Mr Greenspan does Asia a favour

The latest in the Fed rate-cut series should perk up the region

SR Kasbekar

The US Federal Reserve has cut the funds rate by 0.50 percentage point to 4 per cent to aid the incipient recovery in consumer spending and business confidence by a further reduction in the cost of borrowing. The spectre of recession probably no longer haunts the US economy and, if consumer spending goes up and business confidence recoups, the economy may see a rebound in the fourth quarter of 2001.

More importantly from the Asian perspective, the rate cut may have a positive fallout on Asian economies on the rebound as their prospects are irrevocably linked to changes in the US economy. It has been observed that cuts in Federal funds rates generally benefit Asian economies, either by creating opportunities for lower rates or easing pressure on prices and a boost to imports. At this stage it is difficult to predict what it will mean for the Asian electronics sector which is so dependent on the recovery of the US tech-economy.

It is obvious that the slowdown of the US economy has eaten into Asian economic performance lately, largely through a drop in imports. Growth forecasts for Hong Kong, Malaysia, Singapore and Taiwan have been lowered even as China may witness tempering of growth in the remaining part of the year from its strong showing in the first quarter of 2001. Japan’s economic performance hinges on the nous of the newly elected prime minister to implement the long-delayed structural reforms as well as active fiscal policy.

Salomon Smith Barney (SSB), the equities research firm, sees a significant slowdown in the first half of 2001 and a rebound in the second half for the Asian economies. Even a reflation in US imports from the Asian countries, triggered by the rate cut, may be largely nullified by a weak yen and a languishing Japanese economy. This is because a one percentage point drop in Japan’s GDP growth and a 10 per cent depreciation of the yen translates into loss of GDP growth of about 0.3-0.9 percentage points.

Most analysts are keenly watching China’s growth trajectory. It has posted an 8.1 per cent growth in the first quarter of 2001 but most Sino-watchers feel the growth rate may taper off in subsequent quarters. For the neighbouring economies an economically strong China is a threat that gobbles up large foreign capital inflow and, backed by a large trade surplus with the US, is feared to upset the regional trade structure. China’s monthly surplus has remained at $1bn.

The recovery of Asian economies is crucially linked to the strength of their currencies. In 1997, the currency bloodbath triggered by the weak Thai baht spread panic all around, leading to capital flight from the region, and the rest is history. The US slowdown, if not reversed in the near future, will mean weak external demand for the Asian economies. ‘Currency stability’ is a crucial factor that will make a lot of difference to the US-Asian region trade in the aftermath of the latest US rate cut. Japan’s recovery is another factor. SSB feels that the Asian currencies are ‘not yet’ stable. It expects the yen to be weaker in the next few months. The Malaysian ringgit is under careful watch. ‘Even where the longer-term growth outlook improves, the suspicion remains that some regional ‘managed floaters’ are too strong in effective terms.’

The political element is another serious factor in growth consideration. Historically, very few Asian economies have boasted stable political regimes of a long duration. The political situation in Asean (Association of South East Asian Nations) countries such as Indonesia, the Philippines and Thailand is far from stable and political uncertainties do not bode well for currency stability, and therefore external trade. India can in fact cash in on the opportunity to expand its exports provided world demand is maintained and it is able to enhance its competitiveness.

The year 2002 may not be exactly ‘annus mirabilis’ but should still be a year of recovery for the Asian economies. GDP growth rates for the major Asian economies are expected to improve in 2002: Hong Kong’s from the current 1.8 per cent to 4 per cent; Indonesia’s from 4 per cent to 4.5 per cent; Malaysia’s from 3.8 per cent to 5.8 per cent; Singapore’s from 4.2 per cent to 5.5 per cent; South Korea’s from 3.8 per cent to 6.5 per cent; Taiwan’s from 4.4 per cent to 5.4 per cent; Thailand’s from 3.6 per cent to 4.3 per cent; and China’s from 7.8 per cent to 9 per cent. Strong growth of Asian economies should rub off well on India too.