Asia arms itself against the weakening world economy (Retail Asia)

Published in the December 2008 issue of Retail Asia 

GOVERNMENT INTERVENTION HAS BECOME NECESSARY FOR ASIAN ECONOMIES TO WEATHER THE GLOBAL ECONOMIC STORM, AND SPURRING DOMESTIC SPENDING HAS BECOME THE WEAPON OF CHOICE. FROM APPROVING FISCAL INCENTIVES TO EASING MONETARY POLICIES, ASIAN ECONOMIES ARE DOING EVERYTHING TO MAKE ITS CONSTITUENTS GO OUT AND SPEND. JENNEE GRACE U RUBRICO REPORTS.

AS concerns over the impact of the global financial crunch continue to mount, Asian governments have started putting in place measures that seek to limit the contagion of the crisis on their respective economies.

Policy changes — ranging from intervention by monetary authorities to approving fiscal packages aimed at stimulating domestic spending — are being imposed one after the other by countries in a region that is starting to feel the pinch of the economic slowdown of traditional trading partners.

Asian countries have revised economic growth forecasts downward in response to the upheavals that started in the US and spread to the rest of the world.

The China Chengxin International Credit Rating Co has announced that China, which has seen a slump in its exports sector, will likely see its gross domestic product (GDP) — a measure of its economy — posting a single-digit growth of 9.4% this year from last year’s 11.%. Singapore, also heavily dependent on external trade, has revised its growth outlook to 3% from the initial forecast of 4%-5%.

Malaysia has likewise pre-empted a bleak economic scenario for 2009 by revising its GDP outlook for the year to 3.5% from 5.4% as its government warned that it would not be immune to the effects of the global financial crisis.

Indonesia is expected to also announce a cut in its economic growth following deputy central bank governor Hartadi Sarwono’s pronouncements that it would be “tough” to grow over 6% next year given the current global economic conditions.

Pump priming

Asian states are pinning their hopes on domestic consumption to keep economic engines chugging and have imposed policies aimed at encouraging their people to spend.

State-owned Xinhua News Agency reported that Chinese authorities are looking at pump priming efforts to expand domestic consumption, including supporting farmers and allocating public resources to improve social welfare.

State officials also said that the government would put more investments into railroads, urban rail systems and environmental protection facilities.

It recently launched a four-trillion yuan (US$570-billion) stimulus package that is aimed at loosening credit conditions, cutting taxes and funding a massive infrastructure spending programme to offset adverse global economic conditions. The package will be spent over two years and used to finance programmes in 10 major areas, including low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation, and the rebuilding of areas that have been hit by disasters. A comprehensive reform in value-added taxes is also included in the plan and is expected to cut industry costs by 120 billion yuan.

Su Ning, deputy governor of the People’s Bank of China, the central bank, was also quoted as saying that there was “still room to tap more domestic consumption” and that the country’s central bank would adopt a flexible and prudent monetary policy, starting with an October 31 decision to cut interest rates to boost domestic spending.

Malaysia, believed to be fighting off recession, has also announced in early November that it has put together a RM7-billion (US$1.968-billion) stimulus package that would focus on projects that would increase its people’s income and have “major” multiplier effects.

“If we manage to increase domestic consumption, it means we can ensure that there is still momentum in the domestic economy and we can achieve reasonable economic growth,” Finance Minister Datuk Seri Najib Razak stressed.

Thailand, meanwhile, has adopted a deficit spending stance, submitting to Parliament a proposal to augment its 1.84 trillion baht (US$51.41 billion) budget for 2009 by 100 billion baht. The additional allocation, which would raise the country’s deficit to 349.5 billion baht, is aimed at preventing mass layoffs and would be used to create more jobs, help the poor and fund community lending programmes, media reports stated.

For its part, Singapore, believed to already be in a technical recession, has worked towards protecting the economy by announcing in October a “zero percent appreciation” policy for its currency’s nominal effective exchange rate policy band.

The Monetary Authority of Singapore conducts monetary policy through the local currency rather than by setting interest rates. The Singapore dollar is traded against a basket of currencies of its major trading partners within an undisclosed band known as the nominal effective exchange rate (NEER).

“This policy maintains the current level of the policy band and there will be no recentring of the band or change to its width,” MAS said, adding that it would “continue to closely monitor developments in the external environment and their impact on the Singapore economy”.

Asian powerhouses Japan and South Korea have likewise been cutting rates.

Necessary and appropriate

CIMB-GK regional economist Song Seng Wun said that the moves of Asian governments “are all necessary and appropriate responses to cushion the slowdown in external demand”.

“Asian economies are by and large quite dependent on external demand, some more than others. The Philippines and Indonesia are less dependent on it than Singapore and Malaysia, but export is still a fairly sizeable portion of their economies,” he said.

“It is appropriate to increase domestic spending … They (measures) are all complementary. You can’t rely on exchange rate without also getting the fiscal policy side to help out as well,” he explained, adding that lowering taxes could also help boost domestic spending.

Meanwhile, Singapore-based DBS said in a research note that pump-priming measures, particularly in Malaysia’s case, “will certainly help to alleviate pains of an economic slowdown” but added that “timely implementation will be fundamental to ensure effectiveness of these measures”.

The bank, however, also noted some upsides in the dismal US situation.

“There is, to be sure, plenty of room for upside surprises… the financial crisis did not start in September; it has been going for more than a year. And if there is one thing that we’ve seen, it is that the spillover to the real economy has been far less than even the most optimistic imagined a year ago.

“We believe this will continue to be the case, although the meltdown in September/ October means the absolute impact will be larger than before, at least temporarily,” the bank said.

How long the region would feel the effects of the US recession and the financial crunch, experts said, remains uncertain.

“You could win a Nobel Prize for [correctly predicting] that,” said Song. ra