ASIAN economies are expected to continue outperforming the rest of the world in 2004 against the backdrop of an overall global recovery.
Expectations are that most Asian countries would register at least 4% gross domestic product (GDP) growth this year, and that China would again set the pace with a sizzling growth rate of 7% to 8%.
Despite uncertainties ranging from a tenuous recovery in the US economy to the continued threat of terrorism and another possible SARS outbreak in the region, economists remain optimistic that Asian economies could post another strong year. The region as a whole is expected by most to expand by some 5%.
The pace-setters in South-East Asia are expected to be Thailand and Vietnam with growth rates exceeding 6%, while the “firing-on-all-cylinders” Indian economy could close in on China for the top spot in the wider Asian context.
Malaysia is also expected to be one of the better performers this year with growth of at least 5%.
In a 2003 year-end note, JP Morgan said the new year could mark the end of what it termed as “an extended period of macroeconomic underperformance” in the region.
“Nominal growth rates in Asia collapsed to less than one-third the previous trend – from 9% per annum down to 2.5% – while the region’s real effective exchange rate slid roughly 25%,” it said.
The revival in regional real growth, estimated by the investment bank at 5% per year for the next few years, combined with the end of outright deflation, “puts Asia at the centre of the global reflation story.”
UBS Investment Bank’s Hong Kong-based managing director Rob Rankin agreed with this view, saying that the economic picture for Asia “looks good.”
Rankin said among the countries in the region that he was especially bullish about were Malaysia and Thailand. Malaysia, with its healthy consumption growth and a “sensible” political transition, would “look very attractive within the Asian perspective” to potential investors, he said.
Lee Soo Kai, an economist at OSK Research Sdn Bhd, said his firm’s expectations were for Malaysia’s GDP growth to be between 5% and 6%. “Compared with this time last year, the economy is looking much better,” he said.
Lee cautioned, however, that with the government cutting back on spending in certain non-critical areas, GDP growth would need to be driven very much by the private sector.
With the expected global recovery, this could well happen. Analysts said the implications of a sustained turn in the Asian demand cycle could be significant.
JP Morgan said “to the degree that profit forecasts had been marked down too much over the past several years,” equity markets throughout Asia would benefit from the reflation of the region's economies.
For the fixed income markets, long-term yields should rise to close the gap with nominal GDP growth, it added.
On a global scale, JP Morgan said the impact of an Asian demand revival on the world’s commodity markets would be significant, and this would also boost the strength of Asian currencies.
“We expect 2004 to be the year of Asian currency appreciation. As domestic growth gathers momentum, local central banks should become more comfortable allowing their currencies to appreciate,” it said, with the Japanese yen, Korean won, Taiwan dollar and Thai baht all expected to rise in value.
A shift in China’s currency peg, such as a widening of the peg band, could well provide additional impetus to Asian currency appreciation, it added. “This would do little to affect local competitiveness or financial sector stability but would constitute an important symbolic gesture ahead of the US presidential election in November.”
A ringgit re-peg would, however, be unlikely, said JP Morgan, as valuations were “still resolutely fair.”
Analysts said that among the larger risks in the coming year were the heavy calendar of elections right across the region. Asia remained a potential source of headline risks, said one observer.
Elections are scheduled for India, Indonesia, Malaysia, the Philippines, South Korea, Taiwan, and Thailand in 2004. JP Morgan said each country had its “own brand and level of political intrigue” but “market-moving event risks should be isolated to certain hotspots.”
Most analysts, however, do not expect the elections to have a major impact on the current positive economic momentum of the countries concerned.
Morgan Stanley economist Daniel Lian said what was more critical for countries in the region, particularly South-East Asia, was to build domestic demand and move away from an over-dependence on external demand and foreign direct investment by multinationals.
Sustained growth in the longer term, Lian said, would only be possible if South-East Asia successfully engineered a structural lift in domestic demand in order to shed its excessive dependence on exports.
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