Some after-effects of the global financial crisis of 2008-09 are still being felt in Asia, not because Asian economies themselves are weak but because many of them are so exposed to parts of the world where growth has yet to return, says Standard & Poor’s.
“Thailand ... is a relatively open economy, producing things that middle-class people consume. Just getting global growth up is going to help Thailand”
PAUL GRUENWALD
Standard & Poor’s
The external contribution to growth across Asia has been close to zero. “So we are not getting any help from the rest of the world. Global trade remains relatively depressed,” says Paul Gruenwald, chief economist for Asia Pacific of the US-based ratings agency.
Nevertheless, he maintains a fairly optimistic outlook, with a few reservations, which he shared during a recent visit to Bangkok for the YPO (Young Presidents Organisation) Insights Asean summit.
“There is a lot of money out there that wants to be spent,” is how he put it when talking about the future of the Asia Pacific economy. For now, however, governments and businesses just need to be patient.
“We are still in the post-crisis period, so growth has got a little bit weaker than before we got into this mess,” he said. Nevertheless, he expects average annual growth for the region of 5-6% again within the next few years.
While the revival of the US economy gives rise to optimism and will help Asia, there are still no signs of a strong recovery in Europe, which offsets this effect.
Looking at the medium to longer term, Mr Gruenwald sees three main risks for Asian economies. First, in China, property investment could slow down, as there are already signs of weakening. An oversupply is causing price declines and slowing sales. The government faces a difficult choice: it can choose to let the market correct itself or encourage further growth and take the risk of creating a property bubble that could spill over to other countries.
The second main risk is the impact of a rise in US interest rates. At first glance, this might seem a good thing, because it indicates a recovery of the economy. However, since many Asian countries and corporations have greatly increased their debt in recent years, higher US rates would mean a higher debt burden for them, said Mr Gruenwald.
The third risk he sees is geopolitical. With hot spots in Ukraine, the Middle East and also tensions in parts of Asia, conditions are not about to calm down, with the known risks to oil prices and economies worldwide.
Mr Gruenwald is also keeping a close watch on the performance of new leaders in some of Asia’s biggest economies, especially Narendra Modi in India and Joko Widodo in Indonesia.
“Both countries had turbulence [in mid-2013] with the so-called ‘Taper Tantrum’. Currencies weakened, growth slowed down,” he said, referring to the impact of market speculation on the easing of stimulus and the timing of an interest-rate increase by the US Federal Reserve.
India and Indonesia should be growing faster than they currently are, according to Mr Gruenwald. Factors that slow them down are corruption, policy inconsistencies and inefficient infrastructure. “Both of them should be six- or seven-percent growth stories, India in particular, Mr Modi has a big mandate, we will see if he can push that through.”
Japan, meanwhile, is trying to make a big breakthrough after two decades of deflation. Since the end of 2012, Prime Minister Shinzo Abe has been pushing ahead with “Abenomics”, a programme of fiscal stimulus, monetary easing and structural reforms. However, after taxes were raised in April, consumption started to slow down again. However, Mr Gruenwald is a big believer that central bank chief Haruhiko Kuroda can loosen the grip of deflation on the country.
“We think Mr Kuroda’s appointment is very important. He is making a break with his predecessor Masaaki Shirakawa, in the sense that Mr Kuroda is saying that inflation is a monetary phenomenon,” Mr Gruenwald told Asia Focus.
Japan, he said, had an “outrageously” good first quarter this year with 6% year-on-year growth, followed by an outrageously bad contraction of 6.8% in the second quarter. Clearly, people were stocking up in the first quarter ahead of the rise in the consumption tax in the second.
“The question now is whether the economy has good momentum, good for Japan means one percent or one and a half. If we see one and a half percent growth momentum, that we are going to be back on track,” he said.
Worries about slowing inflation or even deflation would be a worst-case scenario for Japan in the current situation. More monetary stimulus or pushing back the second rise in consumption taxes, scheduled for October 2015, would then be the only option remaining to avoid ongoing deflation.
In the case of China, change can be seen in the current anti-corruption campaign, which seems to be a lot tougher than widely expected, and is also going after Chinese outside of the country. But sectoral imbalances remain the biggest problem, in Mr Gruenwald’s view.
“We are worried about the intersection of those overinvested sectors — property, solar, cement, the usual suspects — and the so-called shadow banking sector,” he said. “In our view there is going to need to be some consolidation in the property sector, maybe some consolidation in the non-bank sector.
“The question is, whether China can get through this patch and keep growing at seven or seven and a half percent or whether an adjustment is going to be required.”
An adjustment is no longer a hypothetical scenario, considering falling house prices. One will have to see how much lower growth the Chinese government is willing to tolerate. “I think in the next three to six months it is going to be quite critical.”
Looking at Thailand, where many investors stayed on the sidelines while the political drama of the past year played out, many hopes now rest with the military government’s big infrastructure programme. But it might not make a much difference in the short term.
“Infrastructure is longer-term stuff, but if [the government] unlocks infrastructure spending in the same way as in Indonesia and India, that is going to be good for the economy,” said Mr Gruenwald.
Standard & Poor’s sees the Thai economy recovering in general, expecting growth rates of 4-5% in the next few years. But besides the need for tourist numbers to start rising again, a global economic pickup will be a key to further growth.
“When we rank the economies in the region according to their sensitivity to global trade, Thailand is not at the top, but it is usually in the top half,” said Mr Gruenwald. “It’s a relatively open economy, producing things that middle-class people consume. Just getting global growth up is going to help Thailand.”
In general, further opening of Asian markets — both to the rest of the world and within Asia Pacific itself — could do the region a world of good, in his view.
When markets are opened up, it usually is beneficial for countries as a whole, but some groups in the country are also going to lose. “I think it is the role of the leaders, whether they are political leaders or business CEOs, to make the case that this is a good thing. Joining the Trans Pacific Partnership is a good thing. Joining the Asean Economic Community is a good thing,” he said.
“The losses [from freer trade] tend to be concentrated, so there are a lot of people for the media to easily go to [for comment] and a lot of people get hurt by this sort of stuff.”
In the face of such negative feedback, he said, leaders throughout Asia should make clear to everybody that freer markets are the only opportunity in the long run.
One of the main complaints from foreign investors in Asia, he said, was still that the region is separated into a lot of small markets. With the largest emerging middle class of the world, Asia could be a paradise for foreign direct investors.
Harmonising investment, spending and services would be a definite plus for the region and an obvious goal for the future. This is not only up to political leaders, but also to big companies, SMEs and in the end, every Asian businessman, he concluded.