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THE centre of economic gravity has moved towards Asia, with the region being seen as a force driving global economic growth into the next decade.
Asian economies remain formidable and on the path to further sustainability, against a slowing global economic backdrop – sound macro fundamentals and resilient Asian exports underpinned by buoyant intra-regional trade will see this through.
We forecast Asia’s 2007 gross domestic product (GDP) growth to come in at 7.0% year-on-year (y-o-y), higher than developed countries’ 3.1% y-o-y, driven by sustained private consumption, higher public infrastructure spending and positive export growth.
THE centre of economic gravity has moved towards Asia, with the region being seen as a force driving global economic growth into the next decade.
Asian economies remain formidable and on the path to further sustainability, against a slowing global economic backdrop – sound macro fundamentals and resilient Asian exports underpinned by buoyant intra-regional trade will see this through.
We forecast Asia’s 2007 gross domestic product (GDP) growth to come in at 7.0% year-on-year (y-o-y), higher than developed countries’ 3.1% y-o-y, driven by sustained private consumption, higher public infrastructure spending and positive export growth.
We remain committed to our bullish case for Asia and the domestic economic theme.
A notable improvement in Asia’s economic fundamentals and the prospect of surplus savings (exceeding US$3 trillion) have attracted even more funds inflow into the region. The continuing and further weakness of the US dollar has also proved to be a powerful driver for reflation in Asia.
A weak US dollar will continue to drive more outsourcing from Europe and Japan to Asia. Therefore, we believe OECD (Organisation for Economic Cooperation and Development) demand for Asian products will remain strong.
More important is the shift in economic dynamics for Asian countries from being manufacturing-dependent to services-driven (except for Vietnam, where the manufacturing sector remains the key growth driver given its low labour cost). Services sector growth has surpassed that of manufacturing in Malaysia and Singapore since the second half of 2006. We expect this trend to continue as the services sector takes over as the key driver of economic growth, providing a buffer against cyclical swings in manufacturing.
Post-crisis, South-East Asia has taken important steps at both national and regional levels to develop local financial markets.
The objectives of these efforts are:
·To reduce the risks associated with excessive reliance on short-term external financing, thereby mitigating the currency and maturity mismatch problem;
·To provide an alternative vehicle for channelling domestic savings into productive investments and reducing dependence on bank lending; and
·To support economic and financial integration within East Asia.
These efforts have started to bear fruit as South-East Asian economies have begun to display buoyant growth numbers driving individual domestic demand and investments.
One important achievement is the rapid growth and development of local bond markets for long-term financing, in line with long-term economic development efforts.
As at end-2006, East Asia’s combined local currency bonds outstanding increased further to exceed US$1.5 trillion. Japan possesses the largest debt market in Asia, at 206.7% of the country’s GDP value, followed closely by Malaysia at 96.9%, South Korea at 88.2%, Singapore at 73.9% and Thailand at 50.8%.
Corporate bond issuances are also on a rising trend across Asia, reflecting the increasing importance of bonds as a source of long-term financing post crisis.
Take Malaysia, for instance. Its private debt securities market (as a percentage of GDP) is the largest compared to other regional economies.
Between 2003 and 2006, the Malaysian bond market surpassed banking loans as the preferred choice of funding by the private sector, with corporate bond market outstanding of RM188bil versus corporate loans outstanding of RM131bil as at end-2006.
In the past two months, the US Treasury yield curve has shifted parallel upwards by an average of 40 basis points (bps) across maturities, driven mainly by changes in inflation and monetary policy expectations. As a result, Asian sovereign bond yields have increased in tandem with the rise in Treasury yields, though by a smaller quantum (e.g. Malaysia +4bps, Singapore +18bps and Japan +22bps).
Comparing global sovereign bond yields movement in 1H07, Asian sovereign bond yields have, in fact, tightened between 6bps and 20bps in the past six months despite the higher US Treasury yields. This shows that while the US market has a heavy influence on the Asian financial markets, the force of money and local optimism could well see the region insulated from US economic/market events.
Why should Asian bonds be insulated against the US economic/market events? The short answer is US$1.2 trillion in excess liquidity in the commercial banks in Asia (ex-Japan and China). If we include China, excess liquidity jumps to US$2.4 trillion and this does not include central bank excess liquidity.
As such, the structural fabric of Asian debt markets will weather any potential storm on the financial side, forming a solid fundamental for long-term economic development.
Key risks for Asian economies in 2007, however, lie in the form of external shocks:
·Drastic slowdown in global economies, especially the US, will negatively impact Asia’s electronic & electrical exports – the US still accounts for Asia’s single largest export market and is thus Asia’s “Archilles’ heel”;
·Renewed surge in global crude oil price may reignite inflationary pressures, leading to further monetary tightening amid slowing growth momentum; and
·Political risk, especially in Thailand and the Philippines, may deter foreign investment flows – but we feel this has already been priced into the premiums sought in these markets.
Overall, Asia is still very much the place to be seen in 2007. The positive growth in Japan as well as China’s ‘soft landing’ will also augur well for Asian economies while sustaining demand for exports against any potential slowdown from the US.
l The writer is chief economist and head of research at Kuwait Finance House, Malaysia (KFH).
Source : thestar.com.my |
