S Asian markets likely to have less momentum

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Asia will not be immune from the economic weakness spreading through the world’s leading economies and can be expected to grow, but it will be with less momentum than in the recent past because of rising inflation in the face of commodity price pressures.

There isn’t likely to be any let up in the near term and it is unlikely that we have the full impact of deteriorating credit card and other consumer debt in the US and Europe and there will clearly be more financial institutions that fail both in the US and elsewhere. The nature of the credit crisis has gradually evolved over the past year from a pure liquidity logjam, into a broader deleveraging trend, as solvency doubts rose, and then, finally, into a broad real economy crisis, not just in the US but across the global economy.

Growth in emerging markets has weakened, partially in response to the weakness in the G3, but also partly because of the tightening of monetary conditions in response to inflationary pressures. Emerging markets face a cyclical slowdown but from very high levels of growth.

The longer-term outlook is still very positive, though. The secular shift of economic power from West to East will continue and the eventual end of the credit crisis will almost certainly leave Asia and much of the rest of the emerging markets in a much stronger relative position. The sub-prime mortgage crisis in the US is not likely to seriously impact South Asian countries because of the structure of the region’s trade and financial flows and partly because of compensating effects.

Given the impact in the US and Europe this can be seen as an opportunity for South Asia. The World Bank cites three factors that work well for the region—lack of exposure to the US mortgage securities; availability of liquidity in domestic markets; and the possibility that lower capital inflows could help countries such as India with macroeconomic management. The share of South Asia’s trade with the US has been declining and China, not the US, is now India’s leading supplier. Sri Lanka, which used to rely on the US for its garment exports, has now increased them to Europe and other regions substantially.