Sanjay Mathur
Head of research and strategy, Non-Japan Asia
RBS
There are three channels by which the European Union (EU) crisis is transmitted to Asian economies: external trade, bank deleveraging and portfolio flows.
Economies reliant on domestic consumption, such as Thailand, will be more resilient in the face of euro crisis. Economies more reliant on exports such as Taiwan and South Korea, and to an extent China and India, will not fare so well. India in particular is running a high current account deficit and relies on portfolio flows to fund this.
Exports to the EU have already been performing poorly for the last six months. Our main concern is with bank deleveraging and portfolio flows; severe and prolonged risk contagion induced compression in EU demand will be difficult to manage. Though diminishing, the EU remains a formidable export market for the region and cannot be easily replaced by other export markets at least in the short run.
As regards bank deleveraging, the exposure of EU banks to the region has been declining in an orderly manner. The issue that now deserves consideration is whether a more rapid paring down of exposure is not solely confined to EU banks but is accompanied by credit retrenchment by domestic institutions.
The impact of a withdrawal of portfolio flows is difficult to quantify. Based on net international investment position (NIIP) data, the aggregate stock of portfolio flows into Asia is slightly over 14% of gross domestic product (GDP), excluding Hong Kong and Singapore. The domicile of these funds is not known but in a period of global risk aversion, outflows are likely to be indiscreet.
Against these potential headwinds, the specific policy objectives should encompass three main areas. Firstly they should seek to stabilise or normalise financial markets; secondly they should ensure the corporate sector has local and foreign currency funding provisions; and thirdly they should seek to generate alternate sources of growth.
Tai Hui
Head of regional research, Asia
Standard Chartered Bank
Given the latest market concerns about peripheral European sovereign debt stress and the possibility of Greece leaving the euro area it would be naïve to think Asian economies will be immune to the negative economic and financial impact from Europe.
Via trade, export dependent economies, such as Singapore, Hong Kong, Taiwan, Korea and Malaysia could face recession risk if there is a sharp drop in export demand from Europe, as well as a second-round effect from the slowdown of US and China. This could be exacerbated by a potential liquidity squeeze in trade finance, similar to what we saw in 2008 and 2009, if the Greece exit contagion impact is not contained.
Continental European bank lending has already been contracting since mid 2011, but this was partly mitigated by more aggressive expansion by local and Asian banks to capture market share.
In terms of capital outflow, Indonesia and Malaysia are relatively more vulnerable to temporary outflow from their local fixed income market given high foreign ownership. Korea and India could also face outflow pressure.
However, it is also worth considering the fact that Asian governments are in a favourable position to introduce fiscal stimulus, given their relatively low level of public debt. Moreover, the 2008/2009 crisis has already created some contingent plans to deal with the impact from global financial turmoil on the local job market and keep lending flowing, such as a risk sharing initiative between the governments and banks.
Finally, Asia’s strong structural fundamentals and firm growth outlook imply that capital outflow is likely to be temporary, considering the persistent flushed liquidity environment globally.
Frederic Neumann
Co-head of Asian economics research
HSBC
The shockwaves would be felt far and wide. Trade is the obvious casualty. Europe, after all, is Asia’s biggest trade partner.
A collapse of the euro – were it to happen – would knock out demand for the region’s products. Here, some countries are more affected than others. A big chunk of China’s and India’s products head to Europe, while the share is smaller for others such as Indonesia, Korea or Thailand.
Mainland China however retains considerable fiscal fire-power to counter the external slump, while India, having spent beyond its means for quite some time, is left with a depleted armoury.
As troubling as faltering exports would be, there looms an even bigger headache for Asia, one that even affects economies which do not ship as many goods to Europe as their neighbours: financial flows between East and West would be severely interrupted with the collapse of the euro.
Europe’s banking system, the world’s largest, would batten down the hatches amid the storm, cutting off funding to other parts of the world. As Europe’s financial institutions are forced to rapidly deleverage Asia’s credit dependent economies would feel the pinch, seeing local consumption and investment tumble alongside exports.
India, again, stands out as being especially exposed as it already requires foreign funds to finance its trade shortfall. A further withdrawal of European cash could make this all the harder to achieve. But it is not the only one. Indonesia, too, could see its currency wobble, as would everyone else, if perhaps to a lesser degree.
As tall as China currently stands, it is not immune either, which is why its leaders urgently need to prime the pump, for the sake of the country’s and the region’s stability.