QE junkie Asia flunks chance to reform

A leading Asian economist has launched a scathing attack on what he calls “Asia’s addiction to easy money,” saying that loose monetary policies and a neglect of supply-side reforms have weakened the region’s fundamentals.

Rob Subbaraman, an economist at Nomura in Singapore, painted a picture of opportunity lost in Asia, with central banks using the easy money created by US quantitative easing to avoid making difficult but necessary decisions.

“The strong capital inflow fuelled by QE in the big advanced economies has contributed to five years of low interest rates in Asia, and has also reduced the market discipline to pursue supply-enhancing structural reforms,” he said. “As a consequence — and quite pervasively across the region — there has been a rapid build-up of private domestic credit, frothy property markets, slowing productivity growth and a sizable shrinkage in current account surpluses,” which have turned to deficits in India, Indonesia and Hong Kong.

Subbaraman is also bearish on China, which contributes to his structurally negative view on Asia ex-Japan economies generally. He said that “China’s growth pick-up will soon fade,” and that growth will drop below 7%, to 6.9%, in 2014. “China’s large economic imbalances still need to be addressed, and this will slow growth,” he said.

Nomura’s house view is that by 2020, growth in China will have slipped to 6%-6.5% because of a shrinking labour force and a slowing rate of capital accumulation. Nomura expects China to lower its GDP growth target in December “and start tightening the policy screws again,” with corporate defaults as a consequence, “a necessary outcome to stamp out moral hazard,” Subbaraman said.

Nomura also cut its GDP growth forecast for Thailand from 3.9% to 3.5% for 2013, and from 4.8% to 4.2% in 2014. And, while it reduced its forecast on India’s current account deficit from $65 billion to $54 billion in financial 2015, Subbaraman said: “We are still not convinced that India is out of the woods.”

His comments came as other banks changed their own forecasts to reflect a rapidly changing growth environment for Asia. Last week HSBC raised its GDP forecast for China for this year from 7.4% to 7.7%, and significantly increased its full-year forecasts for the Philippines and Singapore, but slashed India (from 5.5% to 4%), Indonesia (from 6% to 5.6%), and Thailand (from 5% to just 2.8%). JP Morgan this week confirmed an even lower growth expectation for Thailand of just 2.6% in 2013, with analyst Benjamin Shatil citing “an uncertain political environment, slowing credit and wage growth, and a large household debt burden.”