Top strategist predicts slow US rebound

It could take a few years for the United States economy to bounce back. This was the prediction from one of Merrill Lynch’s top strategists at the start of its “Rising Stars” conference in Singapore yesterday.

Mr Mark Matthews, the firm’s chief Asia strategist, said: “We are looking at a protracted recovery that’s going to take the economy two to three years to unwind from its excessive leverage. So, it’s a ‘L’-shaped recovery.”

This was one of the scenarios painted by Singapore Prime Minister Lee Hsien Loong during his May Day Rally.

Mr Lee deemed an “L”-shaped downturn a worst-case scenario, especially if it resembled Japan’s decade-long stagnation after its 1990s slump.

This would be bad for Singapore, which relies heavily on the US for exports.

Despite a gloomier outlook, Mr Matthews believes Asia is now successfully decoupled from the US, thanks to growing demand within the region.

“People are wealthier now and many are millionaires when they weren’t five years ago, so, even if they don’t like the fact that gasoline and food prices are higher, they are spending more than the beginning of the decade,” he said.

In his keynote address, Trade and Industry Minister Lim Hng Kiang noted that China and India would remain “twin engines” propelling Asia forward.

Separately, Merrill’s vice-chairman William McDonough said US Fed rate cuts and liquidity initiatives may have succeeded in containing the US financial crisis.

“It’s the beginning of the end of the sub-prime crisis. We are starting to see situations where some mortgaged-backed securities are being sold,” he said.

Source : Today – 15 May 2008

Fed expands effort to fight credit crisis

The Federal Reserve announced Friday that it will expand a series of efforts to deal with the global credit crisis, in coordination with European central banks.

The Fed said it was boosting the amount of emergency reserves it supplies to United States banks to US$150 billion ($205 billion) in May, from the US$100 billion it supplied in April. The Fed took this action and several other moves to boost credit in coordination with the European Central Bank and the Swiss National Bank.

The latest moves are part of a series of actions the Fed has made since the credit crisis struck in August. The efforts are designed to increase reserves so that banks do not become hesitant about lending to consumers and businesses, which would make the current economic slowdown even more severe.

The Fed’s decision to boost the amount of loans it makes to banks every two weeks was aimed at sending a strong signal that it is prepared to supply as much in reserves as US banks need.

The Fed said it was also expanding the types of assets that investment banks can use as collateral to receive loans from the central bank. In March, the Fed used powers it got during the Great Depression to begin making loans to investment banks. Previously, the Fed only gave direct loans to commercial banks.

Source : Today – 3 May 2008

GIC’s Dr Tony Tan clarifies ‘worst recession’ remarks just one of 3 scenarios considered

Dr Tony Tan, the deputy chairman of the Government of Singapore Investment Corporation (GIC), has clarified that recent comments made on the world facing its worst recession in 30 years is just one of three scenarios GIC is contemplating.

It is not the GIC’s forecast for the global economy.

The other two are an optimistic scenario where there is a recession in the US or globally, with an end to the credit crisis; and, a middle scenario where there is a mild US recession but no global recession.

Speaking at the GIC Staff Conference earlier this week, Dr Tan had said the world “could be facing a recession which is longer, deeper and wider than any recession that we have encountered in the last 30 years.”

He had also said that this could be mitigated if decisive and timely actions are taken by policy makers in the United States and elsewhere.

Putting those remarks in perspective, Dr Tan said that as part of GIC’s risk management discipline, it continuously reviews a range of economic scenarios which can affect its investment strategy.

Dr Tan explained, “In normal times, there will be a central scenario with a dominant probability, with the optimistic and pessimistic scenarios as outliers, each with much lower probability. However, in light of the current fluid and uncertain times, the probability of the pessimistic scenario, while not the highest, has risen to a level that warrants serious consideration by GIC.”

And this was why he had highlighted the scenario at the conference. – CNA/ir

Source : Channel NewsAsia – 25 Apr 2008

GIC says world could be facing worst recession in 30 years

The world could be facing its worst recession in 30 years, said Deputy Chairman and Executive Director of the Government of Singapore Investment Corp (GIC) Dr Tony Tan.

He shared this view with over 500 GIC staff at a conference on Monday.

“The financial contagion has now spread beyond US shores, increasing the likelihood of a global financial crisis and recession. We could be facing a recession which is longer, deeper and wider than any recession that we have encountered in the last 30 years,” he said.

Dr Tan added that this could be mitigated if timely actions are taken by policymakers around the world, boosting both markets and investor sentiment.

If this does not happen within the next three to four months, it will be up to the markets to work out current problems, and this is expected to be a long, painful and drawn-out process.

He said: “What is clear is that the financial and investment markets will be extremely nervous and volatile over the next one or two years.”

While that means GIC’s multi-billion-dollar investments in UBS and Citigroup remain shaky in the short term, Dr Tan pointed out that these are long-term investments and they are expected to give good returns when markets stabilise and economic conditions return to normal levels.

GIC invested US$10.8 billion in UBS in December last year and US$6.88 billion in Citigroup this January.

At the staff conference, GIC also unveiled three new group committees – the Group Management Committee, the Group Investment Committee, and the Group Risk Committee.

The Group Management Committee, chaired by GIC’s Group Managing Director Lim Siong Guan, will address and discuss organisational issues of the group.

The Group Investment Committee will be chaired by Group Chief Investment Officer Ng Kok Song. It will develop and implement asset allocation policies and investment strategies at the group level. It will also review risk and performance of asset classes regularly.

Chief Risk Officer Sung Cheng Chih will chair the Group Risk Committee which will oversee and guide the development and implementation of risk management policies.

These committees will report to an executive committee chaired by Dr Tan.

“This management structure enables GIC to have the group-wide oversight on our business operations, investments and risks while giving sufficient autonomy to our investment subsidiaries so that they can respond in a timely fashion to changes in investment circumstances,” said Dr Tan.

Analysts said this is a natural move as companies around the world brace themselves for a rocky ride ahead.

GIC’s investments are closely watched as the fund is seen as one of the largest sovereign wealth funds in the world.

It is estimated to have some US$330 billion in assets under management, behind Abu Dhabi Investment Authority and Norway’s Government Pension Fund.

Source : Channel NewsAsia – 21 Apr 2008

IMF says Asia less vulnerable to shocks in global market

In light of the ongoing sub-prime mortgage crisis in the United States, major global agencies have relooked their forecasts for this year.

According to the latest World Economic Report, the International Monetary Fund (IMF) is predicting a 3.7 percent growth in the global economy this year – down from a 4.9 percent expansion in 2007.

The IMF has also downgraded its growth projections for Singapore by expecting the economy to grow by just 4 percent this year. It also said home prices in the US could see a further slide.

Charles Collyns, Deputy Director, Research Department, IMF, said: “We are more concerned about the household sectors because of the impact of the housing correction.

“We’ve seen a 10 percent reduction in house prices on the index last year and another 10 percent could be on the way this year. That’s a 20 percent reduction in housing prices and that will have an effect on household balance sheet and will tend to dampen household’s willingness to spend going ahead.”

And according to the IMF, this will have a deep impact on the US economy and could even lead to a contraction.

It has projected that the US is likely to face a mild recession this year, with a possible recovery towards the end of 2009.

Although there are some downside risks, the IMF said according to its forecast, there is only a one-in-four chance of a global recession. That is partly because growth in Asia is expected to hold up, albeit at a slower pace.

For Singapore, the IMF has cut its 2008 growth projections from 5.8 percent to 4 percent.

On the whole, it said emerging Asia will be less vulnerable to shocks in the market, compared to a decade ago.

Ranil Salgado, Resident Representative, Singapore, Asia & Pacific Department, IMF, said: “Most of these countries run substantial trade surpluses and they have large foreign reserves… Policy steps in Asia have created some space for policy adjustments in the event that large downside risks do materialise.”

Besides the slowdown in the US, the IMF has warned that Asian economies need to address the concerns of inflationary pressures on food and oil.

This includes re-thinking biofuel policies and boosting agricultural output to meet rising demand. – CNA/so

Source : Channel NewsAsia – 21 Apr 2008

Global recession: Are Asians ready for a storm?

Riding it out involves open and frank cooperation

AMERICA’S unfolding financial woes continue to surprise. The impact on Asia has been limited thus far, and some think that Asia’s rise is irresistible.

But connections in finance, trade and investment can still bring the storm to Asia. Indeed, regional bourses and currencies have already felt shocks.

After all, Asia’s boom has coincided and benefited from growth in the United States, easy and abundant capital and low inflation.

Conditions on all three fronts have changed. The US economy has slowed and seems headed for recession. Inflation is rising sharply, especially in US dollar terms. The ready availability of credit is also under pressure with the uncertainties in the market.

If the American economy continues to worsen, are Asians ready for a storm?

Historically, what happens in America affects Asia. However, some now argue for a decoupling of the regions. Growing domestic demand in Asian markets, especially China, and greater intra-Asian trade, they say, will keep the region booming, even as America declines.

South-east Asian central banks’ governors expressed such optimism when they met in Jakarta in March. Their statement hoped “that intra-regional trade will provide some buffer against the likely slowing down of exports to the United States and Europe”.

But much of intra-Asian trade is in intermediate goods that, after assembly in China or elsewhere, are intended for final export to the US or Europe.

Concurrently, reports show that global trade is at a standstill. If more problems emerge in the US, this will affect the volume of Asian exports.

The fall in the US dollar compounds the situation. Asian producers are finding that, even as costs and the value of their currencies rise, they cannot increase US dollar prices without losing American customers. Even if sales and trade continues, profit margins are being squeezed or even end up in the red.

Domestically too, inflation in Asia will be tricky. This is more than just an economic issue. It affects the poorest and strains political stability, especially as the most basic Asian staple, rice, is affected.

In response, some states will continue and even increase subsidies for essential goods.

Such measures in Indonesia, for example, will strain public coffers, but are unlikely to be changed, especially with a presidential election due.

For states that hold up an ideal of social equity, there is pressure to dampen inflation, even if this erodes growth rates. Thus, in Vietnam, where inflation early this year hit a record 15.7 per cent, growth is predicted to slow to 5-6 per cent.

Thailand faces a similar challenge. After two years of slow growth under the military-backed government, the new government seems set on an expansionary fiscal policy and reopening the economy to foreign investment. But the appreciation of the baht against the US dollar may affect competitiveness.

In Singapore’s open economy, the last quarters have turned sluggish. Some help can be expected from close ties with India and China, and if sectors like pharmaceuticals pick up.

But the city state’s performance seems to verify the thinking of analysts such as Morgan Stanley who argue that Japan and other advanced Asian economies, instead of de-coupling, are re-coupling with the US economy.

Across Asia, financial systems will be tested by the challenge of delivering growth while dealing with inflation, and aligning currency exchange and interest rates.

Surges and swift falls in short term capital flows can unsettle and even swamp a country’s financial system. Unless well managed, domestic demand in Asian markets may fall victim.

The complexity of financial systems will make this challenging. This is especially for countries that may have banks and regulators who are less used to financial management in a global economy and may have less tools of influence.

There are dangers that have not been seen in the region since the crisis of 1997.

The danger of a black swan event — unexpected in nature and of severe consequence — should not be ruled out. But another crisis is not inevitable.

One key to avoid a crisis is to openly and frankly recognise the problems ahead. Too much talk of a decoupling between Asia and the US, in this regard, runs the danger of hubris that Asians are sheltered from the storm.

Another key is to increase exchanges among financial ministries and central bank regulators. Recall that the lack of transparency and coordination was a major contributor to the turmoil in Asia in 1997.

Hopefully, a decade on, the lesson has been learnt. The Chiang Mai initiative has set up currency swap agreements that can help shield Asia from short term surges in currency values.

Yet, many reforms have yet to be undertaken to strengthen domestic systems and create a closer economic community in the region.

Indeed, without a regional mechanism wider than the Chiang Mai initiative, Asia may again need to turn to the International Monetary Fund (IMF) for wider surveillance, despite the acrimonies after 1997.

Underlying this issue is political leadership. US economic turmoil may be turning into a global storm but American leadership is still focused on their own economy, and not the world.

As such, Asians should prepare to fend for themselves, coordinating more closely as a region. To do so, Asians will need to rise above their domestic politics, and work towards regional resilience.

Fending off a potential crisis can bring the region closer together and provide, in this way, an opportunity as well as a danger.

The writer is chairman of the Singapore Institute of International Affairs and associate professor at the National University of Singapore. Riding it out involves open and frank cooperation

Source : Today Weekend – 12 Apr 2008

Greenspan: US home prices may stabilise this year

Former US Federal Reserve Chairman Alan Greenspan said the drop in American home prices will probably end “well before” early next year as the number of houses on the market diminishes, aiding an economic rebound.

“It will not be until early 2009 that we will be close to having eliminated most of this home inventory,” Mr Greenspan said yesterday. “But it is very likely that home prices will stabilise well before that.”

Mr Greenspan said the health of the United States housing market is tied to broader financial markets that rely on bundling mortgages to sell as securities.

His successor, Mr Ben Bernanke, and other Fed officials highlighted declining home prices as a major economic risk that may hurt household wealth and consumer spending.

“Once the markets start to stabilise, especially if the real economies don’t go into a severe recession we can expect a recovery to begin to take place,” Mr Greenspan, 82, said.

Mr Greenspan described the current credit crisis as the worst in at least 50 years, adding that the extent of damage stemming from the collapse of the sub-prime market would not be known for months.

“Have we reached a point where prices are stable? We cannot know that for a couple of months,” he said. “It looks as though we’re going to get a very large rate of liquidation, but not until the second half of this year.”

Source : Today – 9 Apr 2008

End of the free ride for US consumers

Asian inflation and a weaker greenback are driving up US consumer prices

The free ride for American consumers is ending. For two generations, Americans have imported cheap goods from low-wage countries – first Japan and Korea, then China and now places like Vietnam and India.

But inflation in the developing world, especially Asia, is threatening this. And it is not just limited to China – where rising energy and labour costs have made exports to the United States more expensive – but also in countries with lower production costs.

“Inflation is the major threat to Asian countries,” said Mr Jong Wha Lee, head of the Asian Development Bank’s office of regional economic integration.

It is also a threat to Western consumers because Asian exporters, even in very poor countries, are passing on their rising costs.

Developing countries have experienced bouts of inflation. Some are famous for them, like Brazil, which experienced triple-digit inflation in the late ’80s and early ’90s. But two factors make this time different and promise to push prices higher in the US, just as the possibility of recession looms.

First, developing countries now produce nearly half of American imports. Second, inflation in these countries comes when many of their currencies are rising against the US dollar.

This puts US consumers in a double bind, paying at least some of producers’ higher costs for making their goods and higher prices on top of that because the dollar buys less in those countries.

Asian businessmen say they do not have a choice. “This is a tough time to do business,” said Mr Le Hoai Vu, sales manager for Quang Vinh Ceramic in north Vietnam.

The company has increased by up to 10 per cent prices for hand-painted vases because labour costs are rising 30 per cent a year.

Overall prices in Vietnam rose 19.4 per cent between March 2007 and March 2008.

In China, Foshan Shunde Augustus Bathroom Equipment is about to raise prices by 10 per cent for bathroom fixtures exported to North America.

“Rising inflation is a way of life in China these days, you see it everywhere,” said its international business supervisor Faye Kong.

The cost of American imports from less-industrialised countries as a group is rising. A Bureau of Labour Statistics index of average prices for imports of manufactured goods from such countries fell gradually through early 2004. But it is now rising briskly and was up 5.6 per cent in February from the same month last year.

This contributes to rising inflation in the US. In the 12 months through February 2008, the prices of goods in the US increased 4 per cent, according to the government’s consumer price index.

But so far, Asian exporters have passed along only a portion of their costs. The US dollar’s weakness is a cause of inflation in developing countries, especially those that barely let their currencies rise against the greenback to hold on to export markets.

Ms Teresa Gau, a fishmonger in Taipei, is charging up to a third more for fish and crabs than she did a year ago, as fishing boat owners charge more to cover higher diesel costs.

In Vietnam, Quang Vinh Ceramic’s fastest-rising expense is for blue ink for painting pottery. Imported from Belgium, the ink is priced in euros and has soared 80 per cent over the last year in Vietnamese dong.

Keeping the dong inexpensive in US- dollar terms has not only helped Vietnam increase exports by 24.1 per cent last year, but also lured a flood of investment. Bank loans rose more than 50 per cent last year, feeding a real estate frenzy that has not yet abated.

Brick kiln owners like Mr Le Thi Hop in Vietnam have responded by tripling prices in the last year. “Most people who buy my bricks say the price is crazy, but I say, ‘This is the market’.”- New York Times 

Keith Bradsher

Source : Today – 9 Apr 2008

World Bank forecasts trying times for Asian economies in 2008

Developing economies in East Asia, including Indonesia, Malaysia and Thailand, will grow at their slowest pace in six years in 2008, according to the latest forecast from the World Bank.

It said growth is being dragged down by the US sub-prime mortgage crisis and a drop in exports to the US.

The World Bank also warned that governments in the region need to be watchful over rising inflation.

Trade with the US is key for most economies in East Asia, which is defined by the World Bank to include Southeast Asia and most other countries in the region, with the exception of Japan.

World Bank said these economies will be hurt by falling exports to the US and reduced spending in the wake of the sub-prime mortgage crisis.

Following the 10.2 percent expansion last year, the World Bank now expects developing East Asian economies to grow by 8.6 percent in 2008 – the slowest pace since 2002.

Growth in Indonesia is seen moderating to 6 percent and in Malaysia to 5.5 percent. But the World Bank warned that soaring food and fuel prices is now East Asia’s biggest challenge. Economists said rising costs will hurt developing economies the most.

Joseph Tan, Senior Strategist, Fortis, said: “I think if you look at the problem with food inflation, it is certainly a lot less severe in Singapore, compared to some of the other countries. Obviously in Singapore, we have a fairly even income distribution pattern as compared to some of the other poorer countries in Asia.

“(With regards to) what the World Bank said about the regressive nature of subsidies, we don’t have that problem quite as badly here in Singapore as compared to some of the other countries. The poor will certainly feel it a lot more when food prices start to go up because it is a much bigger part of their consumption basket, and I think that is going to affect the countries that are a lot poorer.”

In its report, the World Bank also noted that Asia is more diversified, with economies like China becoming global growth poles, cushioning the impact from a US slowdown.

The World Bank expects the US economy to grow between 0.5 and 1.4 percent this year, while China is expected to expand at below 10 percent, down from 11.4 percent in 2007.

Source : Channel NewsAsia – 1 Apr 2008

Paul Sarbanes gives his views on the US sub-prime crisis

US regulators should be more aggressive in dealing with the sub-prime crisis, according to Senator Paul Sarbanes, who is in Singapore for a business talk.

Mr Sarbanes, who co-authored the Sarbanes-Oxley Act – hailed as the most far-reaching reforms of American business practices – said some mortgage lending practices should have never been allowed.

US investment bank Bear Stearns is the latest high-profile casualty of the US sub-prime crisis.

The global credit crunch has also caused market players to lose confidence, according to Mr Sarbanes. He said it stems from the failure to use business judgement and prudence when it comes to loan extensions.

He added that the US Congress is now considering legislative measures to address the sub-prime issue. He said some areas include how credit rating agencies assess the credit worthiness of securities issuers.

The lending practices of banks should also be more tightly regulated, requiring them to ascertain the income of borrowers to ensure they could service the loan.

Mr Sarbanes said, “I am very sceptical about the teaser rates, they are inducing people to come in at a very low rate and then jumping that rate on people.

“I think the regulators need to examine more carefully the amount of leveraging that is taking place by some of these financial entities…”

Mr Sarbanes also shared how the Sarbanes-Oxley Act can help protect investors. The Act was passed into US law in 2002 in the wake of the Enron and WorldCom accounting scandals.

However, the law was criticised for significantly raising compliance costs for US-listed companies.

Mr Sarbanes said, “The SEC (Securities and Exchange Commission) and the oversight board are giving a revised guidance on auditing standards, particularly as it affects smaller public companies.

“I think that cost should be regarded in some respect… (as) a capital cost – you make the investment, you put it in place and then you use it year after year. And studies have shown that there’s been a declining cost in subsequent years.”

Mr Sarbanes also said the provisions in the Act have been recognised as best practices and implemented in some European and Asian countries.

Source : Channel NewsAsia – 19 Mar 2008