The global crisis struck Asia with a force that stunned a
region that had thought itself, for a time, immune from the
devastation in the West.
Chinas precipitous drop in output was accompanied by
south-east Asias own collapse in growth, as trade and
capital flows dried up at the end of last year. In response,
policy-makers eased policy fast, while rolling out a range of
measures, including subsidies, transfers and widespread public
A year later, growth has stabilized, supported by rising
global demand, and easy fiscal and monetary conditions.
We see improvements, Zeti Akhtar Aziz, governor of
Bank Negara Malaysia, the countrys central bank, tells
Emerging Markets. The declines are moderating.
If we compare quarter on quarter we see positive growth,
she says. For us, what is most encouraging is the
improvement in domestic demand. It has benefited from the
stimulus, but more importantly the continued access to
financing has supported it.
Just as the slump in activity was concentrated in countries
with high export dependency and large manufacturing sectors, so
too the recovery, driven largely by exports and industrial
production, with the regions economies expected to pick
up in the coming quarters. Its hard to know how
much of the credit easing merely replaced lending that would
have happened anyway, says UBS economist Edward Teather
Whatever the case, the mood in Asean (Association of
South-East Asian Nations) has improved markedly in the second
quarter. Consumer confidence has soared, reflecting an
improving outlook for business, as well as stimulative policy
settings. In Indonesia, the index of consumer confidence stands
at 114.3, close to a decade high.
Now, several governments are signalling an end to fiscal and
monetary expansion. And economists are puzzling over when the
massive economic stimulus will be withdrawn from the system.
We all find ourselves pondering the risk of
economies exit strategies from economic stimulus, says
The scale of the economic shock over the last 18 months
should mean the removal of stimulus will be tentative,
cautious and halting, Teather says. But outside Malaysia,
there is likely to be some tentative removal of
accommodation starting in the second quarter of 2010
across the rest of the Asean economies.
Initially, policy-makers are likely to tread with caution.
Hiking rates can incur real costs including increased
interest burdens for households and businesses risking
the delicate recovery of domestic economies. Questions remain
whether the underlying financial health of businesses and
households across the region is ready to sustain an increase in
But as 2010 progresses, policy-makers are likely to rein in
excess liquidity and tighten monetary conditions, Teather
Long way home
Nevertheless, there is a long way to go before the region
normalizes policy. As elsewhere in the world, Asean nations
eased monetary and fiscal policy aggressively from the first
quarter of 2009 in Malaysias case, for example, a
75 basis point cut in a single hit.
Singapore, Malaysia and Thailand eased most on the fiscal
side, while Thailand and the Philippines relaxed monetary
policy most substantially; Indonesia, which fared much better
in the financial crisis because of the strength of domestic
demand (gross exports account for only 30% of GDP and net
exports barely 1%, compared to over 60% in Malaysia), eased
Asean economies also provided subsidized credit and
increased government spending, and it appears to have worked,
keeping some semblance of business confidence afloat. Zeti says
Malaysia has continued to experience loan growth, has no
large-scale unemployment, low inflation, and is also assisted
by rising commodity prices. In addition, exports decline
Policy-makers could act to curb spending as they refocus on
fiscal sustainability. Indonesia, the Philippines and Thailand
have already put out estimates for the balance of government
finances in 2010. They project a smaller deficit than in 2009,
which suggests less stimulus. Malaysia has not been so
specific, but analysts say it is heading in the same
But concerns over excess liquidity and asset price inflation
are also on the rise. Chinese authorities have already moved to
rein in credit expansion and withdraw liquidity. Economists
believe others may follow suit, using a range of tools
including open market operations, FX forward intervention,
reserve requirements, lending guidelines and hikes in stamp
As always, central bankers decisions will be
driven by their policy goals a combination of
trying to maximize employment in the economy, preserve the
value of money and keep stability in the financial system,
Not so fast
Still, others argue that Asian monetary conditions outside
of China are accommodative, but rightly so for the foreseeable
It has become fashionable to argue that Asias
monetary conditions are too loose and that too much domestic
liquidity is creating asset price bubbles, says Cem
Karacadag, an economist at Credit Suisse in Singapore.
The entire region is being painted with a China brush,
which does not wholly apply.
Adds Karacadag: Domestic and external demand are still
fragile and money and credit growth are still sluggish. Central
banks are certainly not printing money because of foreign
It is neither obvious nor inevitable that liquidity in Asia
will spill into the real economy or asset markets, says
Karacadag. Instead, property prices have surged in places like
Hong Kong and Singapore on the back of sentiment, not
liquidity. Moreover, capital inflows have hardly returned, he
adds. All told, we think monetary and exchange rate
policies across Asia will remain defensive over the next
year, he says.
Data out of Europe and the US are encouraging but still
uncertain; exports and industrial production in Asia, while
improved, are below previous peaks; capacity utilization is low
so it will be a while before investment demand recovers.
Central banks certainly dont want to tighten
policy through currency appreciation, given that export sectors
are the weak spot in their economies. He adds: Put
yourself in the shoes of policy-makers.
Even so, Karacadag has been upgrading his real GDP forecasts
across Asia; where recently he was calling -3.9% in 2009 and
4.4% for 2010 in Singapore, he now expects -2.4% and 5.7%
respectively. He also expects import demand in G3
economies to climb in the next few quarters, helping Asian
But these improvements are not reason enough for central
banks to start tightening in the near future, he says.
Meanwhile, central bankers, while navigating their way out
of the crisis, are also starting to think again about the
longer term. Our concern is mainly structural, says
Zeti. We want to make the economic transformation towards
a higher-performing economy, towards new areas of growth,
higher value-added activity, where we have a higher level of
productivity and efficiency, and a more innovative industrial
and services sector.
Malaysias banks have transformed themselves since the
1990s into useful agents for corporate finance, alongside the
development of the bond market, she says. Now they need
to transition to be able to provide financing for the services
sector, for knowledge-based activities.
The challenge for us is to have the skills to
transform ourselves to that next level of economic performance
Transforming economies is no mean feat, but its at
least encouraging that just a year on from a near-collapse of
the global economy, central bankers can now talk in such