Eurozone crisis to have limited impact on southeast Asia – Asean Risk 2012

Resilience in regional markets will insulate Asian nations from any European slowdown, say economists during Asean Risk 2012 roundtable

The ongoing instability in the eurozone should not have a knock-on effect on the Asean region due to positive growth prospects in other parts of the global economy, according to Ranjiv Biswas, Asia-Pacific chief economist at IHS Global Insight in Singapore.

Speaking at the Asean Risk 2012 conference in Singapore today, Biswas said positive economic momentum from the US and the continuing growth of China as well as the re-emergence of Japan from recession means the Asean region should not fear a slowdown brought on by the eurozone crisis.

“Since last September, there has been positive momentum from the US economy. We see the US growing at slightly over 2% this year and China at around 8%. We also expect Japan to grow 2.5% this year. Therefore the eurozone crisis will have a lesser impact on Asean,” he said.

However concerns still remain, especially in the area of trade finance, as was the case during the 2008 crisis when there was a freeze in the global banking system. But the risk of a credit crunch and the consequent impact on trade finance from the European crisis is much lower than during the global financial crisis in 2008, according David Carbon, chief economist at DBS in Singapore, speaking during a panel debate.

“In 2008, the crisis was driven by derivatives and off-balance-sheet exposures where nobody knew how much of it was and was not on balance sheet. Today, most of the bad exposures are sovereign bonds and it is easy to get an idea of the exposure as they are on the balance sheet. Therefore there is more transparency now than in 2008.

“Also US dollar funding is much more important to global trade finance and this is primarily an eurozone issue,” he said.

However, according to Aladdin Rullo, chief economist of the Asean Secretariat, the impact of the crisis in Europe on trade finance in Asean nations will be significant. “According to the IMF, 30% of trade finance in Asia is concentrated in Asean, so any pullback in trade finance from Europe will have a significant impact on countries such as Malaysia, Philippines and Thailand,” he said.

The panellists were also upbeat on China’s outlook, despite the recent slowdown and the increasing importance of China to the Asean region.

“We don’t think China will have a hard landing. Although there is a slowdown, it is very much a controlled or forced slowdown due to government concerns about the economy overheating. While China’s growth is lower than the traditional 10% we are used to seeing, it is important to remember that the slowdown in China is a government-enforced one,” said Biswas.

“Historically, China has been growing at 10% per year. It can’t continue to do that for ever. We are now entering a period of high single-digit growth for China; the days of double-digit growth are over,” he added.

Rullo also highlighted the increasing importance of China to the region.

“China is now Asean’s largest trade partner with 11% of total trade compared with 10% for the EU and 10% for US. Once the Asean-China free trade agreement [which was signed last year] is realised it will translate into an increase of US$180 billion of foreign direct investment into Asean,” he said.

Today, most of the bad exposures are sovereign bonds and it is easy to get an idea of the exposure as they are on the balance sheet