Mixed prospects for emerging economies amidst sharp global downturn

Highlights

• Big growth dents, but no crises in East Asia
• Global shocks expose domestic weaknesses in South Asia
• Middle East  comparatively resilient with some exceptions
• Commodity price slump takes Africa by surprise

The January World Risk Developments newsletter of Australia’s export credit agency (EFIC) – released today – says the economic prospects of different regions in the year ahead are mixed.

East Asia

“In East Asia, growth will slow sharply and unemployment rise.  But emerging Asia will outperform other emerging markets and an outright crisis is unlikely thanks to strong external buffers,” says EFIC Chief Economist Roger Donnelly.

Recent indicators suggest China has entered 2009 without much - if any - momentum. Growth in exports and industrial production has eased sharply and the Chinese property market is weakening. Achieving Beijing’s 8% GDP growth target for 2009 will depend on recent policy responses gaining traction.

“If the property market does not rebound, a hard landing in China is a distinct possibility,” says Donnelly.

The slump in international commodity prices will hurt Indonesia’s prospects for 2009. But Indonesia will suffer less than its neighbours since it is not as dependent on trade. Growth is projected to slide from 6% in 2008 to 4-5% in 2009.

“The government has been able to assemble a sizeable fiscal stimulus package to support growth thanks to a recently announced $US5½ billion concessional financing facility to help fund the budget, better-than-expected tax collection, and lower-than expected fuel and food subsidies from lower commodity prices.”

“However, Indonesia’s labour unions are militant, increasing the possibility of unrest if unemployment rises. ” says Donnelly.

Growth in the rest of East Asia will slow sharply, led by reduced demand for exports. It is no coincidence that Newly Industrialising Asia (Korea, Taiwan, Singapore and Hong Kong), where activity is very trade-dependent and global financial linkages are strongest, is already contracting.

South Asia

International economic difficulties are exposing domestic weaknesses in India, Pakistan and Sri Lanka and hopes have faded that India will shrug off the global downturn, though it is still likely to emerge as one of the strongest Asian growth performers. 

Though neither Pakistan nor Sri Lanka is deeply integrated into world trade or capital markets, both could succumb to financial crises.  There is a distinct risk that Sri Lanka will experience external financing shortfalls this year that propel it into a balance of payments crisis.

“India will still probably be the strongest performer among major Asian economies outside China,” says Donnelly.

“The international downturn could actually bolster demand for outsourcing as western firms seek cost savings to stay alive  -  business process outsourcing accounts for nearly one-third of Indian export revenues.”

Middle East

The GCC economies are facing a sharp slowdown in 2009, for the obvious reason of the oil price slump, but also because other industries into which they have diversified – tourism, property development, financial services, petrochemicals and aluminium smelting – are being hit severely by the credit crunch. 

 “Dubai will feel the hardest knock, because its network of government-controlled companies – recently dubbed ‘Dubai Inc’ by ratings agency Moody's – went on an overseas borrowing spree that fuelled a large property bubble that has now burst.”

“In 2009, the political influence of the capital-rich Gulf states will grow, as they take an increasing role in containing the regional impact of the global financial crisis.  Already they have provided financial support to Pakistan.  If Abu Dhabi moves to bail out Dubai, it will probably demand a greater say in UAE affairs in return,” says Donnelly.

“The countries that entered the crisis with large macroeconomic imbalances and political instability, notably Iran and Turkey, are both looking decidedly crisis-prone.”

In Iran, the government faces the challenge of warding off a balance of payments crisis as oil prices fall.   Tumbling exports and consumer spending plus slowing investments have already pushed Turkey into recession and its heavy dependence on external financing exposes it to the global credit crunch.

Africa

Hopes that Africa would be able to defy the international economic downturn thanks to its negligible links with the world economy have been dashed.  The commodity price slump in particular is hitting the continent hard.

“The sudden and brutal reversal in commodity prices has following a five-year rally means the continent now faces a decidedly bleaker outlook,” says Donnelly.

“Countries in central and southern Africa are now witnessing a sharp contraction in investment plans as both junior and major resource companies rush to scale back, postpone and cancel exploration and development projects.” 

“Even those that still want to press ahead are having a harder time tapping the debt and equity markets for capital.”