Economic Research:

After The Financial Crisis, Is Asia-Pacific An Export-Lighter, Credit-Heavier Model?

Credit Market Services: Paul F Gruenwald, Asia-Pacific Chief Economist, Singapore (65) 6216 1084; paul.gruenwald@standardandpoors.com Secondary Contact: Vincent R Conti, Singapore (65) 6216 1188; vincent.conti@standardandpoors.com

Table Of Contents
Growth After Global Financial Crisis: Lower But Still Strong, Led By The Big Emerging Markets Post-Crisis Exports: Nice Rebound, But Now Missing In Action Bank Credit After The Global Financial Crisis: Leverage Anyone? Post-Crisis Government Debt: Nothing To See Here Folks, Just Keep Moving Our Forecasts: Growth Still Solid Overall, But Deficit Countries Are More At Risk Note

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Economic Research:

After The Financial Crisis, Is Asia-Pacific An Export-Lighter, Credit-Heavier Model?

Down but not out. Although Asia-Pacific's pace of expansion has declined over the past few years or so, the region's growth continues to be the highest in the world after the global financial crisis. Moreover, exports--the main growth engine in some economies--have waned. With ultra-low interest rates generated by major central banks, lending has surged in some Asian economies, providing--at least for now--an offset to weaker external demand. Add to this mix slower growth in the two Asian giants, China and India, and we believe the region is unlikely to return to pre-crisis growth even if the advanced economies--particularly the United States--recover smartly. Overview Asia has been outperforming in the five years since the global financial crisis reached its peak with the default of Lehman Brothers in September 2008. The region isn't unscathed. GDP and export growth have both fallen after the financial crisis. On the other hand, bank credit has grown sharply in some (though not all) economies in terms of GDP, creating some new vulnerabilities. We forecast growth steadying or picking up in much of the region in the second half of this year and 2014-2015, but not to pre-crisis rates. The Chinese economy seems to have stabilized and Japan continues to grow faster than expected, but the countries with fiscal deficits (India in particular) will struggle.

Growth After Global Financial Crisis: Lower But Still Strong, Led By The Big Emerging Markets
Asia-Pacific economies generally have continued to expand at a respectable rate after the Lehman collapse, although at a slower pace than they did in the five years before that. Indeed, growth for every economy in the region declined across these two periods. In the post-crisis period, real GDP growth across Asia-Pacific averaged 3.8% versus 5.6% over the five years to third-quarter 2008. Considering Emerging Asia alone, growth weakened to 4.4% from 6.3%.

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Economic Research: After The Financial Crisis, Is Asia-Pacific An Export-Lighter, Credit-Heavier Model?

Chart 1

However, there was a wide variation across the region, with the big emerging markets in front. China and India continued to lead the pack in Asia, with growth at 7.9% and 6.3%, respectively, in the period after the financial crisis; growth for both countries is about 3 percentage points below their levels before the crisis. Japan and Australia have the lowest growth rates in our sample. Elsewhere, the more trade-dependent newly industrialized economies (NIE), also called Tiger economies, have seen growth fall 2 percentage points to 3.3% after the crisis while the more domestically focused ASEAN-4 (Indonesia, Malaysia, Philippines, and Thailand) saw a smaller 1.4 percentage point decline to 4.0%.

Post-Crisis Exports: Nice Rebound, But Now Missing In Action

Following the Asian financial crisis of 1997-1998, the region was fortunate to have a robust global economy to aid its export-heavy recovery. The period following the global financial crisis has been less kind. Solid export growth had been a mainstay of the Asian story before the global financial crisis. That is no longer true. The growth of shipments from Asia from mid-2003 to mid-2008 was fairly stable, averaging 22.5% (year-on-year basis) and falling below double-digits only once.

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Economic Research: After The Financial Crisis, Is Asia-Pacific An Export-Lighter, Credit-Heavier Model?

Chart 2

In contrast, Asia-Pacific export growth has swung wildly after the global financial crisis, and exhibited a steady downtrend following an impressive rebound. The growth of shipments fell precipitously in late 2008, turning negative in November and reaching a bottom of negative 29% in May 2009. A sharp rebound to 41% growth one year later spurred optimism about yet another export-led recovery, but the momentum withered soon after. Indeed, export growth has averaged just 8.5% since the crisis and only 4% over the past 12 months. The growth of intra-Asian shipments has held up well in recent years, but this is too small to offset the very weak growth from the United States and Europe.

Bank Credit After The Global Financial Crisis: Leverage Anyone?

Because external demand (exports) has faded as a source of growth for Asia-Pacific, the region has been forced to turn to domestic sources. That, in turn, has led a surge in bank credit, fueled by the U.S. Federal Reserve's ultra-loose monetary policy after the crisis. Or so the story goes. The reality is a bit more nuanced, and certainly not uniform across the region. An important question is how to measure and interpret the rise in leverage in the post-crisis period. Chart 3 shows a scatter plot of the "changes" in the

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Economic Research: After The Financial Crisis, Is Asia-Pacific An Export-Lighter, Credit-Heavier Model?

ratio of bank credit to GDP against the level of bank credit to GDP. The changes try to capture the acceleration of bank credit. As rule of thumb, bank credit to GDP should be rising in emerging economies as part of a process known as financial deepening. The change tries to measure whether the rise in the ratio of bank credit to GDP picked up after the crisis.
Chart 3

The data show wide variation across Asia-Pacific. First, although bank credit has been accelerating, this has not been true everywhere. Singapore, China, and Malaysia show the biggest changes in bank credit to GDP by a wide margin, although all three saw their ratios decline before the crisis. Growth in bank credit has decelerated in Korea (where the ratio actually fell post-Lehman), Australia, and India. Indonesia and India, the countries seeing the most pressure in the recent round of financial market turbulence, have the second- and third-lowest ratios of bank credit to GDP in Asia-Pacific. In terms of the overall level of bank loans, Hong Kong leads the region at 184% of GDP; on the other hand, Hong Kong and Singapore are Asia-Pacific's highest rated banking sectors under Standard & Poor's Banking Industry Country Risk Assessment (BICRA) methodology (see "Banking Industry Country Risk Assessment Update: September 2013," published Sept. 6, 2013).

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Economic Research: After The Financial Crisis, Is Asia-Pacific An Export-Lighter, Credit-Heavier Model?

Post-Crisis Government Debt: Nothing To See Here Folks, Just Keep Moving
Unlike "Western" economies, where public debt levels remain high and debt sustainability remains a concern in some cases, the levels are generally under control in Asia, excluding Japan. (1) Indeed, the ratio of net average general government debt to GDP in our sample was 31.5% at end-2012. Although this level is almost 5 percentage points higher than that of end-2007, it is broadly unchanged from end-2002. Thus, unlike bank debt, government debt has been broadly stable after the crisis.
Chart 4

As is usually the case in Asia-Pacific, there is considerable variation across economies (see chart 4). Public debt levels are higher in India (72.7% of GDP at end-2012) and the ASEAN group (31.1%). Since the onset of the global financial crisis, Australia's and New Zealand's net general government debt levels (as a percentage of GDP) rose nearly 20 percentage points, but both countries entered the period with negative numbers. In the Tiger economies, those levels increased 10 percentage points in Taiwan and 8 percentage points in Korea. In the ASEAN group, Malaysia's net general government debt (as a percentage of GDP) has risen 13.5 percentage points since the start of the crisis and Vietnam climbed 5.5 percentage points.

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Economic Research: After The Financial Crisis, Is Asia-Pacific An Export-Lighter, Credit-Heavier Model?

Our Forecasts: Growth Still Solid Overall, But Deficit Countries Are More At Risk
For the region as a whole, we have lowered our baseline GDP growth forecast fractionally for 2013-2015 relative to our previously published views (see "Credit Conditions: Increased China Downside Risk Dampens Asia's Growth," published July 30, 2013). Although our China forecast is unchanged, we have raised our numbers for Japan, based on a stronger-than-expected revised second-quarter outturn, and lowered our India forecast as the recent market turbulence has taken a toll on investment and growth. We have raised our forecasts for the Tiger economies following signs of an incipient rebound in the third quarter while the ASEAN group, which has seen the bulk of the recent market pressures, has been marked down. We expect China will continue to lead Asia-Pacific growth, with GDP expanding 7%-7.5% over the next few years. As we argued in a companion article, titled "Slower Growth In China: Inevitable, Necessary, And Now More Palatable," published Sept. 25, 2013, we believe the authorities are comfortable with the current pace of activity as they accept a number of trade-offs. These include the health of the financial sector following China's policy response to the global financial crisis, which makes a return to the growth of above 9% in the past two decades less attractive. While the Chinese authorities appear to have been successful again in maintaining growth near or above target (7.5% this year), they have made only minimal progress in moving away from investment and toward consumption as the main driver of GDP. The 2-percentage-point downshifting of growth came almost entirely from slower investment growth. Japan continues to surprise on the upside, as the effects of Prime Minister Abe's economic policies (often called Abenomics) take hold. GDP growth in the first half of 2013 was about 1% per quarter. Consumption has been the main contributor to economic activity, with net exports chipping in as well. Importantly, nominal GDP has been running at or above real GDP, suggesting that inflation (at least as measured by the implicit price deflator) has turned positive, although we are quite far from having steady 2% inflation as targeted by the Bank of Japan. We think the current rate of GDP expansion is unsustainable and see growth easing toward 1% per year over the medium term (see "Credit FAQ: Are Japan's Efforts To Boost Growth And Escape Deflation Likely To Succeed?" published Sept. 25, 2013). India has been the weakest performer in Asia-Pacific this year (relative to expectations), having been on the front lines of the global risk sell-off that began in May. Market participants perceived India's sizable twin fiscal and current account deficits as vulnerabilities. In the ensuing capital outflow, the rupee depreciated sharply and the blow to confidence and investment has slowed growth to just 4.4% in the June quarter, two-thirds the rate in 2008-2009. Inflation looms as a threat as well (see "India's Macroeconomic Woes Are Unlikely To Correct Soon," published Sept. 25, 2013). We forecast a tepid recovery over the next few years with growth of 5%-6%. Australia's growth has decelerated, given its reliance on Chinese demand for hard commodities. We forecast growth of 2.5% this year, rising to about 3% in 2014 and 2015. The challenge for Australia is to rotate part of its investment toward the non-mining sectors. Record-low interest rates (reflecting slower growth and low inflation) and a somewhat weaker currency should help this process. We forecast New Zealand will see a similar growth pattern of 2.5% this year and about 3% over the next few years. Although the hard commodity links are far less than in Australia's case, New Zealand nonetheless is facing a bubbly housing sector and falling export prices.

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Economic Research: After The Financial Crisis, Is Asia-Pacific An Export-Lighter, Credit-Heavier Model?

The Tiger economies, led by Korea (40% GDP share), continue to show below-trend growth owing to their relatively trade-dependent nature. Importantly, strong fiscal and external fundamentals have mostly shielded these economies from the global risk sell-off that began in May. Looking ahead, we expect growth in this group to rise to 4% or above in 2014-2015, from 2.7% this year. This rebound is predicated on a pickup in global growth and, more importantly, global trade. Growth in the ASEAN-5 group, led by Indonesia (50% GDP weighting), has been higher and more stable than the Tiger economies. However, this group generally runs weaker fiscal and external accounts and has been hit much harder (along with India) by the recent risk sell-off. As a result, we have lowered our growth forecasts for Indonesia and Malaysia. We also trimmed our forecast for Thailand's GDP by a full point, owing to its technical recession in the first half of this year. We expect GDP growth for the ASEAN-5 group to fall by 0.3 percentage point this year to 5.2%, with a modest uptick in 2015. We continue to see the risks around our baseline forecasts as tilted to the downside across most economies in Asia-Pacific. There are a number of reasons. The prospects for a rebound in external demand from the advanced economies are still not firm, in our view; this is particularly true in Europe, the largest trading partner for much of the region. Also, the recent bout of market volatility is likely to bias investment and financing decisions downward, particularly in South and Southeast Asia. On the upside, we see some scope for a stronger-than-expected pickup in U.S. growth should fiscal policy become more predictable and less restrictive, and the personal consumption rebound gathers additional momentum.
Table 1

GDP Growth Forecasts, September 2013

(Annual percentage growth) 2013f Australia China India* Japan South Korea Hong Kong Indonesia Malaysia Philippines Singapore Taiwan Thailand Vietnam New Zealand Asia-Pacific Emerging Asia NIEs ASEAN 2.5 7.3 4.8 2.0 2.9 3.0 5.9 4.8 7.1 4.2 2.7 2.8 5.3 2.5 5.2 5.9 3.0 5.2 2014f 2.9 7.3 5.5 1.9 4.2 4.0 5.8 5.7 6.0 3.9 4.5 3.6 5.5 3.1 5.5 6.3 4.2 5.3 2015f 3.1 7.1 6.0 1.2 4.9 4.6 5.9 5.2 6.2 3.4 4.1 3.1 6.0 2.8 5.4 6.3 4.5 5.3

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Table 1

GDP Growth Forecasts, September 2013 (cont.)

f--forecasts. * Fiscal year ending March. Hong Kong, Singapore, South Korea, and Taiwan. Indonesia, Malaysia, Philippines, Thailand, and Vietnam. Sources: CEIC, Standard & Poor's.

Note
(1) We excluded Japan because of its well-documented fiscal and debt challenges, which are an outlier in the region. We have also omitted Hong Kong and Singapore, given their large net creditor positions.

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