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Beware Asia’s Current Woes

Source: September 05 2008 - Australasian Investment Review – (AIR)

Fears are swirling through Asia that the unrest in Thailand and Malaysia, the economic and political woes of Japan and the continuing weakness in South Korea might be a precursor to more serious problems at a time when the Australian economy's sole remaining lifeline is linked firmly into the region.

This week's National Account and trade figures showed that the booming resource sector led by miners and exporters of coking and thermal coal and especially iron ore, boosted corporate income and profits to the point where it and the sector's investment plans stopped the economy from dipping into the red in the June quarter.

We received a nasty reminder yesterday that our trade performance is not permanent and might be a bit more tenuous than we think. The trade surplus evident in June disappeared in July with the Australian Bureau of Statistics reporting a $717 million deficit as exports stalled and imports, particularly of oil, surged. The deficit compared with a revised surplus of $351 million in June (It was $411 million in the original report). The deficit is far worse that the small surplus expected by the market.

The ABS said exports fell 1% to $22.9 billion in July, with rural shipments down 3% and coal off a large 9%. Imports rose 4% to $23.6 billion as the oil price rise (world prices peaked in mid July at more than $US147 a barrel) sent the cost of fuel imports surging by 29%. The price falls since then will trim, but not by as much as it could have because of the sharp fall in the value of the Australian dollar, which is now 16 cents or well over 16% lower. The Aussie dollar fell again overnight to just above 82 US cents.

The Aussie's fall is inflationary, so imports, such as oil will cost more, instead of the way the stronger dollar cushioned us against higher oil prices in the past year. But we should watch Asia closely, not just for China. The rising level of instability is an unwanted reminder of the problems of a decade ago and the last Asian crisis. It won't happen again, if politicians and others hold their heads, but that's going to be difficult.

Thailand and Malaysia could emerge as the flashpoints, while South Korea shouldn't be ignored as it struggles to stabilise an economy that is stuttering, while the Government is under pressure from an increasingly sceptical electorate (And don't forget North Korea which seems to be again trying to frustrate anti-nuclear agreements it signed up to respect)

Despite a belief a year ago that Asia and other emerging markets (ex-Japan) were bolt holes for nervous western money driven out of the US and other markets by the subprime mess and credit crunch, that hasn't proved to be the case. Asian equities are the worst performing stocks globally this year: most markets have fallen by between a quarter and a fifth. Weakening exports are to blame for open economies like Singapore where non-oil exports fell year-on-year for the third consecutive month in July.

Dynamic Hong Kong is looking at economic growth halving next year from the current level of just under 7%, while in less open economies like Thailand and Malaysia, artificially low interest rates (in nominal and real terms) are fuelling inflation, which is hurting consumers, who are also voters.

South Korea is suffering from both problems, as well as being crushed by the still high levels of private sector debt. And every time the won falls, inflationary pressures are stoked and business has to pay more for their foreign debt. The slowing global economy makes it tougher for South Korean exporters to take advantage of the cheaper won, as US exporters have ridden the weak US dollar for the past four years.

China is of course the main customer and there was a large bit of good news out this morning with a well-timed leak in official media that China's consumer inflation rate eased in August less than 6% annual rate from the 6.3% in July's: a sign that the economy isn't feeling too much stress from high oil and food prices any more.

Central banks in Thailand, Malaysia, South Korea and The Philippines have been reported as intervening this week to support their nervous currencies: South Korea's central bank has been trying to stop its currency, the won from falling for the past three or more months, without much success. There're signs of some capital flight as investors sell out of stockmarkets in the region which have fallen and then sell the currencies: it has been this selling that has forced the central bank support.

Thailand's anti-democracy demonstrations are emerging as the major concern; as they have the capability to get rid of the current Government. The army, which intervened in a coup a couple of years ago after Thaksin Shinawatra fell as Prime Minister, seems to be giving active support to the demonstrators by refusing to clear them from the Government House in Bangkok. The demonstrators want a return to partly elected, partly appointed parliaments and more control for the Bangkok based urban middle classes who object to the support and power the less well off have given Thaksin and the present government. The Thai Prime Minister, Samak Sundaravej yesterday refused to resign or call new elections, even after his Foreign minister quit yesterday.

Reuters said that in an hour-long national radio address, Samak sought to shore up his public support, proclaiming himself as a defender of Thailand's democracy and its revered monarchy, against a movement that he described as "lawless." The People's Alliance for Democracy (PAD) has spent the past 10 days occupying the grounds of Samak's Government House offices, demanding his resignation over claims that he is a puppet for ousted premier Thaksin Shinawatra. But the PAD also wants to roll back many of Thailand's democratic gains by creating a new parliament in which only 30% of seats would be elected: that would undo the current system of Government which gives representation to the country's lower classes and poorer people.

For that reason, any success by the PAD could very well see a new round of protests, more instability and greater volatility in the economy (and for the important tourist sector). The Government last night decided to hold a referendum on its future and on the PAD's place in the demonstrations and its plans to alter the country's political system. That will make for volatile times.

In Malaysia there's talk of a new Government economic package at the weekend that might be highly inflationary and populist to try and fight off the attempted grab for power by Anwar Ibrahim who is trying to seduce members of the ruling party away to his parliamentary grouping by September 16.

Japan's prime minister Yasuo Fukuda has resigned only three days after revealing a $US105 billion emergency tax and spending plan for the economy. There are fears that in their battle for control the members of the Liberal democratic Party might resort to silly inflationary promises at a time when the economy is suffering from high costs and slow or no growth.

South Korea is at least growing, but surging import costs have eaten away at the trade surplus, the Government is uncertain after facing a rising tide of demonstrations in recent months, the currency is weak and now at a four year low. There are fears that exports and the economy might start slowing as the rest of the global economy slows. That's why the country's central bank has spent an estimated $US40 billion in trying to support the currency this year, to no avail.

On Monday South Korea revealed a $US20 billion tax and spending package similar to that from Japan but the next day a senior finance minister was forced to deny that the country was facing a financial crisis, which unnerved markets because of the tone of his comments. The South Korean won rose a touch yesterday for the first time in four days.

To add to this the plunge in commodity prices has proven to be not the godsend many had though lower oil and petrol prices and subsidies might be. Malaysia is suffering from falling oil and palm oil prices, as is Indonesia. Thailand should get a boost, but sugar and rice prices have eased, cutting returns. South Korea and Japan should get the major boost given they import nearly all their commodities, but currency weakness in South Korea means the benefits of the lower prices is not being fully passed through (and the same is happening in Thailand). Japan seems best placed, along with China. But Japan's political instability and the looming possibility of early elections (before those due in a year's time) means the country probably won't have the leadership to keep the economy from continuing with its current sluggish level of growth (Its economy contracted in the second quarter).

The sharp slump in commodity prices is pressing on the currencies of commodity-producing countries apart from those in Asia. The Australian and New Zealand dollars have visited one year lows in the past day: driven also by easing interest rates and expectations of more to come to soften the landing of sliding economies. But adding to it are fears that the instability emerging in Asia could hit economic activity and further slow demand for commodities and resources. That could in turn slow demand in China as Asia is probably that country's fastest growing export destination (and China has just emerged as Japan's top export destination, supplanting slumping America).


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