SINGAPORE: Countries from India to Australia may have to cut interest rates and raise government spending to buffer their economies from a decline in trade and consumer spending that’s likely to result from a war in Iraq, investors say.
Cutting borrowing costs would be the quickest way to protect Asian economies already reeling from rising oil prices and a drop in exports to the United States, they said. Spending increases and tax cuts may come later.
“Monetary policy will be the primary tool used to mitigate the risk of war,” said Edwin Chungunco, a fund manager at Citigroup Asset Management Ltd here.
With inflation under control in much of Asia, central banks still have room to cut rates, already the lowest in decades in many countries.
The Reserve Bank of Australia’s overnight cash rate of 4.75% is a half-point above a 30-year low. The Reserve Bank of India’s bank rate is at a 29-year low of 6.25%.
With the exception of Japan, where rates are near zero, interest-rate cuts “should be the first line of defence” for the region, said David Burton, director of the International Monetary Fund’s Asia and Pacific department. Growth in Asia outside Japan was twice the world average at 6% last year.
That does not mean that Asian countries won’t also spend more.
“It will be probably a mix of the two, depending on the country and the ability to absorb more fiscal spending,” said James Blair, who manages Asian bonds at Aberdeen Asset Management Ltd.
The region’s central banks will probably take their cue from US Federal Reserve Board policymakers, who meet Tuesday. While 26 of 32 economists surveyed by Bloomberg News expect the Fed to keep its benchmark rate unchanged at 1.25% – the lowest since 1961 – that could change if reports show more economic weakness, analysts said.
A reduction by the Fed “would build up expectations of a cut in the bank rate in India,” said A. Balasubramaniam, who manages Indian debt at Birla Sun Life Asset Management Co. He said India’s bank rate could be cut by a quarter-point in April.
The prospect of a war is already taking a toll. Australian consumer confidence fell to its lowest in almost two years in March, and Japanese exports fell for a second month in January, reports this week showed. South Korea last week cut its growth forecast for this year.
“If a war starts, we will suffer and sales will slump,” said Gerry Harvey, chairman of Harvey Norman Holdings, Australia’s third-biggest retailer by market value.
Lower borrowing costs would spur consumer spending on homes and television sets, countering a decline in exports.
Interest-rate cuts would also compensate for the 21% rise in oil prices this year, which has increased costs for companies from Korean Air Co to the Singaporean shipping company Neptune Orient Lines Ltd.
Asia accounts for 28% of world energy demand.
Asian trade would also get a boost from rate cuts, which would weaken the region’s currencies. Asian exports have been hurt by the dollar’s 9.3% decline against the yen and 5.4% drop versus the South Korean won in the past year.
Some central banks are already taking action.
In Pakistan, where the rupee’s 3.5% gain against the dollar in the past year has hurt textile exporters, the central bank said Wednesday it would cut the rate it charges on foreign-currency loans to 1.93% from 2.98%.
Rate cuts would help companies such as Qantas Airways Ltd, Australia’s largest carrier, which has been hurt by a decline in travel. Qantas last month said it might delay buying new aircraft and return leased planes should bookings fall further.
Australia may cut corporate taxes to spur investment when the government announces its 2003 budget on May 13, said Alan Oster, chief economist at National Australia Bank Ltd.
South Korea, which is trying to control a consumer-spending boom with restrictions on lending, probably would not cut rates, the central bank governor, Park Seung, said last week.
The bank cut its 2003 growth forecast for Asia’s fourth-largest economy to about 5% from 5.5%. It left its benchmark rate unchanged at 4.25% for a 10th month.
“What we would like to see is the government encouraging consumer spending through measures such as easing restrictions on lending,” said Jake Jang, a spokesman at Hyundai Motor Co.
The Bank of Japan reduced short-term borrowing costs almost to zero in March 2001 in an effort to pull the world’s No. 2 economy out of a decade-long slump.
Although the bank may pump more money into the economy by raising monthly bond purchases, the government may also have to raise spending.
“The government would need to provide fiscal stimulus to revive the economy,” said Shinichi Matsuzawa, executive director of economic research at Asahi Bank Research Institute Co in Tokyo.
“Monetary policy won't be enough.” – IHT