ASIA HAND
SE Asia offers haven from US turmoil
By Shawn W Crispin

BANGKOK - To decouple or not to decouple, that is the question that will loom over Southeast Asian economies and markets throughout 2008.

Global investors are bracing for the possibility of a US recession next year, an increasingly likely scenario as the staggering scale of the subprime housing loan crisis comes into clearer view. Many now wonder whether Southeast Asia's trade-geared economies, after decoupling to varying degrees from their historical reliance on US-destined exports, now represent a countercyclical shelter against the US's anticipated economic storm.

Asian markets, led by China and India but closely followed by many Southeast Asian economies, have this year provided a high-growth, high-return hedge against the financial doom and gloom emanating from the US. China's and India's stock markets were up in dollar terms around 175% and 66% year-on-year through the second week of December, while Indonesia, Singapore and Malaysia climbed 50%, 26% and 38%, according to official national statistics.

Markets across the region dipped slightly this week on revived concerns of a US recession, as investors uprooted capital to cover subprime-related losses in America. But while US capital markets are still major factors in determining Southeast Asia's economic performance, past strong correlations between US demand and regional export growth has weakened significantly in recent years. Demand in China, Europe and, to a lesser degree, the Middle East all buoyed regional exports this year, helping to fill the economic gap left by slackening US demand.

The great regional hope going forward is that China, where only around 30% of total gross domestic product (GDP) is derived from exports, will be able to sustain growth in Southeast Asia's more trade-geared economies. There are varying degrees of regional vulnerability to a US recession. Exports destined for the United States in 2006 accounting for nearly 20% of total GDP in Singapore and Malaysia, 13% in Vietnam, 9% in Thailand, 7% in the Philippines and less than 5% in Indonesia.

At the same time, there is growing statistical evidence that the region has in recent years decoupled significantly from the US's demand cycle and that a slowing US economy could accelerate that process. According to investment bank Credit Suisse, the percentage of Asia's exports (excluding China and Japan) to the US fell over the seven-year period spanning 2000-2006, dipping from 21% in 2000 to 15% in 2006. Regional exports to China, on the other hand, in 2006 accounted for 19% of the region's total, up from 13% in 2000.

The research forecasts that a 10% dip in US imports next year would, measuring first-round impacts, shave 0.9 percentage points off GDP growth in Singapore, 0.8 pp in Malaysia and the Philippines, 0.6 pp in Thailand, 0.2 pp in Indonesia, and 0.1 pp in Vietnam. Most importantly, China would see a mere 0.3 pp decline due to sliding US demand for Asian exports, according to Credit Suisse, which goes on to state that "there is no statistically significant relationship between China's growth rates and those of the US".

To be sure, China's growing consumption of Southeast Asian-produced goods is still partially linked to the US - through China's processing and re-exporting the region's intermediate goods to US markets. Yet some regional economists point to growing evidence that China is consuming rather than re-exporting a growing percentage of its Southeast Asian imports, crucially including electronics and raw materials.

Commodity plays
High global commodity prices and seemingly insatiable Chinese demand for raw materials have buoyed several Southeast Asian economies, including Thailand, Malaysia and Indonesia. In particular, natural resource-rich Indonesia has piggybacked on China's economic boom, offsetting the negative economic impacts of a decade-long de-industrialization process through ramping up energy and commodity exports.

Malaysia has profited from spiking global palm oil exports, Thailand from value-added foods, and Vietnam from food commodities. HSBC regional economist Fredric Neumann ventures that even if the US goes into recession, global commodity prices would not collapse due mainly to Chinese demand. "It represents the first time that the commodity price cycle is not directly linked to US demand," Neumann says. "That's where you've really seen a Southeast Asian decoupling [from the US]."

It wasn't that long ago that Southeast Asia was more widely associated with its 1997-98 financial and banking meltdowns, underperforming economies and poor corporate governance records. After 10 years of varying degrees of de-leveraging and corporate restructuring, the region's economies' robust growth rates and strong current account surpluses now seem comparatively sound vis-a-vis the US and its subprime loan problems.

Most governments in the region now have plenty of fiscal room to implement countercyclical spending policies to help cushion the potential blow of a US slowdown on their domestic economies. Credit Suisse notes that domestic demand is already growing strong in China, with overall GDP expanding 11.9% year-on-year in the second quarter of this year, and is now gathering pace in several Southeast Asian economies.

Rising bank loans, growing cement sales and falling interest rates are, counter-cyclical to the US, revving Indonesia's economy, where GDP is on pace to grow 6% this year and next, according to Credit Suisse. Malaysia, meanwhile, is taking aggressive steps to boost domestic demand, including a recent boost to civil servant salaries and a government decision to allow beginning next year the 5 million contributors to the Government Provident Fund to make early withdrawals for home financing purposes.

Singapore, whose percentage of total exports to the US has fallen by half from 20% in the mid-1990s to 10% today, continues to defy economic logic through its extraordinary domestic demand-led growth, including a go-go construction boom which has helped lift GDP growth to around 8% this year. The island state recently flexed its financial muscle when the state-run Government Investment Corporation paid US$10 billion for a 9% stake in subprime loan hit Swiss investment bank UBS, making it the financial institution's largest shareholder.

Even politically troubled, economically laggard, Thailand is showing new signs of consumer and investor confidence, spurred in part by the myriad populist spending pledges all political parties on the hustings have promised to implement if elected at the December 23 polls - though most economic analysts agree that a full economic recovery in Thailand depends on a smooth transition from military to democratic rule.

Some economists argue that for Southeast Asia's decoupling story to hold, Europe must continue to grow strongly and consume a growing share of the region's non-commodity exports. The appreciation of the euro vis-a-vis the dollar (on a trade-weighted basis at its lowest level since the 1960s) and some regional currencies would nominally support that trend. But Europe's banks are also highly exposed to the US's subprime problems, and should broad investor confidence collapse, all emerging markets, including Southeast Asia's, would likely see massive capital outflows.

Other analysts believe that sustained fast growth in China will save the day. HSBC's Neumann points to potential capital upsides for the region, as China is expected to invest as much as $200 billion of its qualified domestic institutional investor (QDII) outward investment program into Southeast Asia and South Korea. The economic forecast may be gloomy in the US, but for global investors looking for a countercyclical safe haven from a US recession, they could do worse than punting on Southeast Asia's slowly but surely decoupling economies.

Shawn W Crispin is Asia Times Online's Southeast Asia Editor. He may be reached at swcrispin@atimes.com