07 June 2010Steve Finch
Southeast Asia GlobeAsia is on alert as European mountain of debt gives world economy the jitters. But what impact will Greece's financial crisis have on Southeast Asian economies? Just when Southeast Asian economies seemed to be on track after a disastrous end to 2008 and an even worse 2009, economists are again warning of a possible economic meltdown as Europe struggles to contain Greece’s debt crisis.
In large part, the problems that have afflicted Greece in particular, and to a lesser extent other eurozone countries including Portugal, represent the second wave of the financial crisis that dates back to the collapse of Lehman Brothers in September, 2007.
In responding to the crisis, many countries saw public spending spiral out of control – in Greece’s case, government debt was estimated in May at 13.6% of GDP prompting its debt rating to be lowered to ‘junk’ by the likes of Standard & Poor’s at the end of April.
And despite a European Union rescue package agreed jointly with the International Monetary Fund last month worth close to US$1 trillion, world markets have in recent weeks once again become extremely erratic.
With the fallout largely still contained in Europe, Asia remains on alert for yet another financial crisis after capital, trade and markets recently stabilised, according to the Asian Development Bank.
"While the return of capital flows is welcome, surges in short-term capital inflows could potentially leave countries vulnerable to a sudden reversal in portfolio investment and to sharp currency movements," Srinivasa Madhur, senior director of ADB's Office of Regional Economic Integration, says.
"More broadly, the region is holding up well in the face of the debt crisis in Greece and its potential contagion effect," he adds.
Still, Asian markets have not escaped the volatility.
The flight to safe assets saw gold reach consecutive record values last month. In May, gold climbed 1% in Asia to $1,224.40 an ounce while the US dollar has risen against just about every other major currency and commodity during the meantime, except gold.
But despite an 11% rise in the value of bullion this year, analysts are forecasting that gold may be hitting a ceiling on world markets with short-term backers reaching their limit. In Asia, buyers struggle to meet record-high prices in markets where the metal is traditionally procured for decoration rather than short-term speculation. In Cambodia, this effect is already apparent.
“Gold demand has decreased . . . since the gold price has become more expensive in recent months,” Phnom Penh gold dealer Heng Kunthea says. “People have said that as gold is more expensive, they don’t have the money to buy it.”
In highly dollarised economies in the region such as Cambodia, Myanmar, Laos and Vietnam, the surging dollar has seen local currencies struggle, creating the longer-term risk of escalating inflation and lower purchasing power.
In Cambodia, the riel shed more than 1% of its value between mid-April and mid-May. The Vietnamese dong lost 5.4% of its value last year despite rigid government policies controlling the use of the dollar in a bid to spur demand for the local currency, but the dong has continued to drop. It has lost a further 2.6% of its value this year, according to ADB, falling to about 18,500 dong to the dollar as Hanoi was forced into a denial last month that it would again devalue the currency by 4%.
The Greece fallout led to a huge near-1000 point crash on the New York Stock Exchange in May, and markets have been volatile across the globe as Brussels debated if and when to bail out Athens before settling on the IMF-backed package. In Asia, markets have been more choppy than usual but have fared better than those in the West.
Vietnam remains the best performing bourse in Southeast Asia this year, and Thailand has held up relatively well despite the chaos in Bangkok caused by ongoing protests, even if the Stock Exchange of Thailand closed an hour early on a couple occasions last month as the standoff reached its climax.
Still, the more developed Chinese and Indian exchanges have seen intermittent sharp falls as Asian markets lost an average 2%, for example, on May 17.
As with the financial crisis previously, the rule has generally been that Asia’s lesser developed – and therefore integrated – economies have fared better following the Greek turmoil. But with Cambodia and Laos both scheduled to launch stock exchanges this year, instability could prompt further delays as well as the kind of opening volatility that characterised other young bourses in the region such as Dhaka or Ho Chi Minh City. Government officials in Phnom Penh, for example, previously cited the global financial crisis as part of Cambodia’s reasoning for postponing the launch of its exchange which had been planned for 2009.
The real threat for the region, and particularly developing economies in Southeast Asia, remains a wider global slowdown prompted by the eurozone crisis as was the case post-Lehman, say analysts.
Economies like Cambodia – without any stock market, limited financial integration and a low debt-to-GDP ratio – remain in recovery mode from the first financial fallout, according to Stephen Higgins, CEO of ANZ Royal Bank.
“No real impact here yet. It's a bit like the global financial crisis post Lehman Brothers – the direct impact was minimal, but as the rest of the world then fell in to recession, that impacted Cambodia,” he says. “So not out of the woods yet, but really depends on whether Europe can sort itself out, or whether we get a sharp contraction in global growth again.”
Economies such as Cambodia, Laos and Myanmar are mostly susceptible to falls in demand in industries such as the garment sector and tourism, say analysts, as well as any drop in foreign direct investment, the front line of expansion in emerging economies.
“While Greece’s sovereign debt situation has not had a major impact on flows to the region, the main risk scenario is one of worsening global risk aversion, should the jitters spill over to some of the larger European economies,” the IMF warned in its April outlook for Asia.
With banks in Europe providing close to half of cross-border lending to the Asia region, the IMF adds, “further balance-sheet deleveraging and some pullback from Asia also could affect funding of some key activities in the region, especially trade financing”.
Other analysts say there could be positive effects for the region.
Douglas Clayton, CEO of Leopard Capital, an investment fund operating in Cambodia and Sri Lanka, says this year’s Greek tragedy need not be a disaster for the region.
“The effect on Asia is neutral to slightly positive,” he says. “While global risk aversion will rise and Europe’s import demand will fall, there will be a shift in investor attention from Europe to Asia, and from highly leveraged advanced economies to low-leverage emerging markets.”
The key tourism sector, however, looks to be in trouble, especially when the violence in Bangkok – the region’s main air hub – is factored in to what was previously a positive outlook for the longer term.
Earlier in the year, the Pacific Asia Travel Association (PATA) forecasted a 1% rise in Asia-Pacific arrivals in 2010, climbing to 4.5% growth for 2011, but that was before Bangkok and Athens headed south, meaning this outlook may later be revised downwards.
“Both issues cause major concern for travel industry stakeholders,” says Dale Lawrence, PATA’s Bangkok-based head of corporate communications.
“Of course, you can still visit Thailand and have a wonderful holiday in a number of resorts unaffected by the current troubles. But the media images are certainly bound to have an impact on the confidence factor,” he added.
In regards to the fallout from Europe, Thailand’s main visitor is the UK tourist, while France, Holland, Russia, Germany and Scandinavia are “also sending significant numbers”, says Lawrence. Greece, meanwhile, was forecast to send less than 100,000 tourists to Thailand this year.
Similarly in Cambodia, visitors from the UK, France and Germany alone represented more than 13% of total visitors to the Kingdom in the first quarter, according to ministry of tourism figures, which showed a 10% climb in total arrivals in the same period in 2009.
But with chaos in Bangkok, European travellers tightening their belts as austerity measures kick in and a possible contagion effect spending across the whole industry, the Mekong region in particular – which relies on Bangkok’s Suvarhnabhumi as a transit hub – faces a difficult year’s end.
“When Thailand’s tourism suffers, the pain is felt by its neighbours,” says Ken Scott, a spokesman for the Mekong Tourism Coordinating Office, adding that Vietnam is slightly better off due to its larger volume of flights, some intercontinental. “Events in Bangkok have greatly damaged Thailand’s tourism prospects for this year and will also dampen demand for Laos, Cambodia, Myanmar and, to a lesser extent, Vietnam.”
Although he says European travellers won’t be unduly deterred by the European debt crisis, most would be expected to downgrade on hotels and be more careful about holiday spending.
Indeed, belt tightening – originating in Europe – may only represent a little here and there. But when extrapolated across the whole of the global economy, Southeast Asia could again find itself on the wrong end of a financial mess for which it can claim zero responsibility.
With the euro hitting successive four-year lows against the US dollar late last month, eurozone purchasing power looks to be under serious threat, an effect that is multiplied by reduced state spending and faltering economic recovery.
Clearly tourism markets or industries in Southeast Asia relying on the eurozone are the most at risk from the current debt crisis, however, the worst-case scenario would be a second global downturn should Europe’s financial problems prove contagious.
In Cambodia’s case, agriculture – the country’s biggest sector – actually expanded last year as just about every other industry suffered, growing between 5 to 6% as foreign investment soared on the back of interest from Vietnam and Israel in particular.
As Thailand saw its SET index fall 3.11% in April, investment groups like the Thai Capital Fund reported its three top performing stock categories were energy and utilities, banking and food and beverages, according to the fund’s monthly market review.
“In times of global uncertainty, it’s best to stick to the basics and invest in things like food production and utilities, as demand for them tends to be relatively inelastic,” says Clayton of the Leopard Fund.
Traditionally, investors shed perceived risk in times of uncertainty, with many – particularly in the West – viewing the likes of Laos or Myanmar as emerging and therefore highly risky.
But the recent financial and economic woes have shown it’s not necessarily certain countries or markets that should be avoided. More important is the sector or industry. And after all, haven’t the US and eurozone shown themselves to be the least steady economies in the past few years?
With Asia having recovered first from the recent global economic crisis, while maintaining on average much lower levels of debt than more developed Europe and North America, surely the region remains well-placed to ride out what could be a second meltdown.
GOLD
With the precious metal hitting recent highs, most people might expect gold to be a safe bet at the moment – but don’t forget investors would be almost certainly buying at a high. Many analysts are now predicting that gold can’t sustain its current price, arguing that recent highs are just a short-term reaction to the Greek crisis. Still it remains a safe bet. With a full-blown economic recovery still some way off, the safety of gold remains an alluring, and indeed sensible, choice particularly in countries where there are few other solid investment alternatives.
PROPERTY
Cambodia’s recently passed property law was designed to spur a lackluster market and many analysts say the only way is up. Certainly the market is somewhere around the bottom so it’s a good time to buy property, but buying land as a foreigner is still not possible in Cambodia. Foreigners can only purchase property as long as it is not the ground floor of a building. The adventurous might look west to Bangkok – after staying fairly robust after the worst of the crisis, the Thai capital is sure to see a few bargains after the violence of the red shirts protests. Bangkok will remain the regional air hub for years to come and therefore remains a good long-term bet.
STOCKS
Thailand’s burning stock market is no doubt undervalued in the wake of recent violence in the capital but prospects depend very much on how long the chaos continues. Vietnam has been a much safer bet in 2010 and is likely to benefit from the country’s strong prospects for economic growth for this year. Pioneers could test the forthcoming Laos and Cambodian bourses due later this year but expect volatility.
DOLLAR
The Greenback is strong at the moment but that is only likely to last as long as the turbulence continues. Still, for those in Cambodia and Vietnam in particular, holding savings in dollars is a winner. In Laos, the kip has steadily risen in recent years so do the exact opposite. The baht is likely to weaken against the dollar as long as political instability is the order of the day, even if the Thai currency remained surprisingly robust in April and the first half of May.
SAVINGS
With the likes of the UK and the US in particular offering little in the way of interest, streetwise savers coming to Cambodia often marvel at fixed rate deposit accounts offering upwards of 5%. Go for a fixed term that fits the likely duration of your stay in the Kingdom and only save in US dollars, despite its slightly lower rates than the local currency. The riel has been sliding recently and its longer term outlook isn’t great.
LAND OF OPPORTUNITY
Human rights activists consider the country off-limits, but given its track record during the global economic crisis, Myanmar is the latest emerging market in Southeast Asia. While the likes of Thailand, Vietnam and Cambodia in particular, all suffered large reversals in GDP, Myanmar barely registered a dent last year. Key sectors include agriculture and even the supposedly high-risk tourism and hospitality sectors for the particularly brave.
