While most of Thailand was busy enjoying and recovering from the Songkran festival last week, those with energy left to follow the news were either following the Preah Vihear hearings at the International Court of Justice, or fretting about the Chinese economy.
A ruling in the Preah Vihear temple dispute between Thailand and Cambodia is not expected until October, but at least it was encouraging to see both sides airing their cases in the proper forum. Whichever way the decision goes, both parties should respect it and move on despite any domestic backlash that may occur.
But what has been more interesting, with greater implications for all Asia and the world, was the release of China’s gross domestic product (GDP) figures. The world’s second largest economy expanded by 7.7% year-on-year in the first quarter, down from 7.9% seen during the last quarter of 2012 and below the 8% expectation of the markets.
Most people would agree that 7.7% growth is not that bad, and the global selloff in commodities in response to China’s “slowdown” is not that bad a sign. After all, we the consumers have ultimately been paying for the robust growth of China through high prices for commodities such as gold, oil, copper, coal … you name it, China has been blamed for pushing up the price with its growth-fuelled demand.
It’s been evident for some time that China was going to have trouble sustaining such high growth, and the problems have been well documented. Many issues need to be addressed, from data collection to the health of the overall economy, financial institutions and the property market.
China is not alone, as economies including India and even Asean powers such as Vietnam are facing gradual slowdowns. Vietnam’s first-quarter GDP growth eased to 4.89% from 5.44% in the previous quarter.
The International Monetary Fund (IMF) has reduced its economic growth forecasts for the entire region except Japan, which it says will finally see some thanks to the aggressive stimulus policies of the Shinzo Abe government.
The fragile state of large parts of the world economy is one of the best arguments for a focus on domestic-led growth. Apart from consumption, an infusion of government spending is something that should be seen as a good sign, and many countries in the region are heeding the message. Thailand has been a poster child for this approach, and more money circulating in Malaysia — thanks largely to the election — is keeping its economy humming.
But while the economic news is not all bad, investor sentiment is fragile and markets are quite volatile, a challenge that governments and central banks have to keep in mind.
Over the past few weeks and months, the influx of hot money into the “safe haven” markets of Asia away from the Europe and the United States has created a problem of its own, such as currency appreciation. In Thailand, the baht is up 6.3% against the dollar so far this year, the most among 11 major Asian currencies.
In countries that rely as heavily as Thailand does on exports, some checks on the strengthening currency are necessary. Although exports are slowing, mainly due to declining demand across most major markets, the sector remains the lifeblood of the Thai economy and could be in jeopardy if the exchange rate isn’t stabilised.
The central banks of the region have done a good job so far in managing the ups and downs of the global economy since they got their acts together after the 1997 financial crisis. But they are likely to face a tougher test in the months ahead as the economies start to slow and pressure mounts on governments, while the “hot money” starts to flow out.
Although most of the problems of the past seem to have disappeared, new clouds may be forming on the horizon. Maybe it’s time for central banks to think of new strategies to stop the influx of hot money and ways to promote domestic growth-driven economies.
Taking action after the outflow begins will only create more negative sentiment. Malaysia’s decision to impose capital controls during the 1997 crisis is one that is still remembered because it was made when the flight of capital was taking place.
Such a move would also help put an end to the speculation that has been rife in all aspects of the economy thanks to the influx of hot money, be it in the property or the capital markets.
Putting in place systems that would be ready to handle capital movements ahead of any problems that may arise would be more appropriate, and once one central bank makes this decision, others will follow soon.