In a panel discussion at INSEAD Leadership Summit Asia 2008 on ‘Asia as a power: financial and macroeconomic challenges’, four experts shared their views on the impact of the global financial crisis on the region. All were optimistic that Asia will recover from the crisis in about a year, but the experts also flagged potential problems.
On the plus side, Vaseehar Hassan Abdul Razack, Chairman of Unicorn International Islamic Bank Malaysia, says Asia’s central banks have greater reserves than countries in the West, its banking sector and most businesses are less leveraged and much of the bad debt was cleaned out 10 years ago during the Asian financial crisis.
But Asia will not be immune to the crisis.
“The banking sector is sound but there is this feedback effect. The real economy starts shrinking here or is not growing as fast and that translates into deteriorating balance sheets and that is the danger. De-coupling is a nice story but if in the United States and Europe this financial crisis is not arrested, then Asia, with very sound banks, will see a deeper crisis coming,” says Ilian Mihov, INSEAD Professor of Economics.
The downturn in Asia may be more serious than many economists and business leaders currently expect.
Officials face one of their toughest challenges in Asia right now because no one can predict just how serious the downturn might become. From what they can see right now, Asia will stumble but it may not fall.
“We’ve been extremely cautious in terms of lending and loan to asset ratios,” Fong says. “When you have a big thick reverse in your balance sheet, you can take the punch.”
What the experts are beginning to see is that the problems faced by the banking industry and their resulting reluctance to lend is putting a lot of pressure on business and what is sometimes called the ‘real economy.’
“From a financial crisis, it has transformed into a real economy crisis,” Fong adds.
That will mean a much more challenging business environment in the coming year, declining economic growth and rising unemployment. Still they predict that growth in Asia will continue, just at a much slower pace.
Hassan agrees. “We need to look at both the political and business leadership.” He believes Asia has produced some strong, successful business leaders. “What is sadly lacking is the political leadership in Asia,” Hassan says.
For the next few months, regulators in Asia will be looking towards the West to guage the fallout in the financial sector in the US and Europe, and will also be looking at Asia to see the impact closer to home. Fong says it is nearly impossible for regulators in Asia to predict what will be required in the coming year, “We are waiting to see how the banking and investment banking industries will settle.”
All four experts agree that Asia will be the engine of growth in this century and that the region will become a much bigger economic player.
“Asia will be the powerhouse of the 21st century,” Hassan says.
“This is a shift of power commensurate with only one other event: the discovery of North America by Europeans and the subsequent rise of the United States as a major production center,” says Mihov.
That shift will require new structures and new Asian regional cooperation. There isn’t likely to be an Asian Union along the lines of the European Union any time soon, but Asia should come up with a unified position on trade for example.
The region remains divided along national lines and along economic lines. According to Nag, “Asia is (made up of) two Asias.”
“We should spend some time talking not just about Wall Street, not just about Main Street, but the addresses which don’t have a street,” says Nag.
“Not very far from here you see an Asia where 620 million people still live on less than one dollar a day and 700 million people do not have access to clean water,” Nag says. This group will be more affected by rising unemployment as the real economy in Asia slows in the coming year and these are the people who will really hurt.
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