Given that Asia is now widely seen as leading the world out of the crisis, it is fitting that the role of Asia was more prominently recognized in the global economic system in the recent G20 meeting held in Pittsburgh. Since we last looked in July, the outlook for the emerging markets of East Asia has continued to brighten. The latest regional forecasts come from the Asian Development Bank in its Asian Development Outlook (pdf) published last week. It points to “the rapid turnaround in [Asia’s] largest, less export-dependent economies” and predicts that “the regional economy is now poised to achieve a V-shaped rebound.” These are very positive words indeed! As the graph below shows, the ADB has in fact upgraded its growth forecasts for a number of economies for 2009.
Although the signs are pointing upwards, performance is still mixed in a number of key areas.
|Source: Asian Development Bank, “Outlook 2009 Update” (pdf), Sept. 22 2009
Industrial production did improve over the summer, led by manufacturing. But, most economies across the East Asia and Pacific region have less negative growth in production than last year. In other words, they are not yet in to positive territory as compared to the past. Exports are also way off of last year’s performance with average year-on-year growth in the region sitting at negative 23.5% as of July. However, monthly export growth began to turn positive for most economies in the region in June.
So if the news is mixed, what is keeping the economies going? Much of this recovery can be attributed to two key factors: preparation and reaction. First, as I noted months ago, most economies in the region were well prepared going into this crisis in terms of better macroeconomic management, larger fiscal balances, improved monetary policy, stronger corporate sector performance, and healthier financial systems. In fact, most financial sectors across the region had limited direct exposure to the toxic assets that originated in western financial institutions – they had relatively high capital levels, and low levels of non-performing loans. In terms of reaction, the large fiscal spending packages and loose monetary policies combined to provide the needed short-term stimulus to most economies. In addition to these measures, most of the major developing economies in Asia have taken a range of actions to support their financial systems.
Now that the economies across much of the region appear to be growing again, most central banks have stopped their long run of interest rate cuts. Bank Indonesia was the last East Asian economy to put a halt to the cutting cycle, leaving the policy rate unchanged on September 3 at 6.5% (this ends a 300 basis point reduction in the benchmark interest rate since December).
Some of the other measures to support financial systems across the region are also coming to a pause. For example, the interest rate subsidy program in Vietnam is running to a close, and there is debate within the country as to whether a second program is needed. As we previously discussed, this subsidy program that allows commercial banks, through the central bank, to offer 4% interest rates on loans (well below the market rates) may lead to future contingent liabilities in the form of bank losses. This program has disbursed about $22.5 billion with the state owned banks doing about 70% of the lending. A positive sign on this matter is that apparently there is now a healthy debate within the country regarding whether the program is distorting capital allocation and actually resulting in less credit flowing to those in need of it most – small and mid-sized corporations.
The credit boom in China appears to still be going strong, with Chinese banks lending more in August ($60 billion) than in July ($52 billion), but there are signs that the composition of this lending is shifting with the major state owned banks only doing about 33% of this new lending and indications that more of the new lending is of longer maturities. It’s too early to read into what this means, but the positive read on it could be that it potentially shows a more sustainable lending dynamic whereby the customers of the joint stock banks are lending to the non-state sector for longer-term investments. Although it could also mean that provincial and municipal governments are now putting political pressure on the smaller banks (many are owned at the local government level) to lend in their districts as the centrally owned banks pull back their new lending ... It’s hard to know.
|Source: MSCI Barra|
That about does it for now, but stay tuned for more.