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Emerging Asia better able to cope with risks of financial tightening: MAS

But US trade curbs on countries such as China and Mexico would trigger "cascading effects" through Asia's integrated production networks
Tuesday, January 17, 2017 - 05:50

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Mr Menon: "But we shouldn't talk ourselves into gloom. It's highly uncertain what the trade policies would be."

Singapore

THE challenge of balancing growth and stability will become more acute in China and emerging Asia, as global financial conditions tighten, said Monetary Authority of Singapore managing director Ravi Menon.

But emerging Asia is today better able to cope with the risks of tighter financial conditions, he said.

"While there are several pockets of weaknesses, the household, corporate and banking sector balance sheets are, on the whole, strong enough to ride through the coming turbulence."

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Mr Menon was the keynote speaker in UBS's Wealth Insights 2017 conference on Monday. In a dialogue with Edmund Koh, UBS wealth management head for the Asia-Pacific, following his speech, he expressed hope that extreme anti-trade measures would not ensue with the Trump administration.

He said that US trade restrictions on countries such as China and Mexico would provoke "cascading effects" through Asia's integrated production networks. "Global supply chains are extremely complex. Bilateral imbalances, exchange rates, restrictions and tariffs are not confined to those two countries and spread in ways you don't fully understand but can sense when you talk to people in supply chain and logistics businesses. That is quite unambiguous.

"But we shouldn't talk ourselves into gloom. It's highly uncertain what the trade policies would be. Maybe it's more hope than careful assessment, but there is a strong body of views in the US establishment that trade has been on the whole beneficial to the US, and that extreme trade measures cause more harm than good for everyone involved."

The potential impact of three to four rate hikes this year by the US Federal Reserve will depend on how much is already priced in through currency rates, for instance.

"But it is important that policymakers stay calm, absorb some changes, lean against it if necessary to moderate or dampen some of the most excessive swings in foreign exchange markets," Mr Menon said.

He said that the global economy needs to see more investment, both public and private, to enhance economies' productive capacities, rather than any quick-fix stimulus. "The global economy needs to reconfigure and restructure, something we're trying to do in Singapore . . . The theme of structural reform is a dominant one; the hard part is doing it. A good part has to do with investment in skills, equipping the workforce to take advantage of new areas of growth so they can work more efficiently and be more productive, investment in technologies which enable much smoother business processes."

In his speech, Mr Menon highlighted four key driving forces for the global economic outlook. The first is fiscal policy, not just in the US but also in major advanced economies. The second is monetary divergence and tighter financial conditions globally. The third is the challenge of balancing growth and stability, particularly in China and emerging Asia. And the last is the rise of protectionism which can undermine growth prospects over the medium term.

The size of fiscal stimulus in the US is unknown. But there are signs that the US economy is close to full employment. This suggests that fiscal stimulus could end up mostly in inflation rather than growth, he said. "In the US, to the extent that fiscal stimulus boosts demand and lifts inflation towards the Fed's target, it could precipitate a faster pace of interest rate normalisation than currently priced in."

Higher US growth could support Asia through the trade channel as it benefits Asian exports. But it could also weigh Asia down through the financial channel. "Higher interest rates will squeeze the debt servicing capabilities of corporates and households in Asia, which have taken on more leverage in recent years amid the low interest rate environment."

Emerging Asia is grappling with a "dramatic" build-up in debt among corporates and households. Financial tightening and a strong US dollar deal a double whammy to over-extended borrowers in the form of higher interest rates and a rise in the foreign currency risks of unhedged debt. This could threaten financial stability and drag down investment and consumption. Still, he maintains that Asia is on a stronger footing today. "Asian economies have been proactive in implementing macro-prudential measures to limit the build-up of financial vulnerabilities."

On trade, he said that trade conflicts could have "disastrous" consequences for the global economy. But "in all likelihood, it may not be that bad". "There remains within various arms of the US establishment a strong belief in the benefits of an open global trading system and the risks of punitive trade restrictions."

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