Can emerging Asia prosper against the backdrop of Europe's lost decade?

“We continue to believe that the global financial market crisis of 2008-09 was a watershed event and that we are moving towards a new world order. In this post-crisis world, the shift in the centre of economic gravity away from industrialised countries to emerging markets, which was already evident, has accelerated,” Philip Poole, global head of macro and investment strategy of Hongkong and Shanghai Banking Corporation (HSBC), said last week.
But the latest development in Europe has shaken confidence in Asia. Asian currencies softened against the US dollar and stock |markets plunged last week.
As investors went into panic mode, they looked to the US dollar as a safe haven asset. They moved into US government bonds, making the US dollar rebound and US bonds expensive, offering depressing yields.
Investors are worried about the ripple effect of the Greece crisis, sending Spain and Italy’s bond yields rising – showing low confidence in those governments’ ability to service debt.
Voters not only in Greece but across Europe demonstrated against austerity measures imposed to reduce government indebtedness.
Political issues have complicated the economic woes as many are convinced that austerity is needed to tackle the unsustainable debt level.
Markets are worried about a change in politics after general elections in Greece and France that might also bring about a change to economic policy. France cut spending for three years to address its fiscal deficit but its economy has not improved, said Boonchai Charassangsomboon, executive director of the Macro-economic Policy Bureau at the Finance Ministry.
“If the new French government shifts policy from cutting spending to stimulating growth by increasing spending, investors are fearful of its fiscal stance,” he said.
In the euro-zone, government debt to gross domestic product (GDP) averages 98 per cent and household debt averages 50 per cent of GDP, according to the Organisation for Economic Cooperation and Development.
However, the debt level of emerging markets, including Thailand, is manageable, according to many economists.
Chinese government debt is 17 per cent of GDP, which is very low by developed market standards. Its household debt is also low at only 7 per cent of GDP.
Politicians in the West and economists are cheering China and other emerging markets to boost domestic demand in order to rely less on developed markets for their own growth.
They have also urged China to let its currency appreciate in line with its market value.
Private consumption in China is only about 40 per cent of GDP. Rising consumer spending and currency appreciation means that other countries can export more to China.
As China has become a key export market of Thailand, accounting for 12 per cent of total exports last year, the Kingdom would also directly benefit from the expansion of domestic demand in China.
The Commerce Ministry hopes that by diversifying exports to emerging markets, particularly Asean, which took 17 per cent of the country’s exports last year, the country could reach its export growth target of 15 per cent this year.
Both governments and central banks in emerging economies have faced challenges in steering their economies against the backdrop of most of the developed economies entering the “lost decade”, as Japan did in the 1990s.
Increasing public spending would drive up public debt. For example, Thailand still runs a budget deficit. If the country cannot close the gap, public debt will go up from 40 per cent of GDP currently.
Higher public debt would then become a threat to economic stability. The good news is that Thailand has some savings, while other emerging economies particularly in Asia have accumulated very high savings.
Taming inflation would also be one of the key issues, especially for central banks in emerging economies, as low inflation would remain in mature economies for many years, HSBC’s Poole said.
“Inflationary pressure would from time to time return to emerging markets,” he said.
Among emerging economies, some like Thailand may need much more investment than consumption, as private consumption is relatively high at 52 per cent of GDP.
“Our investment is slightly more than 20 per cent of GDP and the government aims to raise it to 25 per cent of GDP,” Boonchai said.
Now nobody knows the extent of the debt crisis in the euro zone and its repercussions on the global economy.
Many have placed their bets on Asia and other emerging markets, yet these countries are facing a challenge in increasing domestic consumption and productive investment.