Although the global economic outlook for next year is improving as the United States and Europe recover, capital markets will remain volatile as the US Federal Reserve tapers its quantitative easing measures, likely by the end of the first quarter or early second quarter, say top regional analysts.
“The overall outlook seems to be positive for next year with the recovery in the United States and stabilisation in Europe,” said Michael Spencer, chief economist and head of research for Deutsche Bank based in Hong Kong.
This is good news for Asia, which has always been reliant on exports for growth, but improvement could come at a cost, said Adrian Mowat, chief Asia and emerging markets equity strategist for JP Morgan.
With credit growth far outstripping GDP growth in Asia, central banks must be very vigilant about household debt, says Lord Adair Turner.
“The Fed may raise rates by 2015 and this could have an impact,” he added.
Mr Mowat said the current sentiment in the markets remained very gloomy, perhaps “overly pessimistic”, although one could expect some surprises going into the future.
He and other speakers at the World Capital Markets Symposium in Kuala Lumpur last week said that Thailand, Malaysia, the Philippines and, to some degree, Indonesia, were markets that they would put their money into next year. However, they would remain cautious about Indonesia as the country struggles to reduce its current account deficit.
Most of the panelists were positive about the growth outlook for the region, saying that most of Asia’s policymakers had already put in place measures that would help keep their economies sound even if things got worse.
However, they also see some areas for improvement. They pointed to the need for continuing structural reforms, better preparation for the impact from the tapering of the Fed’s massive stimulus programme, and even the slowdown of some economies such as China, India and even Indonesia.
Indonesia, the largest Asean economy, has been witnessing a prolonged stretch of current account deficits, which economists say is not healthy in case things go south.
“There is a current obsession with the population of each of the countries and Indonesia is gaining in that regard although its macro situation is not as good,” said Christopher Eoyang, chief emerging market strategist and co-head of Asia Pacific portfolio strategy at Goldman Sachs.
Other countries in the region have current account deficits but the levels are too minuscule to have an impact.
“Indonesia is one of the ‘Fragile Five’ [to be affected] from any tapering (by the Fed), and the fact that it has raised interest rates, that is something it should have undertaken two years ago,” said Mr Spencer of Deutsche Bank.
(Morgan Stanley coined the term “Fragile Five” earlier this year to refer to troubled emerging market currencies under the most pressure against the US dollar: the Brazilian real, the Indonesian rupiah, the South African rand, the Indian rupee, and the Turkish lira.)
Mr Mowat said that what Indonesia needed was a weaker rupiah to help spur growth.
“The rupiah is overvalued in our view along with the Chinese renminibi (RMB) and out of the two I think the rupiah is more so than the RMB,” he said.
Until Indonesia sorts out its foreign-exchange issues, he said, uncertainty will deter foreign investors from entering the market.
Other markets such as Malaysia also need structural reforms to add value to their export-oriented economies, panelists agreed.
The overall rise in debt, including household obligations, is a worrisome trend in China and across Asia, said Lord Adair Turner, the former chairman of the Financial Services Authority in the United Kingdom.
He pointed out that credit growth in emerging markets averaged 13.9% a year between 2004 and 2011, compared with 7% from 1996 to 2003. GDP over the same periods grew by 4.9% (1996-2003) and 6.5% annually (2004-11.
It is imperative for central banks to take appropriate action to control the situation by not only using interest rate policy but also other measures, he said.
Pointing to the higher returns from speculation in property markets, Lord Turner said that even jacking up interest rates by 100 basis points would not deter those who can make 5-10 times more than that from speculation.
Singapore and Hong Kong are among the jurisdictions that need to rein in runaway property prices that have shut most of the younger generation out of the market.
A lot of the property inflation has been fed by funds flowing into the region as a result of QE, and there could be dire consequences when that fund flow starts to ebb.
“If there is any major risk [in Hong Kong] it is the property market which is in a bubble. $1.9 million for 600 square feet overlooking a toll booth and a typhoon shelter? Do you think that’s a good deal?” Mr Mowat asked the audience.
“The use of loan-to-value and loan-to-income tools may sound ancient but they are ones that would be of great help in these times,” Lord Turner said. Non-performing loans in the real-estate sector rise dramatically once the situation turns sour but often are not visible during a boom because speculators flip property and can manage the consequences, he said.
The panelists also warned that China should tackle its problems seriously or it could face a similar fate to Japan, which for two decades kept on bumping around zero growth.
China, they said, lacked a strong fiscal policy and its debt to GDP is on the rise. It needs to redirect funds to the private sector and not the public sector which is lethargic and inflexible.
The good news, they agreed, was that Japan’s economic reforms seem to be working and this could lend weight to the upswing in western growth, thus helping Asia’s overall stability.