Despite uncertainties, Asian economies heading towards full recovery in 2010

13:51, February 13, 2010      

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The global recession, which started late 2008, hit Asia hard as its economies were mainly powered by manufacturing sector that exports most of the products to industrialized economies.

Thanks to swift government response -- including reduction of interest rates, decreasing bank reserve requirements and stimulus spending -- Asian economies led the global recovery from the worst recession in decades. The Asian Development Bank (ADB) said the region's GDP would grow by 4.5 percent last year, a rate higher than many other parts of the world.

Experts, however, also warned that early signs of growth will not necessarily translate to a long term recovery, especially as export-reliant Asian economies were still hinged on the performance of developed countries in 2010. And there are no indications yet that the crisis that crippled the U.S. and Europe is finally over.

A question is thus raised for Asian governments in 2010 on how and when to implement their exit strategies. It would be one of the key issues affecting Asia's sustained recovery.

ROSY PICTURE FOR 2010

Since the beginning of 2010, economists and analysts seem to have painted a rosy picture for the Asian economy. In January, Dominique Strauss-Kahn, chief of International Monetary Fund (IMF)said in Hong Kong that excluding Japan, Asia may expand by more than 7 percent.

While dismissing fears of a "double-dip" recession for the world economy, he said the pace of recovery had been uneven -- with Asia bouncing back faster than the rest of the world.

The ADB also said Asian economies were expected to lead the recovery from the global financial crisis with growth anticipated to quicken this year to 6.6 percent.

"The region is already well into the recovery phase, leading the global economy out of recession...2010 looks as though it will resemble something closer to normal for the Asia-Pacific region," Moody's said in a report forecasting the Asian economy.

Moody's said China and India will continue to drive the regional economy. With some of the Chinese government's 4 trillion yuan (586 billion U.S. dollars) stimulus still to be spent -- and suggestions that further stimulus spending will be required – GDP growth in China will accelerate towards 9 percent in 2010. Boosted by the Commonwealth Games, India will expand by more than 8 percent in 2010 after 2009's relatively modest 6.1 percent growth rate.

According to a forecast by the Bank of Korea (BOK), South Korea's GDP will expand 4.6 percent in 2010. Experts say the country's year-on-year growth rates, buoyed by a strong inventory rebound, will exceed this threshold in the first half of 2010.

Fiscal stimulus, exports, as well as inventory adjustments will drive a recovery in the nations of ASEAN (the Association of Southeast Asian Nations), with conditions varying markedly across economies.

Indonesia is expected to lead the recovery for ASEAN countries. The IMF has raised its estimation for Indonesia's GDP growth rate to 5.5 percent this year, from 4.8 percent, equal to the government's 2010 target.

"Bank loans started to grow in November and December last year. Increasing export and investment recovery may spur the economic growth this year. The increased debt rating awarded by Fitch also reflects such a situation. We are very sure that growth momentum can be preserved," said IMF Asia-Pacific Division Chief Thomas R Rumbaugh.

The recovery is likely to be more gradual elsewhere in Southeast Asia, according to Moody's, with a return to trend growth not expected until 2011 for most other ASEAN members. Malaysia, the Philippines and Thailand will record GDP growth around 3 percent in 2010 and Singapore around 4 percent.

WELL-TIMED EXIT STRATEGY URGED

The economic rebound of Asian economy has raised the question that when the Asian governments should go with their exit strategies -- a time to unwind previous policy and regulatory guidelines.

ADB president Haruhiko Kuroda said in January that each country needed to calibrate policy adjustments to individual situations to cushion the region from future shocks.

"We have to be careful about this because the impact of the global economic crisis on developing Asia was not uniform and was diverse," he said.

He warned that recovery could falter if decision makers reduce the stimulus too soon, but doing it too late may lead to higher inflation, unsustainable government deficits and large debts.

"While we believe developing Asia is leading the global economic recovery, it is too early to relax vigorous efforts to restore demand and stabilize financial systems," he said. "In particular, exit strategies for fiscal stimulus must be carefully timed."

China took an early step with the central bank's decision to raise the deposit reserve requirement ratio by 0.5 percentage points from Jan. 18, the first increase since June 2008.

Kuroda said China's move would help cool down the overheating real estate sector but will not undermine the country's strong recovery. "It appears quite appropriate," he said.

However, the move did not indicate a shift in the Chinese government's "moderately" loose monetary policy, said Zuo Xiaolei, economist with the China Galaxy Securities. It reflected the flexibility the government vowed in its policies to handle new circumstances in 2010, she said.

China's central bank said at its annual work conference that the 2010 monetary policy aimed to sustain a stable and relatively fast rate of economic growth and stabilize prices and effectively manage inflation expectations. It also vowed to add flexibility of its policy.

The People's Bank of China (PBOC), the country's central bank, announced Friday it will raise the deposit reserve requirement ratio for Chinese financial institutions by 0.5 percentage points from Feb. 25 this year.

The move targets the "comparatively loose liquidity" while keeping the "moderately easy" monetary policy unchanged, an unnamed PBOC spokesman said.

For Manu Bhaskaran, director of Centennial Asia Advisor, Centennial Group, the time to unwind monetary policies should be "sooner rather than later", given the stronger than expected economic growth in the region.

"It was fine to talk about the plan for exit program, but not to actually implement it, " Bhaskaran said in ADB regional forum on the impact of the global economic and financial crisis.

REBALANCING GROWTH

Many economists agree with the analysis that ultimately a rebalancing of growth is needed away from exports to the West and more towards fostering local demand instead.

Asia must look at boosting domestic demand to cut its reliance on foreign consumers, especially in the hard-hit United States, IMF chief Strauss-Kahn said.

"Asian countries themselves have a big enough market to generate the demand now developed countries fail to," said Zhao Xiaoyu, Vice-President of ADB, "but this requires countries to make concerted efforts under regional cooperative platform."

"My analysis is that once the pan-Asian cooperation is put on track and demand is boosted, there will be very positive factors to tackle the crisis," he said.

On Jan. 1, China's Free Trade Agreement with ASEAN came into effect, an important step for Asian's cooperation that could spur much-needed regional investment.

The China-ASEAN Free Trade Area (CAFTA), the world's largest free trade area of developing countries, covers a population of 1.9 billion and accounts for about 4.5 trillion U.S. dollars in trade volume.

China's Deputy Commerce Minister Yi Xiaozhun said China's investment in southeast Asia would rise rapidly as firms become more eager to go abroad to invest.

Under the FTA, the average tariff on goods from ASEAN countries to China is reduced from 9.8 percent to 0.1 percent. The six original ASEAN members -- Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand -- slashed the average tariff on Chinese goods from 12.8 percent to 0.6 percent.

Both China and ASEAN should make full use of investment funds and other resources and step up infrastructure construction to meet the need of further trade cooperation, Yi said.

"The FTA is mutually beneficial," Yi said. "With full consideration of economic development levels and market capacities of both sides, the FTA will advance the regional economic integrity by eliminating barriers of trade and investment."

In addition, ASEAN countries vowed to create the ASEAN Economic Community by 2015 to ensure free flow of skilled workers and capital. ASEAN+3 (China, Japan, and South Korea) are cooperating on a 120-billion-US dollars foreign currency reserve pool to tackle financial difficulties. In some sense, the economic crisis has provided a spur to the Asian efforts of forming a more integrated economy.

Source: Xinhua
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