A new Standard and Poor’s (S&P) report said that the recent uncertainties in the global markets may cause slower growth for emerging countries in Asia, but will not result in another regional financial crisis.
Titled “South And Southeast Asian Economies Grapple With Growth And External Financing Risks,” the report said that present market turbulence is driven largely by uncertainties around the timing of “tapering” or the lowering of bond purchases by the United States Federal Reserve.
It added that the Fed moves coincided with recent cuts in Asian gross domestic product growth forecasts, most notably for China.
“The road may be rocky in the near term, particularly for the largest deficit countries—India and Indonesia—but we don’t think this is the Asian crisis all over again,” said S&P Asia Pacific Chief Economist Paul Gruenwald.
The report also said that financial markets appear to be in the midst of pricing in a different path for US monetary policy. It noted that during the process, volatilities in the emerging Asian economies may result in weaker currencies, lower asset prices and subdued sentiment and growth, but it stressed that the situation was not viewed as a repeat of the 1997 Asian financial crisis.
“The external positions for the emerging Asian economies are much stronger. The central banks are also not defending their exchange rates. In addition, the increase in leverage over the past five years has been moderate in the economies with high external risks,” Gruenwald said.
Furthermore, the report discusses the two types of external macroeconomic risks that emerging Asian economies face: growth and financing.
It said that the smaller, more open, more trade-dependent economies in Asia, such as Singapore and Hong Kong, have higher growth betas, or risks to growth. In contrast, the larger, more domestically driven economies such as China, India, Indonesia and the Philippines have lower growth betas.
“External financing risks arise from the financing mix of domestic investment and growth. The key metric here is the current account balance, which reflects not only exports less imports of goods and services but savings less investment,” Gruenwald said.
Meanwhile, the report said that economies running a current account deficit have savings that are insufficient to finance their investment and growth, and therefore need to borrow from the rest of the world.
In times of normal risk appetite, this dependency may not be a problem. However, when markets become risk averse, economies with current account deficits often find themselves facing external financing pressure, it said.