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Sovereign debt contagion to hit East Asia

World Bank joins the ranks with IMF in expressing major concerns over the sovereign debt crisis impacting Asia

Asia has been the pin-up for growth and opportunity for financial markets for some time. In fact, its status as a beacon for recovery has only been heightened by the woes of the West.

Asia has grown substantially during the past five years in industrial output and services, and energy demand and output, while the liberalisation of China’s currency the renminbi has helped the region to gain significant ground as a global superpower.

There is no doubt that there would naturally be a slowdown in growth – as such growth rates are simply not sustainable – but heightened risk within the region and the sovereign debt crisis inevitably has had an impact on Asia.

In other words, you can make, build or produce as much as you like, but if externally no one is buying it, then where does that leave you? Well, according to the International Monetary Fund's latest report, a rather worrying situation:

The region's growth slow-down was more pronounced in industrial production. Exports of major regional industrial supply chains, especially electronics, have started to decline. Demand for commodities and raw materials remained strong, helping resource-rich economies maintain high levels of export and GDP growth.

As demand weakens in developed countries, China's share in world imports has grown, making it an increasingly important source of global demand. A shift to more consumer-goods imports in China is also benefiting the region's manufacturing exporters.

On Tuesday, the World Bank joined the IMF in outlining weakening external demand for East Asia, after the uncertainties surrounding Western countries in line with the sovereign debt crisis, and claimed that Asia needs to start honing in on domestic demand to avoid a systemic collapse: 

Growth is still strong in developing East Asia, but continues to moderate mainly due to weakening external demand, underscoring the need for governments to refocus on reforms to increase domestic demand and productivity, says the World Bank in its latest East Asia and Pacific Economic Update.

The report, issued biannually, projects that amid uncertainties in Europe and a global growth slowdown, real GDP in developing East Asia will increase by 8.2% this year (4.7% excluding China) and by 7.8% in 2012. Domestic demand in middle-income countries was the largest contributor to growth in the region, although it is easing, driven by the normalization of fiscal and monetary policy.

Only last month, the IMF warned of the US and eurozone problems “spilling over” into Asia and focused on the risks that weakening external demands pose for the region: 

In the IMF’s latest report, October 2011 Regional Economic Outlook for Asia and the Pacific, the group also revised down its second quarter 2011 predictions for growth in Asia, mainly as a result of weakening external demand, while also highlighting the increased level of downside risks.

It says that growth in Asia will be slightly lower in 2011/12 than forecast in April, but the expansion should remain healthy, supported by domestic demand, and inflation is expected to recede modestly after peaking this year.

In no uncertain terms, Bert Hofman, the World Bank’s chief economist for the East Asia and Pacific region, announced that in the group’s 'East Asia and Pacific Economic Update': 

"Lower growth in Europe in the course of fiscal austerity and the banks need to increase capital coverage would affect East Asia. Less credit from European banks can also affect capital flows to East Asia, but high reserves and current account surpluses protect most countries in the region against the impact of possible renewed financial stress.”

While the sovereign debt contagion hitting Asia is highlighted in the World Bank and IMF reports, the risks within China’s financial system is another source of concern, which has been covered extensively by Euromoney

IMF: Domestic risks to China’s financial system four-fold

GDP growth in China dependent on maintaining social stability

Asia's banks not investors' financial utopia

Investment banking: Do more due diligence

What's behind the great China stock scandals?

- Euromoney Skew Blog


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