Emerging Asia is likely to grow at 5.6% year-on-year GDP growth in the first quarter of 2012, the slowest growth in a decade excluding 2008-9, according to a report by JP Morgan. After witnessing robust inflows and trade surpluses in the past three years, Asian economies are likely to see a sizeable risk to capital flows. The region has already witnessed capital outflows since August, with Indonesia seeing the largest decline (-$13 billion), followed by India (-$15 billion), and Thailand (-$10 billion). On the other hand, weaker external demand poses challenges to the trade account.
The contagion from the global financial crisis in 2008-9 impacted Asia via two channels: trade and credit. Weaker external demand is already weighing on export figures, but the transmission of stress via credit channels is less transparent.
Cross-border claims on Asia have increased by 49% to $1.1 trillion since the first quarter of 2009, with 25% of the claims held by Euro zone banks. JP Morgan believes that Asia is still vulnerable from the perspective that most foreign claims are truly “cross-border”.
Despite the structural risks facing global growth generally and financial markets specifically, fiscal stimulus and monetary policy are two key reasons to be more optimistic in 2012. Moreover, inflation is coming down across the region and continued strong household credit growths are other reasons to be bullish. According to the report, while manufacturing output looks to have stalled, global retail sales volumes are accelerating.
The report is overweight on China with prospects of easing measures supports, along with balance sheet resilience anchored by high-and-rising loan-loss reserves (255% of loans) and capital ratios (10%). On the other hand, India remains most vulnerable to a “classic” emerging market crisis whereby capital flows reverse after funding a persistent, current account deficit. Higher rates and political uncertainty has also led to a slowdown in investment, with fixed capital formation actually falling 0.6% YoY in the latest 3Q GDP figures. Overall, the major drivers for the Asian region include pricing power in SME and consumer lending, fiscal stimulus and infra-spending. Moreover, falling inflation will benefit real incomes and support further monetary policy easing across the region.