THE latest non-farm payrolls - 295,000 jobs were added in February, while the unemployment rate fell to 5.5% - will reassure investors about the health of the US economy, while simultaneously provoking concerns about the likely date of the first Federal Reserve rate increase.

But what about the global economy? There are four things that might give investors pause. The first is the direction of central bank policy. The Fed might be thinking of pushing up rates but many more central banks have been cutting; India and Poland were the latest to join the trend. That doesn't suggest confidence in a global recovery. The second is bond yields. Euro zone 10-year yields are now on a par with their Japanese equivalents at 0.38%; the US has the highest yields in the G7 at 2.2%. Of course, one can argue that these yields have been manipulated by central banks, although both the Fed and the Bank of England reduced or stopped QE a while ago. The third and fourth measures are commodity prices and the Baltic Dry index, a measure of shipping rates (see chart, which is on a log scale). Both dipped in 2008-2009 and recently but the Baltic Dry's decline is much more precipitous; it recently hit a 30-year low.

One would expect there to be some kind of link between the two. After all, commodities are exactly the kind of product - bulky, imperishable - that companies are going to send by ship. And these indices are, of course, driven by the balance of supply and demand. Commodity markets operate with a lag - it takes time to develop new oil fields and dig new mines - so the risk is that the price may have dropped by the time the extra supply comes on stream. Shipping operates with an extra lag since shipowners respond to higher commodity demand. New ship orders more than trebled between 2012 and 2013. But it may not be just supply that is to blame; the WTO has been cutting its forecasts for world trade growth.

The head of Maersk, the shipping group, recently talked of slower global trade growth, adding that

The economies in Europe are still very sluggish. Brazil, Russia and China: those three economies used to drive a lot of growth, and right now we are not really seeing that to the same extent. The only real bright spot is the US, and even the US is good but not great

One should be pretty cautious about overinterpreting the Baltic Dry's movements; its sheer volatility over the long term suggests it can hardly be an exact forecaster of the economy. In some respects, its fall may even be good news, as some commenters point out. However the index's slump hardly suggests a boom either. And another bellwether isKorean exports which fell 3.4% year on year in February (although seasonal factors played their part).

The big question is whether lower oil prices and interest rate cuts will eventually act to give the economy a second wind, or whether both developments are merely a symbol of incipient weakness. The equity markets clearly favour the benign interpretation, and indeed one can partly explain rate-cutting and low bond yields with respect to the effect of falling commodity prices on inflation. As always, we need more data; first quarter GDP numbers from the emerging markets (out next month) will be the next test.

Source: Economist

Baltic index rise reflects China’s industrial activity

The Baltic Exchange’s main sea freight index, which hit a fresh 2009 high last week, should no longer be seen as an accurate gauge of the world economy, but rather a measure of reviving Chinese industrial activity.

With about 90% of the world’s traded goods by volume transported by sea, a resurgence in seaborne freight movement would be a major sign of a world economic recovery.

Indeed, lately, the Baltic Dry Index (BDI), which gauges the cost of shipping resources, including iron ore, cement, grain, coal and fertiliser, has been climbing and hit a new 2009 high last week.

But analysts and shipping industry officials said the jump in the index was driven by Chinese demand for iron ore, coal and grains, as well as rising port congestion in Australia and China, and did not necessarily bode for a broader world recovery.

”It is not really Japan, European or other Asian demand that is driving this (rally). It continues to be China,” Martin Sommerseth Jaer, analyst with Arctic Securities, said.

The main index, which was launched in 1985, has remained volatile this year due to swings in demand by China for iron ore – the primary material in the manufacture of steel.

“Last year, the BDI did work quite effectively as a global economic indicator,” Peter Malpas, group research manager with shipbroker Braemar Seascope, said. “This year it definitely has not.”

The Baltic Exchange said it had never set out to provide economic insight and analysis through the main index, “but an independent and accurate view” of the cost of moving dry bulk commodities such as iron ore and coal by sea.

”With so many factors coming into play and driving freight rates, what these figures mean for the wider economy is for economists to decide,” a Baltic Exchange spokesman said.

Strong appetite for iron ore and coal in India and China and other industrial activity helped push the Baltic index to a record high in May 2008 of 11,793 points. But global turmoil, compounded by a reduction in demand for raw materials, manufactured goods and consumer products drove it back down to as low as 663 in December.

The volatility this year on the main index has also been driven by the availability of large capsize ships, typically hauling 150,000 tonne cargoes such as iron ore and coal, rather than signals of appetite for raw materials from the wider economy.

In June and November, when the main index rallied, port congestion in China, as well as at coal ports in Australia, tightened the availability of ships, helping to sustain gains.

“The BDI is a reflection of both supply and demand. At the moment, it is being led up by the capes. Clearly congestion has returned,” Nigel Prentis, head of research, consulting and advisory with HSBC Shipping Services Ltd said.

Source: StarBiz

Shipping companies anchor vessels near Pengeran to save costs

Hundreds of ships anchored near Pengeran in Johor may be left idle by shipping companies following a drop in business due to the global economic slowdown.

Malaysian Maritime Enforcement Agency (MMEA) deputy director-general Datuk Nor Aziz Yunana said he was not aware of the ships as highlighted by fishermen in Kota Tinggi but suspected they might be “parked” there until business picked up again.

He said there were many such vessels left anchored along the Malacca and Johor straits since the economic downturn.

He added that ship owners would leave their vessels anchored outside port limits without most of the crew as a means to save costs by avoiding port fees and crew maintenance costs.

“Although there are security concerns because thieves might board these crew-less ships, they are not breaking any laws as long as they remain outside shipping lanes.

“We do monitor the vessels to prevent theft but there’s not much else we can do,” he said after a special media briefing on MMEA’s operations and future plans.

Nor Aziz was commenting on a news report yesterday that hundreds of ships were left anchored off Pengeran and no one knew what the crew were doing.

The report said the area was not a designated anchorage for ships and fishermen were concerned as they claimed sludge from the vessels damaged their fishing gear and marine life, affecting their livelihood.

Nor Aziz said the agency would look into the complaints and take necessary action if any offence had been committed.

Source: The Star

Baltic Dry Index set to surge

The Baltic Dry Index (BDI) may hit 4,000 points in the current quarter, propelled by increasing demand for iron ore and grains from China, analysts say.

The BDI, a measure of shipping costs for commodities, rose 5.6% to 2,284 points on Oct 1 from 2,163 on Sept 24.

The highest level it reached this year was 4,291 points on June 3.

An analyst with a local research house told StarBiz that he expected the BDI to jump to more than 4,000 points in the current quarter as iron-ore demand from China was forecast to increase due to a pick-up in construction activities there.

“This was because most construction works were slow in the third quarter owing to hot weather, which is quite common especially in southern China,” he said. “Now, the weather has cooled which is more conducive for construction works to resume.”

The analyst added that the cold weather also prompted more coal to be exported to China.

Bloomberg reported China Ocean Shipping (Group) Co as saying the BDI might surge more than 80% by the year-end on increased demand from China.

And a report posted on www.business-standard.com said China’s steel makers were buying more iron ore as the government had implemented a US$586bil stimulus package to revive growth.

“China’s economy is forecast to expand 8.2% this year, compared with the March estimate of 7%,” it said.

Iron ore is the largest dry-bulk cargo moved by sea and China is a major consumer of the commodity.

Furthermore, the analyst said bumper crop harvesting such as wheat and corn in the United States would also contribute to the rise in the index.

“This is because the bumper harvesting will drive grain prices down where it is expected to create demand,” he said.

The positive BDI outlook augur well for Malaysian Bulk Carriers Bhd (Maybulk), Kenanga Research said, noting that the shipper had agreed to acquire a 3½-year vessel of 32,000 deadweight tonne, Ikan Juara, for US$23.75mil.

“The group’s current fleet will expand to 13 after the addition of Ikan Juara,” the brokerage said in an update report.

Source: StarOnline

Talks on iron ore benchmark prices push down Baltic Dry Index

THE Baltic Dry Index (BDI) fell 59 points in three consecutive days last week to 1,714 on Thursday due to ongoing negotiations on annual benchmark prices for iron ore imports.

The negotiations will likely be concluded after April 1.

China, the world’s biggest steelmaker, is looking at lower iron ore prices while suppliers such as Rio Tinto, BHP and Vale are waiting for demand to revive.

According to China Daily, an online news portal, talks between miners and Chinese steelmakers may drag for a longer time compared with last year as negotiations are more complicated this time.

As the world’s largest iron ore consumer, China expects to have a bigger say in negotiations, according to the daily.

Iron ore takes up a large chunk of dry-bulk shipping capacity.

The other common cargoes that are carried on dry-bulk vessels are cement, grain, coal and fertiliser.

The decline in BDI is also in line with the world’s crude steel production that is on the downtrend.

The production of the 66 countries reporting to the World Steel Association was 84 million tonnes in February, a drop of 22% year-on-year.

“Crude steel production showed a continued decrease in nearly all the major steel-producing countries in February compared with the same month in 2008, except for Iran and China,” the association said in a statement.

It said Iran recorded an increase of 15.9% in February and the Middle East was the only region showing production growth this month.

“China’s crude steel production for February 2009 was 40.4 million tonnes, an increase of 4.9% compared with the same month last year,” it said.

World Steel Association represents about 180 steel producers (including 18 of the world’s 20 largest steel companies), national and regional steel industry associations, as well as steel research institutes.

Association members produce about 85% of the world’s steel.

The BDI had shown signs of recovery early this year on stronger bookings for iron ore and coal transportation to China before the Chinese New Year and on advanced demand for raw materials to make steel.

The index took a beating last year due to slower iron demand from China post-Olympics, coupled with the global economic downturn that has affected the construction and shipbuilding industries.

The BDI stood at 2,298 points on March 10. It slumped almost 92% last year from its peak of 11,793 points.

Source: Star Online

Slump in Asian trade may drag into 2011

THE slump in Asian trade could last into 2011, putting more shipping lines out of business and potentially aggravated by signs of rising protectionism, the Hong Kong Shippers’ Council said last Friday.

Sunny Ho, executive director of the council, which represents exporters, importers and other shipping users, expressed shock at the pace of the meltdown in Asian trade in the past two months as shipments from major ports have skidded at double-digit rates.

“It’s the worst we’ve seen in the past 20 years. I’m particularly pessimistic. I think we’ll see a very sharp decline in Asian exports this year and negative growth in 2010. We might see some mild growth in 2011 but not back to levels we’ve seen over the past few years,” said Ho.

In Hong Kong, Shanghai, Singapore and other Asian ports, ships are now lying idle and loaded with empty containers as shipping lines use them as floating storage depots rather than pay to keep the containers in a depot.

Ho said investor expectations of a recovery in Chinese demand for raw materials, which has spurred a 30% surge in the Baltic Dry Index, a measure of freight prices in the past two days, was premature.

“The Chinese recovery will be shortlived. Prices of raw materials have come down so much that China has started buying again. But, unless there is growth in demand for consumer products, then demand for these raw materials will not be sustainable,” he said.

Ho is much more bearish than economists who forecast Asian trade will pick up in 2010 as global fiscal stimulus takes effect.

Container throughput from Hong Kong suddenly slumped 19% in the final two months of last year while throughput via the Shenzhen port in southern China fell 11% as recession in the United States and Europe depressed demand for Chinese goods.

China’s economic slowdown means growth in Chinese consumption would not be strong enough to pick up the slack in global demand, although a massive fiscal stimulus by the government would help, Ho said.

Over-leveraged US consumers, meanwhile, would have to save for the next few years and the US downturn was already giving rise to protectionism, he said.

Last month, the US further tightened documentary and inspection requirements for US imports of toys and other goods containing lead.

Ho saw a proposed “Buy American” clause in President Barack Obama’s stimulus package as another ominous sign.

“We are concerned that more protectionism will come. This makes it very costly for manufacturers,” he said.

Weak sales in Western markets left Asian manufacturers with a rising risk of order cancellations and demands to prolong payment times from retailers and other customers whose finances are stretched, Ho said. That makes some manufacturers reluctant to accept orders. - Reuters

Source: Star Online

Investor offers tankers to oil speculators

LONDON: Shipping investor Nobu Su plans to offer his fleet of 20 supertankers to speculators who want to store oil and bet they can sell it later in the year for a profit.

Su's Taipei-based company, TMT Co Ltd, will lease out its two-million-barrel vessels at below-market prices in return for a share of any profit his customers make on the trade in oil. His fleet, able to hold enough crude to supply Europe for two days, is available for immediate hire, he said.

"The oil price is very low," Su, founder and chief executive officer of TMT, said in an interview here on Thursday. "We get a lot of enquiries" about storing cargoes, he said.

Rather than buy crude now, store it and sell futures contracts to lock in a profit, Su said he thinks the trade will make even more money by simply purchasing the oil and storing it offshore. The investor sells it when crude prices rally later, he said.

Oil companies such as BP and banks including Citigroup, through its Phibro LLC unit, have stored as much as 80 million barrels of crude at sea, seeking to profit from the spread between immediate supply and futures. The price spread, known as a contango, narrowed for some grades this month, reducing opportunities for the trade.

TMT will help investors secure cargoes by introducing them to oil traders, Su said. TMT may store some cargoes in the Persian Gulf at cheaper prices on its four single-hull supertankers and deliver them in vessels with two hulls, he said.

The average price of storing two million barrels of oil on a tanker is about US$57,500 (US$1 = RM3.61) a day, depending on the duration of the contract, the quality of the ship and its location, according to data from London-based shipbroker Galbraith's Ltd. That works out to 86 US cents a barrel a month. Traders also have to pay insurance and financing costs.

Crude oil traded on the New York Mercantile Exchange, more than US$100 a barrel below its July 2008 record, has advanced 26 per cent from its low on January 20 as the Organisation of Petroleum Exporting Countries curbs output.

The cost of shipping Saudi Arabian crude to Japan, the tanker industry benchmark, has slumped for 10 consecutive trading sessions, according to the London-based Baltic Exchange.

The measure, updated once a day, fell 6 per cent to 46.72 Worldscale points on Thursday, which works out at US$37,022 in daily earnings for vessels.

Worldscale points are a percentage of a nominal rate, or flat rate, for more than 320,000 specific routes. Flat rates for every voyage, quoted in US dollars a tonne, are revised annually by the Worldscale Association in London to reflect changing fuel costs, port tariffs and exchange rates. 

Source: NST Online

DHL: Asia too dependent on the West

ASIAN governments need to re-balance their economies as they are currently too dependent on the West, according to a study commissioned by DHL and undertaken by the Economist Intelligence Unit.

“Much of Asia has grown up on the back of vibrant trade with the West,” said Justin Wood, a director at the Economist Intelligence Unit and South-East Asia expert.

Justin Wood

“But with the economies of North America and Europe forecast to perform poorly next year, the impact on Asia’s trade-dependent economies could be serious indeed.”

The study, entitled: Fuelling Global Trade: How GDP growth and oil prices affect international trade flows, also revealed the slowing Asian growth story and the need to re-balance their economies, said Frank Appel, the CEO of Deutsche Post World Net, the parent company of DHL.

“The challenge that Asian trade faces today is to hasten the migration to high value goods and focus on managing their growing dependence on oil.”

“The impact of rising oil prices will add risks and negatively impact Asian international trade,” Appel continued. “The study also reveals that for 2009 and beyond, international trade will depend more on rising Asian incomes, than the West.”

The study examined trade flows between 39 countries in three regions - Asia, the European Union and the North America Free Trade Agreement (NAFTA).

It included three countries under NAFTA- the US, Canada and Mexico, 25 European Union countries, the six largest economies in ASEAN along with Japan, South Korea, India, China and Hong Kong in Asia.

The report looked at the bilateral trade flows between each country and those outside its immediate trade bloc or region, which resulted in 383 bilateral trade relationships.

According to the study, the link between income and trade is stronger between Asia and the West than between North America and Europe.

A 1% increase in combined income between an Asian country and a Western country will deliver a 1.36% increase in trade.

Trade between ASEAN and the West will rise 1.35% for every 1% increase in combined income, while between two Western countries, a 1% increase in combined income delivers a 1.14% increase in trade.

“Equally, with oil prices showing extreme volatility this year, and with the price of oil likely to rise after the current economic downturn passes, this study identifies further challenges for Asian nations to address, especially in terms of pushing their manufacturing industries up the value chain,” Wood said.

Based on an average of all the 383 bilateral trade relationships in the study, a 1% increase in oil price leads to a 0.24% reduction in trade, with the assumption that all other drivers, such as income levels in two countries, remaining constant.

High oil prices have the greatest effect on Southeast Asia, where trade decreases the most.

The impact on oil prices is much greater when an ASEAN country trades with a nation in the EU or NAFTA , a 1% increase in the price of oil reduces the value of trade by 0.3%. Assuming no rise in income levels, the value of trade between ASEAN and the West would fall by 30% over five years if oil prices doubled, as had happened in middle of this year.

In West-to-West trade, there is a higher proportion of “high-value” goods such as computers, aircraft and media devices, and a smaller share of “low-value” goods such as coal and gas, palm oil, textiles and shoes.

In contrast, Asian nations are likely to have a much higher proportion of trade centred on low-value goods.

Since transport costs make up a larger share of the final cost of low-value goods than they do for high-value goods, rising oil prices have a larger impact on trade growth for Asia.

Source: Star Online

Malaysia's exports weakening

PETALING JAYA: Malaysia’s exports are expected to decline well into 2009 after a dismal performance in October which saw the effects of falling consumer demand kick in.

“The sharp reversal in merchandise exports, from a 15.1% year-on-year increase in September to a 2.6% contraction in October, suggests exports in November will slump further,” an economist said.

He said the gloomy outlook was also premised on the forecast that demand in recession-hit developed economies would take a “deeper-than-expected hit”.

Malaysia’s exports in October fell 2.6% to RM53.5bil from a year earlier, the first decline in 15 months.

The economist forecasts about a 5% drop year-on-year in Malaysia’s exports in November and sees further contraction going into 2009 as the full impact of the slower global growth takes its toll on the country’s exports.

CIMB Research chief economist Lee Heng Guie concurred. “It will not be good,” he said.

For next year, Lee said he expected exports to contract up to 3% year-on-year against the Government’s forecast of 1.5%.

“We are likely to see a more pronounced price effect of the commodity fallout in the first half of next year, coupled with continued sluggish demand for electrical and electronics (E&E) products due to reduced consumer spending.” he said.

Year-to-date, the E&E exports were the country’s top revenue generator, accounting for RM217.8bil or 38.5% of total exports. Palm oil and palm oil-based products were second with a combined value of RM56.3bil, or 10% of total exports.

Meanwhile, the sentiment among export-oriented local industry players appeared to be mixed, according to observers.

An industry source noted that certain major multinational corporations (MNCs) such as Intel, Dell and Motorola used local E&E-related companies as their main materials and equipment suppliers.

This could mean these companies are highly dependent on MNCs.

“If the economic crisis becomes worse, there will be a drastic reduction in demand. Equally important is the possibility that future investments or re-investments would also come to a halt,” he said.

The source said these local companies would “be badly hurt” and estimated they would suffer at least a 30% drop in business, hence having a huge impact on their bottom lines.

Malaysian-American Electronics Industry (MAEI) chairman Datuk Wong Siew Hai said he expected export sales in the first half of next year to be even weaker as demand continued to decline.

“The fourth quarter continues to be challenging with sales dropping by as much as 20% compared with the previous quarter.

“For 2008, MAEI members are expected to register a possible contraction from 5% to 10%,” he said. MAEI’s 17 member-companies registered export sales of RM73.8bil, or 27.7% of Malaysia’s total exports of E&E products last year.

An MQ Technology Bhd spokesman told StarBiz that although he expected exports to “slow a little” next year, business was “still okay”. MQ, which is involved in consumer electronics, counts Japanese firms as its biggest customers. “Japan, although in recession, is a mature market and relatively stable. Our customers are cash-rich and this is the most important thing,” he said.

Source: Star Online

Global economic weakness to hurt Malaysian exports and economic growth in 4Q

KUALA LUMPUR: Current global economic weakness is expected to hurt Malaysian exports and economic growth further in the final quarter (4Q) of 2008.

In a note, ECM Libra said the nation's fourth quarter real export growth might decline by 9.1% from a year earlier, resulting in a slower real gross domestic product expansion of between 1.3% and 1.5% compared to the annual GDP growth of 4.7% in the preceding third quarter (3Q).

"To be sure, Malaysia was not the only country in the region which experienced a big decline in exports in October 08. Both Taiwan and Singapore registered a sharp drop in exports as well.

"As for Indonesia, Thailand and South Korea, their export growth in October 08 had also declined rather significantly," said ECM Libra.

Source: Edge Daily

Malaysia's October annual exports suffer surprise drop

KUALA LUMPUR: The country's exports unexpectedly fell in October from a year ago, the latest evidence that it is being hit by falling demand from abroad because of the global economic slowdown.

The 2.6% decline from a year ago compared with economists' expectations for a 6.3% rise in a country where trade is more than 100% of gross domestic product, or the value of all goods and services produced.

"We are likely to see much weaker numbers for Malaysia going forward with external demand very weak, and with the unlikelihood that demand for electronics will recover anytime soon," said Alvin Liew, an economist at Standard Chartered.

Exports dipped slightly in July 2007 but the last big fall was in March 2007 when they fell 4.5%.

Imports for October fell by 5.3% year-on-year compared with analyst expectations for a 1.8% rise.

The data comes after South Korea saw exports slide by 18.3% in November, the biggest drop in seven years, and amid tumbling oil and commodity prices, key exports for Malaysia.

Exports totalled RM53.46 billion, down from RM62.31 billion in September, while imports fell to RM43.84 billion.

That ate into the trade surplus, which fell to RM9.62 billion in October compared with RM14.5 billion in September.

.

Malaysia has pinned its hopes of avoiding a recession on boosting exports to Asia, although the October data showed exports to the 10 countries that make up Asean fell by 6.1% from a year ago and exports to China fell to RM4.89 billion from RM5.26 billion on weaker commodity and oil prices.

Malaysia hopes to record economic growth of 3.5% in 2009, but many economists say it will not manage that. Investment bank UBS sees no growth at all.

The poor trade data may spur Malaysia's central bank into action after its first rate cut in five years earlier this month when it shaved 25 basis points off its key rate to 3.25%.

"The central bank will look into at least another 25 basis points. I'm looking at 50 basis points in January and February," said Gundy Cayhadi, economist at IDEAglobal.com.

Source: Edge Daily

Sittin' on the dock of a bay

Trade slows and gloom mounts. But Asia’s economic downturn will be milder than the one it endured a decade ago

eyevine

EARLIER this year most businessmen and investors hoped that Asia’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 Asia’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 2007—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. China’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 world’s worst recession since the 1930s. China’s exports have so far held up surprisingly well, growing by 19% in the 12 months to October. South Korea’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.

Asia’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%—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 Kong’s chief executive, Donald Tsang, expects growth to be flat or negative in all the region’s “mature” 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 India’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 Kong’s Mr Tsang is “up to his eyeballs in contingency plans”.

In contrast to the late 1990s, most Asian economies are in relatively good shape, if not Pakistan’s (see article). Elsewhere, foreign-exchange reserves exceed short-term foreign debts. Almost all the region’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 investment—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, India’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 “bounce back” to 9% next year. Many economists reckon it is likely to be closer to 6%, while China’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 GDP—proportionally, more than three times bigger than Indonesia’s. Thailand, where Asia’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 Asia’s slowcoaches.

On the surface, the massive debts of South Korea’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 world’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.

Source: The Economist