Emerging Asian markets to succumb, says Australian consultant

by **Cals** Tue 22 Oct 2013, 10:15

Business & Markets 2013

Written by Charles Yong of theedgemalaysia.com

Tuesday, 22 October 2013 09:41

KUALA LUMPUR: It is only a matter of time before emerging markets in Asia and elsewhere succumb to the same debt crisis that has crippled the developed world since the late 2000s, said Australia-based consultant Satyajit Das (pic) of S Das & Associates Pty Ltd.

In a talk hosted by the Malaysian Investment Banking Association and the Institute of Bankers Malaysia last week, he said emerging market growth pre-2007 was fuelled by one-off factors such as a low base, strong global growth, globalisation, re-organisation of supply chains around China, low cost structures, large un-financialised savings pools, favourable demographics and deregulation.

But these emerging markets started to crack around 2008, he said.

“Growth fell sharply due to weaknesses in the global economy. Policies in emerging markets switched from a focus on exports to a focus on consumption and investments by expanding credit. Zero-interest rate policies in the developed world helped to inflate this credit bubble.

“Bond yields fell from an average of 12% to 4%. Debt levels in emerging markets are now around 150% to 200% of their GDP, not far shy of the levels of ailing developed countries. GDP growth was only half of credit growth.”

Das said much of the debt in Asia went to consumer credit and housing. Many loans were secured against property, while foreign currency debt and non-performing loans have also increased.

Against this environment, Das said any slowdown in emerging market growth or an increase in global interest rates would lead to a crisis.

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The problem is worse for Southeast Asia, he noted, because it is not only vulnerable to developed countries’ policies, but also to any slowdown in China due to its close integration with the country.

Das pointed out that signs of an impending crisis are already showing, following the announcement in June by US Federal Reserve chairman Ben Bernanke of a possible tapering of quantitative easing this year.

“Current account surpluses have fallen, bond yields have increased, currencies have depreciated and growth projections have been marked down.”

Ultimately, said Das, the US will emerge the winner. “Despite the US government indebtedness, they have managed to reduce debt, unlike most countries. And they have a lot of assets. In terms of net debt, at minus 235% of GDP, they are second only to Japan.

“They are also a closed market with only 15% of the economy exposed to trade.”

Das said US exports, solidly grounded on technology, face little competition. More importantly, the world’s biggest economy has increasing energy independence.

The US also has a flexible labour market, better demographics than China with a fertility rate of 2.08 against China’s 1.56. It also has strength in its military, science, education and immigration as well as a culture of risk taking.

“The fact that the US dollar is the world’s reserve currency allows the country to export its problems to other nations. Thirty-three per cent of holders of US Treasury debt are foreigners. Foreign creditors lost US$627.5 billion between 2008 and 2012 simply because of US currency depreciation.”

Das predicted that the 21st century will still be an American century.

This article first appeared in The Edge Financial Daily, on October 22, 2013.