Asia cushioned despite US economy slowdown

Donald Hanna, Salomon Smith Barney''s chief economist, doubts a repeat of the Asian crisis despite expectations of higher US interest rates.

Asian economies will continue to recover in 2000 even as the US economy slows, reflecting a projected increase in Japan's gross domestic product, which will cushion the region from likely increases in US interest rates, according to Salomon Smith Barney economist Donald Hanna.

Japan is expected to benefit from increased inter-Asian trade as Japanese consumers spend rising incomes on imports from surrounding countries, Hanna told investors at FinanceAsia's fourth Asian Debt Conference in Hong Kong.

"Exchange rate policy and current account surpluses should insulate Asia from world interest rate hikes," Hanna says. "But such cushioning can only favour countries that are linked to Japan or have strong reform measures and low borrowing needs such as Korea, Malaysia, China and Taiwan."

Growth rates rising

Hanna expects growth rates across Asia to rise as the financial markets adjust to higher than expected US interest rates. Salomon recently revised its forecast for US overnight interest rates to 7.5% by the end of 2000 from a May projection of 6.75%, reflecting robust demand and rising inflation risk.

Hanna believes US gross domestic product will grow by 3.7% in 2001, down from an earlier projection of 3.9%. The slower growth rate won't be enough, however, to prevent further rate hikes, he says. Hanna foresees 7.2% growth across the Asia-Pacific region in 2000, up from an April forecast of 6.8%. He expects growth in 2001 to slow to 6.6% from an earlier forecast of 6.5%.

In Asia, growth in the first quarter exceeded expectations in some countries because of increased trade, including Singapore, which grew 9.1%; Hong Kong, which grew 14%; and Korea, which grew 13%. As a result, Hanna has revised his forecast upwards for other countries such as Indonesia. At the same time, he revised downwards his forecast for the Philippines because of political unrest, higher interest rates and weaker imports.

Better protection

Asia is also better protected than previously from a repeat of the crisis of 1997-98, when bankers called in loans and investors abandoned the region amid sinking currencies, because more foreign debt has been paid down and currency reserves have increased.

"The potential for a panic flight is reduced because liquidity is up and short-term debt is reduced," he says. "The threat of interest rate differentials triggering a run of capital is not true."

As investment opportunities increase in Asia and companies look to finance those investments through credit they will be increasingly likely to restructure old debt, Hanna says. Increased investment will offset the effects of old non-performing bank assets.