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ECONOMY WATCH: Asia not immune to global market turbulence: ADB chief

Bank will help region if drastic slowdown occurs, by changing ‘lending priorities’

IN TOKYO

WITH the US economy poised on the brink of possible recession this year, the dangers of economic shocks being transmitted to Asia via trade and financial linkages are very real, Asian Development Bank (ADB) president Haruhiko Kuroda warned yesterday in Tokyo.

Asian economies are ‘not immune to global market turbulence and negative developments’, he told a symposium on regional growth prospects. The ADB stands ready to help the region, should a significant slowdown occur, by changing its ‘lending priorities’, Mr Kuroda told The Business Times after the meeting.

While he expected major Asian economies to continuing growing at relatively robust rates in 2008, certain smaller countries with low growth rates could need help, he indicated.

‘So far, the region’s strong macroeconomic fundamentals have helped mitigate the impact of a US slowdown,’ Mr Kuroda noted in his speech to the ADB seminar. Despite a slowing in US growth to 1.5 per cent this year projected by the International Monetary Fund (IMF), the impact on the emerging countries of Asia should be limited by strong expansion in China and India.

But ‘a significant slowdown in the US economy would most certainly affect the region’s growth performance through trade, investment and financial linkages. With its unparalleled presence in world trade, finance and investment, the US exerts a significant influence on the global business cycle. A deep and prolonged US recession could be accompanied by much slower growth in Asia.’

Nearly 42 per cent of exports from emerging Asian economies still go to the Group of Three (G-3) economies – the US, European Union and Japan – and this figure rises above 60 per cent if that part of trade among Asian countries that eventually ends up in exports to the G-3 is included, Mr Kuroda said. ‘Changing conditions in the world’s major economies are still important to emerging Asian export growth.’

Global financial linkages are also strengthening, Mr Kuroda noted, ‘and emerging Asian stock markets tend to follow the US market closely. As stock markets in the region have grown and become more open to foreign investors, stock prices have become more sensitive to global financial shocks. And Asian economies have become more sensitive to swings in stock prices through the balance sheets of both households and financial institutions.’

Likewise, although the exposure of Asian banks to US sub-prime mortgages and related credit products has so far been small relative to the size of their assets, ‘spillovers from US and eventually other G-3 financial markets could be potentially large’, Mr Kuroda suggested. ‘The rapid transmission of financial volatility during the recent market sell-off is a vivid reminder of this region’s vulnerability to disruptions in the global financial system.

‘With the region’s trade, investment and financial linkages to global markets still high, potential spillover from a further tightening in global credit markets and a slowing in the US and other economies do pose a significant risk to the regional economic outlook.’

Asian policymakers need to take steps to bolster confidence in the region’s financial markets, Mr Kuroda suggested. They also need to take measures to increase domestic consumption – especially in China – and elsewhere to step up levels of domestic capital investment, which have flagged since crisis struck emerging Asia 10 years ago, he said.

Climate change will be a major theme of the ADB’s annual meeting in Madrid later this year, and Mr Kuroda urged the creation of a ‘pool of funds to help dampen the financial impact on countries that may be called upon to accommodate large populations displaced by climate change’. No single country ‘should have to bear the burden of climate-driven refugees on its own’, he said.

 

Source: Business Times 9 Feb 08

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