Lehman bullish on Asia

Investment bank sees new economic paradigm for the region, coupled by strong growth forecasts.
Lehman Brothers anticipates strong regional growth in 2006 based on flourishing economic fundamentals. The investment bank also believes that the US Federal Reserve will implement two more interest rate rises and believes the worldÆs largest economy will enjoy a moderately robust first half.

The US investment bank projects that non-Japan Asian economies will experience aggregate 7% growth during 2006, with a similar level anticipated in 2007. On an individual country basis, Lehman forecasts that China will again be the regional growth engine, topping out at 9% GDP growth. South Korea is also expected to have a banner year, with growth estimates of 6%.

According to Lehman, Asia is currently primed for a new economic paradigm, wherein the region will start to move away from its export-led development growth model. Rob Subbaraman, the bankÆs senior economist Asia ex-Japan suggests that the new economic environment will result from a resurgence in domestic demand, stronger Asian currencies and shrinking current account surpluses.

ôWeÆre very optimistic on emerging Asian economies and the region is clearly in its best shape since the economic crisis, especially when looking at the fundamentals,ö he says. ôThe region has been remarkably resilient in the face of SARS, high oil prices and the tsunami, as well as other factors including rock solid balance of payments, improving debt to equity ratios and significant progress in structural reforms.ö

In terms of fundamentals, Lehman is also quick to point out that sovereign foreign currency long-term credit ratings have drastically improved since the crisis and he expects positive news for both the Philippines and Indonesia over the course of the year.

On the hot topic of currency revaluation, Lehman expects the Chinese yuan to appreciate mildly over 2006 and land at RMB7.5 by year end. The firm also stresses that the current rigid FX rate makes interest rate hikes difficult to foresee. Although not committing to a timeline for further appreciation, Lehman also predicts that ChinaÆs balance of payments will remain extremely high and its foreign exchange reserves will overtake Japan, the worldÆs largest, over the year, and cross the $1 trillion threshold by December.

In Korea, Lehman sees a strong export market and continuing momentum as a result of a consumption led recovery. It also concludes that Hong KongÆs economy will again be tied to ChinaÆs performance.