Asia’s next wild ride

From Ebola to debt to deflation, fear once again stalks the global economy.

With bewildering speed, concerns about credit defaults, slowing demand and political instability have eclipsed exuberance over America’s falling jobless rate and Alibaba’s record-breaking IPO. The most-asked question isn’t where to make profits, but where to find a safe haven from the coming storm. Could it be Asia again? Sadly, unlike during the most recent global recession, even this region finds itself in an increasingly dangerous position this time around.

That’s not to say Asia doesn’t have enviable fundamentals. Even given China’s worsening data, the stalling of “Abenomics” in Japan and structural headwinds that challenge officials almost everywhere, Asia may yet ride out renewed turbulence better than the West - just as it did in 2008. If one thinks of investment destinations as beauty contestants, Asia is still hands down the least ugly candidate.

But the region’s growth over the last six years has been driven more by asset bubbles than genuinely sustainable economic demand. Already, we are seeing structural slowdowns from Seoul to Jakarta. These strains will become even more pronounced as Europe’s debt troubles re-emerge and the Federal Reserve’s record stimulus loses potency. Asian policymakers also have less latitude going forward to support growth.

“A full recovery of demand in the West, sufficient to pull Asia out of its malaise, remains a distant prospect,” says Qu Hongbin, Hong Kong-based co-head of Asian Economic Research at HSBC Holdings. “Rather, reviving growth in Asia, whether in China, Japan, India or anywhere in between, requires deep structural reforms: pruning subsidies, spending more on quality infrastructure, boosting education, opening further to foreign direct investment, and, perhaps most important of all, introducing greater competition in local markets. These are politically tough choices to make. But they will grow only more difficult, the longer they are put off.”

Admittedly, Asia has done considerable heavy lifting since the region’s own crisis in 1997. For a reality check, I consulted with Callum Henderson of Standard Chartered in Singapore, who arguably published the first comprehensive history of that period, “Asia Falling.” One parallel between then and now worries Henderson: a huge devaluation in the Japanese yen that pressured exchange rates around the region.

But the differences are far more striking. Asian currencies are now generally unpegged; many governments have sizable current-account surpluses and huge foreign exchange reserve cushions; and the investor base now reflects longer-term real money as opposed to fickle hot money. While risks abound, Henderson concludes, “this is not 1997.”

Still, those risks are flaring up in hurry. What worries economist Glenn Maguire of the Australia and New Zealand Banking Group in Hong Kong is how rapidly commodity prices are receding from the gains of recent years (commodity prices in general are at a five-year low). “Certainly, the global or regional economy does not seem to be slowing as quickly commodity prices are falling,” Maguire points out.

Asia did a remarkable job steering around the worst of Wall Street’s crash in 2008. But it did so with fiscal stimulus and monetary policies that stretched national balance sheets and boosted asset prices in artificial and unsustainable ways. “We are stuck in a narrow and disappointing growth range across Asia,” says HSBC’s Qu. “The temptation is to blame the West for its tired consumers. But that is to miss the real problem. Slowing productivity growth is what really ails the region, prompting its dependence on credit to sustain demand.”

Asia may indeed look like the least ugly region as global markets cascade lower. But it’s high time policymakers looked into the mirror and addressed their own economic blemishes.

*The author is a Bloomberg View columnist based in Tokyo.

by William Pesek