HARUHIKO KURODA: Managing risk
The worst phase of the eurozone crisis may be over, says ADB president Haruhiko Kuroda, but it still poses fundamental problems – including for Asia
Financial markets have stabilized since the end of last year. The provision of more than E1 trillion of loans by the European Central Bank has contributed substantially to calming financial markets. Meanwhile the E100 billion debt reduction for Greece has made a significant impact not only on the situation in Greece but also on the eurozone as a whole.
However, fundamental problems remain. Fiscal problems still exist in a few countries and fiscal consolidation is absolutely necessary in the peripheral eurozone. It will take years before fiscal consolidation is completed. There are also internal imbalances in the eurozone. There are countries with large current account surpluses and large current account deficits. Even within the single currency zone, excessive internal imbalances cannot be sustained. One way or another, sooner or later, these internal imbalances must be addressed.
Finally, a few European countries the banking sector continues to suffer from non-performing assets and forced deleveraging. The sector still requires careful monitoring and, if necessary, a strengthening of capital. European banks have been withdrawing their credit in Asia, particularly in emerging Asia and that has impacted some emerging economies.
Relatively open economies tend to be affected more than countries with closed capital accounts. ASEAN countries have been affected to some extent but not so dramatically. After the Asian financial crisis and the Lehman shock those countries with open capital accounts strengthened their safety nets and their financial sectors.
European banks still have to continue to address this issue and deleveraging will continue. That means Asia could be subject to continued withdrawal of European credit in the coming year but to what extent over coming months and year is not quite clear.
US banks, dealing with their own problems, have not replaced the gap left by European bank deleveraging. Japanese banks, with good balance sheets and good profits, could have filled the gap but in reality they have not. ASEAN countries know that Basel III rules will require substantially more capital and liquidity. The target year for Basel III is 2019 but the transition starts in 2013 a lengthy period and banks know that they have to reach the target. Knowing that, they are naturally cautious in expanding their assets.
Fortunately, the Asian financial system at this moment is much safer and more robust than in the past. Asian economies are growing fast despite the global economic slowdown. It is true that while India and China are slowing these economies are still likely to grow very fast and the growth rate is likely to accelerate towards next year.
I do not think the slowdown is a sign of what will happen over the medium-term. Of course, in the very long run the Chinese economy will slow down because the demographic dividend will disappear. But on the other hand, in India the demographic dividend will continue to provide impetus to growth for the next 30 years. So the Indian economy may accelerate in the long run.
The fairly benign growth forecast for Asia this year and next could be subject to some downside risks. One is the European situation and another is commodity prices including food and fuel prices. Food prices have in general been declining in over the last 12 months, although soya bean prices have shot up substantially. In some countries some specific food prices may have affected inflation.
We are concerned about oil prices because oil prices have been very high despite the clear global economic slowdown in the last couple of years. That is somewhat worrisome. Whether high oil prices are caused by tensions in some oil producing countries in the Middle East and North Africa or is by financial speculation in derivatives markets is not really clear. But high oil prices tend to decelerate growth and accelerate inflation in Asia because Asia as a whole is a big oil importer, unlike Africa, Latin America or Middle East.
Asia will be significantly affected by high oil prices. If oil prices go up further that could decelerate economic growth and accelerate inflation further. It is difficult to predict but this is a risk factor.
But this week will also see the ADB focus on an equally important long-term issue income inequality. Governors will look at what policies can ameliorate this problem. There are several factors behind this including globalization and technological progress, both of which tend to favour capital and highly-skilled persons, while manual workers or ordinary people have not benefited greatly from globalisation and technological progress.
Of course there are some countries where inequality, as measured by the Gini coefficient, has not changed significantly such as in Vietnam. Despite that it is clear that in Asia, income inequality has been rising significantly for the last couple of decades, particularly in rapidly growing economies like China and India. This is a really big issue.