But global outlook and protectionism are still a concern
THE worst of the crisis seems to be over for Asia, which will emerge stronger owing to its sound fundamentals, said Government of Singapore Investment Corporation (GIC) deputy chairman and executive director Tony Tan yesterday.
He sounded a cautiously upbeat message at the annual Economic Society of Singapore dinner, noting that the crisis also presented opportunities for Asian financial institutions and markets.
'The worst seems to be behind us in Asia. Asian economies are now expected to see continued improvement through 2010,' Dr Tan said at the event, held at Swissotel The Stamford.
While cautiously optimistic in the short term, he also warned of possible risks and challenges to recovery, such as trade protectionism and a global environment which does not stabilise and recover by next year.
In July 2007, at another event, Dr Tan spoke of dark clouds on the horizon for financial markets. In April last year, well before the financial mayhem that erupted in September, he warned the world could be facing its worst recession in 30 years.
Last night, he noted that the region could emerge from the crisis in a better position, and reorientate itself to ensure more balanced and sustainable development.
Dr Tan said: 'Asia's fundamentals are generally sound, policymakers have lots of flexibility, and the population is hard-working and educated.'
The economic downturn has presented regional financial institutions and markets with 'tremendous opportunities over the next decade', he noted.
This is because Western banks will probably be unable to meet the capital demand needed to finance Asia's growth due to constraints and re-regulation.
'This leaves the playing field unusually open for Asian financial institutions and markets, particularly for the next three to five years,' he said.
However, regional banks and markets will need to develop quickly to fill this gap, he added.
Other implications of the crisis for Asia are the volatile capital flows and asset bubbles which policymakers will face due to ample liquidity and low interest rates.
'Like in the early 1990s, managing large capital inflows and prospective bubbles given managed exchange rates will be a major task for policymakers.'
But the road ahead also holds a few potential bumps.
'The greatest risk to the outlook for Asia is a global economic and financial environment that does not stabilise and recover by 2010. Downside risks remain high, despite signs of stabilisation.'
For instance, US officials may need to ask Congress for more funds if the economy fares worse than expected.
Another risk is the US consumer spending less and saving more. This could result in sustained deflation, and America relapsing into recession.
Protectionism is also a key threat, said Dr Tan, and it is not confined to developed countries as several developing nations also use import restrictions to deal with slowing global demand. 'There is a danger - probably highest if there is no recovery next year - that protectionism could rise dramatically,' he added.
On the crisis front, Dr Tan noted that the global economy is stabilising as massive measures taken by governments and central banks start to work through the economies.
'Confidence is returning and fears of a meltdown in global financial markets and banks have receded,' he said.
Key economies, including the United States, are expected to post positive growth later this year.
However, Dr Tan tipped lower growth among the developed countries in the coming years, due to deleveraging, derisking, re-regulation and ageing populations.
For instance, the US banking sector will likely be stable enough to support 'sub-par growth of 1-2 per cent', but may not be strong enough to support credit needed for a 'sustained robust growth significantly above 2per cent'.
Another major change is an increased risk of both inflation and deflation.
Dr Tan also noted that emerging economies, anchored by China and India, will play a more important role in the world economy, and are expected to account for more than half of the world's gross domestic product growth over the next decade.
'Emerging economies are likely to displace the G-7 as the world's largest economies over the next 10-15 years, even if per capita incomes still lag behind the developed economies,' he added.
Source: Straits Times, 7 Aug 2009
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