Bangkok--Dec 21--Aziam Burson-Marsteller
The global outlook is more uncertain than usual, but we are inclined to take a “glass-half full” view on two crucial factors shaping Asia ex-Japan’s outlook: China and oil prices. We are encouraged that China’s GDP growth is not only slowing, but also becoming better balanced (investment cooling down, consumption picking up), so we expect China’s economy to achieve a soft landing of about 8% GDP growth in 2005. On oil prices too, we expect their recent drop to be sustained, helped by China’s slower growth.
Provided China achieves a soft landing and oil prices do not rise anew, we are optimistic that Asia ex-Japan will enter a new paradigm in 2005, emerging decisively from the shadow of the Asian crisis. The new paradigm will entail robust domestic demand — a green light for Asian policymakers to finally allow significant currency appreciation, which will further rotate the mix of GDP growth toward domestic demand. In this new paradigm, the region’s large current account surpluses will narrow sharply. And in a major break from the past, Asian central banks will lag behind the US Fed in raising rates, as monetary conditions will tighten significantly via exchange rate appreciation.
Robust domestic demand will be partly driven by the region’s very loose macro policies: the average short-term real rate for Asia ex-Japan has fallen to close to 0%, the lowest level since 1995. But also we believe that the region is starting to thrive from stronger economic fundamentals, and other positive long-term structural forces, including a growing middle class, rapid urbanization, a rising share of the population that is of working age, and a younger generation that is more willing to borrow and spend.
Performances Within The Asian Region
South-East Asia
Thailand’s economy is losing steam, due to high oil prices, the avian virus and unrest in the South, but this may have a silver lining if it focuses policymakers on the unresolved structural problems in the financial and corporate sectors. Singapore is successfully seeking out new niche industries to stay competitive, but there is no room for complacency. Malaysia’s outlook is bright due to strong leadership, sound fundamentals, low unemployment, low rates, and an increasingly competitive currency.
Indonesia’s political risk has eased after the successful presidential elections. Also, good progress has been made in fiscal consolidation, and reducing the external debt-to- GDP ratio. Indonesia’s biggest problem is a worn out capital stock, due to a dearth of new investment, ever since the Asian crisis. Encouragingly, new President Yudhoyono is on a mission to attract new investment which, if successful, will allow Indonesia to capitalize on its abundance of natural resources. The fundamentals of the Philippines are worrying: the budget deficit is large; debts are rising; NPLs are high; FX reserves are low; and inflation is climbing sharply. Higher rates, or a weaker peso seem likely.
North-East Asia
In China, tighter policies, the squeeze on profit margins, supply-side disruptions, and rising inventories have slowed the economy. However, the slowdown has been at a measured pace, and there are some encouraging signs of an improving mix of GDP growth: strong consumption and exports are cushioning GDP from the cooling down of overinvestment in several industries. As a result, we have reduced our probability of a hard landing from 25% to 20%. China has started raising interest rates, and as the economy continues to rebalance for the better, we expect the tighter administrative restrictions to be replaced with further rate hikes, but probably not until next year. On the renminbi, there is a fundamental need for China to move to a flexible exchange rate to better equilibrate the growing flows of foreign trade and investment, and to regain control over monetary policy. We judge that the transition will start in a matter of quarters, not years, leading to a gradual appreciation of the renminbi. In Hong Kong, deflation is over, and the growth outlook is brightening, given the HK$ is pegged to the sliding US$, and the huge benefits to Hong Kong from China’s opening economy.
Virtually all of South Korea’s GDP growth this year has been driven by exports; domestic demand continues to languish, because of the credit card debt overhang and the high cost of energy. However, we do not believe that Korea is in a Japan-style liquidity trap. Personal incomes are growing, and savings are being rebuilt, so at some point households will loosen their purse strings again. We are reluctant to extrapolate the current economic gloom through to 2005, as Korea’s fundamentals are relatively sound and its macro polices are becoming more stimulative. Taiwan’s export sector is very competitive, thanks to an undervalued currency and a well established exports platform in China; while close to negative real short-term interest rates have spurred a strong pickup in consumer credit, which in turn is helping revive the property market. The two big risks to Taiwan are Taipei-Beijing tensions, and an unchecked liquidity boom.
Satida Sritunyatorn
Media Relations Manager
Aziam Burson-Marsteller
Tel: 0 2252 9871 x122
Fax: 0 2254 8353 End.