Asia Ex-China: The Outlook For 2014 And Beyond

HSBCChinaReliance

By John Richardson

IN a special series of blog posts over the next few weeks we will re-examine the outlook for the major Asian petrochemical producing countries, ex-China. The posts won’t necessarily appear every day, as important news events may require immediate analysis, but our aim is to finish the series by mid-October.

Last month, we looked at India, Indonesia, Malaysia and Thailand. We will revisit these countries, starting with Indonesia on Monday following yesterday’s surprise decision by its central bank to raise interest rates to 7.25%. GDP growth is, as a result, expected to fall to a four-year-low.

We will also extend our focus on China ex-Asia to these other petrochemicals producing countries: Japan, South Korea, Taiwan, Singapore, the Philippines and Australia.

At the end of the series, we will provide a summary of our key conclusions. This will, hopefully, help with your planning process for 2014 and beyond.

And today, as a way of introduction, here are the key challenges facing Asia ex-China:

  • As Western demand becomes less of an important driver for Asian growth, thanks to the great “de-coupling” as it used to be called, China has become more important, especially in the case of South Korea and Taiwan (See the above chart. South Korea is listed as the KR – the Korea Republic – on the farthest right of this chart), But, as you can also see from the chart, many other countries are highly vulnerable. China’s current purple patch of stronger growth cannot last.
  • A credit boom has powered Asia e-China, largely thanks to the US Fed’s quantitative easing, which will soon be tapered. The last five years have amounted to a lost opportunity, wrote HSBC in its Q3 Asian Macroeconomic Report. “Rather than pursue continuous reforms, the region rode the wave of easy cash with scant regard for how the journey might be sustained without the tailwinds of record low interest rates,” said HSBC.
  • Excessive leverage takes several forms. In the case of India and Indonesia, their crisis is a throwback to the events of of the Asian Financial Crisis of 1997-1998.. Falling exchange rates and a rise in dollar-denominated debt have tied the hands of their central banks, thus forcing yesterday’s rate rise in Indonesia. The largest overall increases in debt-to-GDP ratios since 2008 have been in Singapore, Japan and Malaysia, added HSBC in the same report. Much of this debt has been in the form of consumer borrowing. Rising mortgage and credit-card debt have therefore been the main drivers of GDP growth. Thailand, too, has seen a sharp rise in consumer debt. Thus, these economies have a lot to lose from Fed tapering. South Korea falls into another category. Although bank lending has risen relatively modestly since 2008, corporate-bond debt has surged with foreigners playing a big role in the local bond market. South Korea is, as a result, very vulnerable to capital outflows.
  • Major structural reforms must now be carried out. It would have been much easier to implement these reforms when economies were booming. But some investment banks – and the foreign and local governments who unfortunately listened to these banks – kept telling everybody that “macro-prudential policies” and the rise of the Asian middle classes guaranteed sustained growth, regardless of credit flows. Chronic corruption, poor infrastructure, excessive bureaucracy and falling labour productivity  growth are amongst the problems that must be dealt with immediately. This won’t be easy when GDP growth is weakening. There will be lots of angry people demanding, and winning, more rather than fewer entitlements – as we shall discuss in our post on Malaysia over the next few days.

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