Hello ASEAN+3, good-bye Europe

Fithra Faisal Hastiadi, Tokyo | Tue, 12/13/2011 9:28 PM

A Distinguished Speakers Seminar (DSS) held by the Asian Development Bank Institute (ADBI) in Tokyo in November came to the powerful conclusion that the European mess was getting messier.

As stated by Wyplosz (2011), since late 2009 the European debt crisis has not shown any sign of recovery.

For several reasons, apparently, the policy responses have been wrong. Wyplosz argues that the mother of all mistakes may lie in the policy options to provide ¤110 billion to save Greece through its tough austerity program.

There were two major flaws in this policy. First, it violates the no-bailout clause in the European Central Bank (ECB) system; and second, austerity in the midst of recession cannot act as a remedy.

These factors eventually led to a liquidity crisis that has overwhelmed the European banking system (Collignon, 2011).

Colloquially speaking, the liquidity shock caused a sudden deterioration in specific classes of assets that has spilled over into banks, which are in dire need of liquidity.

The liquidity shortage then put banks in distress as the deteriorating asset prices affected their balance sheets and thus reduced bank capital. These difficulties then spilled over into the real economy in the form of a recession. This recession will most likely see Europe sinking into irrelevance.

Meanwhile, ASEAN is fueled by a youthful spirit that could bring new hope during the current global imbalances. ASEAN members are becoming increasingly connected. The ASEAN region has experienced sustainable growth of intra-regional trade share. In 1990, the intra-regional trade share was only 17 percent but in 2010 the figure swelled to 25.2 percent.

If we expand the coverage to include ASEAN’s plus three countries (China, Japan and Korea), the intra-regional trade figure is becoming more robust.

In 1990, it already reached 47.2 percent and developed over a decade as it leapt to 58.4 percent.

The FTAs and EPAs that have been emerging since mid-2000 have had made a significant contribution to warming of relations among ASEAN+3 countries.

An important factor explaining the success of the ASEAN+3 economies has been their participation in a dynamic, regionally integrated economic structure beyond just ASEAN+3. Strong and dynamic production networks have progressively linked East Asian and ASEAN+3 countries.

The fragmentation of manufacturing production and “fragmented trade” linked to rising intra-industry trade has enabled ASEAN+3 countries to maintain their competitiveness and successfully pursue an export-led development strategy. ASEAN+3 countries have also developed robust, flexible and vibrant small and medium size enterprise (SME) sectors.

While this region has experienced two periods of economic crisis (late 1997 and late 2008), it did well in bouncing back afterward.

During the first crisis, the total ASEAN+3 intra-regional exports fell from US$179,732.1 million in 1997 to $146,166.3 million in 1998. Imports also declined from $186,630.5 million in 1997 to $141,979.3 million in 1998. This number contributed to an almost 3 percent decline of ASEAN+3’s intra-regional trade from 49.9 percent in 1997 to 47.2 percent in 1998. But in 1999 this bounced back well to 49 percent, followed by 51.4 percent in 2000. This figure gave a big boost to East Asian countries at that time to recover from the crisis.

The second crisis in late 2008 also caused regional trade imbalances in ASEAN+3 countries as the total exports and imports fell from $547,427.5 million and $518,966.8 million in 2008 to $450,665.6 million and $411,663.3 million in 2009.

But, again, the regional economy bounced back in 2010 to $630,089.6 million for exports and $609,465.3 million for imports. This bounce was also seen in the intra-regional trade share figure that experienced a hike from 55.8 percent in 2008 to 58.4 percent in 2010.

Comparing these two crisis periods, we can draw the general conclusion that East Asia has learned well in coping with crises. This is reflected by the speed of recovery in 2010 which was better than that of 1999. Also, the closer integration among the countries has created a vaccine-like treatment in the region.

Looking into the future, based on ADB projections, in 2030, per capita GDP in 2007 constant US dollars, will reach 9,012 for ASEAN, 12,361 for China, 40,415 for Japan and 41,674 for Korea.

These figures surely indicate a very optimistic path for the region in taking a powerful role globally, but in order to play that role the region, especially the ASEAN countries, must pay more attention to several crucial factors.

The first of these is infrastructure. The simulation result confirms the importance of infrastructure to create greater room for the region to evolve. The second is industrialization. A one point rise in the industrial index will most likely increase the tendency of economic growth by 0.04 percent. The third is population.

Population is regarded as the most important variable that serves as a foundation for strong growth. A 1 percent increase in the total population will increase the likelihood of regional growth by 0.86 percent.

The sheer size of the East Asian population creates not only the potential demand for the goods traded in the region but also the supply of labor and low absolute level of wages.

This trend is very important since homogeneity in industrialization among countries in the region will assist the progress of economic integration, and thus economic growth.

To wrap up, ASEAN+3 countries should ensure countries within this region that are lagging behind to eventually catch up with the rest.

Sound policy measures that incorporate the expansion of production networks should be set as a common goal for the future of this region. Whether ASEAN+3 moves forward or ends the story like the Europeans is a matter of political will.

The writer is research associate at the Asian Development Bank Institute (ADBI), Tokyo. The opinions expressed are his own.

Debt crisis and the future of Europe: Is Indonesia safe?

Winarno Zain, Jakarta | Sat, 11/05/2011 1:07 PM

The Greek drama surrounding its debt crisis is still unfolding, and it is clear by the day that the crisis is more severe than expected.

The resolution of the crisis will take several years and will be very costly and the magnitude of that cost will be beyond the financial ability of the eurozone governments.

Efforts to make decisions to resolve the crisis are facing the risk of being obstructed by policy paralysis resulting from political uncertainties that grip several euro countries.

All these were evident after eurozone leaders finished their summit on Oct. 27 in Brussels. They claimed to have crafted a “comprehensive policy” to contain the European debt crisis. But markets think the policy lacks meaningful details and leaves many questions. It reflects the daunting task of the eurozone leaders.

The problem is getting more serious as the amount of Greek debt that needs to be written off turns out to be larger than previously forecasted. In July, it was estimated that a 21 percent write down of Greek sovereign bonds would be sufficient to give some relief for the Greek government. But the Greek economy deteriorated rapidly, as austerity measures have caused a deeper recession than expected.

According to the IMF, the Greek economy will contract 5.5 percent this year and its debt will continue to rise reaching 186 percent of GDP in 2013. Its bond yield has reached a staggering 24.5 percent, a crushing debt load for the Greek government. That is the reason a 50 percent write off of Greek debt was envisaged by the European leaders during the summit. It should be implemented on a voluntary basis by investors holding Greek government bonds. If it is agreed, then it would mean a de facto default by the Greek government.

The risk is that it could lead to chaos in the credit-default swap (CDS) market that makes eurozone debt harder to insure. It could also lead to other countries having similar problems to Greece demanding the same amount of debt “hair cut”. All this would make banks more skittish in extending loans and this could stall economic recovery in Europe.

The debt crisis has hit European banks severely, as their holdings in Greek bonds have lost their value and significantly weakened their capital and their ability to lend. One Belgian bank had to be bailed out recently, while other banks with their severely weakened balance sheets would not be able to withstand bank runs and another debt default in Italy or Spain.

The agreement reached at the summit means that those banks would have to write down their Greek debt holding by 50 percent, which means a capital injection of ¤106 billion (US$146 billion) would be required by the banks for them to stay afloat. Banks are required to raise their capital ratio to 9 percent next year.

Unlike the US government that still had enough money to bail out some big banks in Wall Street during the 2008 crisis, the eurozone governments have no money to bail out banks. So the banks have to seek money from private investors, or else they have to cut dividends and bonuses.

Another tough issue for the eurozone countries is not only containing the debt crisis in Greece but also how to prevent the contagion of this debt crisis into other countries. Italy is the next worry. Its bond yield jumped from 5.7 percent to 6.1 percent last week, a level considered by the market as in the danger zone, and could exacerbate Italy’s debt burden. Italy is plagued with political uncertainties. Prime Minister Silvio Berlusconi does not appear to be a credible figure to inspire confidence in the market. Because Italy’s sovereign bond market is one of the biggest in Europe, its default would be catastrophic.

To prevent Italy defaulting means that investors must be persuaded to continue buying Italy’s sovereign bonds. To dispel worries and to inspire confidence among investors an entity called the European Financial System Facilities (EFSF) has been created to bail out governments and banks hit by the crisis. The problem is that EFSF funds of some ¤440 billion ($616 billion) are not sufficient.

A sort of financial engineering was attempted through guarantee mechanisms, whereby the fund is also used for insurance against loss in new bond issuances if there is a write down. In theory, this could “enhance” EFSF funds to ¤1 trillion ($1.4 trillion). To increase its potential funding, a special-purpose vehicle (SPV) would be created to attract funds from emerging economies, such as China and Brazil.

But it is doubtful whether China will lend a helping hand to Europe when it is facing hostility from EU governments on its exports to and investments in Europe. Why would China put their money in the EFSF when Germany and France themselves are reluctant to do the same? Besides, how could bond buyers have confidence in the guarantee by euro governments if they themselves are vulnerable to crises that hit their neighbors?

The debt crisis has strained the sanctity of the eurozone treaty and has exposed some of its flaws. Its members did not surrender their fiscal sovereignty to a supranational body, and the euro governments are unable to impose sanctions on member countries that breach the maximum limit of debt and deficits relative to GDP.

The single currency policy denies member countries any flexible policies in times of crisis. Being tied to monetary union, countries like Greece and Ireland can only improve their competitiveness through brutal and painful cost cutting. Monetary policy is exercised by the European Central Bank imposing a single interest rate within the eurozone. But there is the catch; a single interest rate by the European Central Bank impacted its member countries differently.

A low interest rate benefited such countries as Germany and France, but triggered excessive spending and inflation in Greece. There are rumors that because of the unresolved crisis Greece is thinking of leaving the European Union (EU). The eurozone will not break up of course, because the stakes are too high but many will start questioning its sustainability and viability.

A debt debacle that is more severe than expected would result in lower growth for the world economy than already forecast. This has started to impact the Indonesian economy. Indonesian exports dropped significantly in September, mainly due to a significant drop in exports to the US and EU. Between August and September, exports to the EU and the US fell by 28 percent and 15 percent, respectively.

Even our exports to ASEAN, our main export destination, also dropped by 2 percent, due to weak growth in Singapore and the floods in Thailand. As our exports continue to slow down in the coming months, it will be difficult for Indonesia to achieve its 6.4-6.5 percent growth target next year.

To compensate for the slower growth in exports the government should concentrate on policies to spur domestic consumption and investment.

The writer is an economist.

Oil hovers above $91 ahead of Europe debt plan

Associated Press, Singapore | Tue, 10/25/2011 10:54 AM

Oil prices hovered above $91 a barrel Tuesday in Asia as investors await details of Europe's plan to contain its debt crisis.

Benchmark crude for December delivery was up 17 cents at $91.44 a barrel at midmorning Singapore time in electronic trading on the New York Mercantile Exchange. he contract rose $3.87, or 4.4 percent, to settle at $91.27 in New York on Monday.

Brent crude was down 20 cents at $111.25 a barrel on the ICE Futures Exchange in London.

Oil has jumped 21 percent in three weeks amid growing investor optimism that European leaders will devise a plan to limit the damage from a possible default of Greek sovereign debt. Details of the plan are expected to be announced Wednesday.

"Although the euro zone debt issue remains quite murky, the market appears to be pricing in a viable resolution to this crisis," energy consultant Ritterbusch and Associates said in a report. "Wednesday's EU summit could still bring some bearish news if a comprehensive debt plan is not forthcoming."

Crude has also rebounded this month because of signs global economic growth may not slow as much as some investors had previously expected. China, which has led global commodity demand growth in recent years, sad Monday manufacturing likely improved in October from September.

Last week, China said its economy grew 9.1 percent in the third quarter.

"We continue to grow more positive on the outlook for China's commodity import demand over the remainder of the year," Barclays Capital said in a report. "Improving evidence from the macroeconomic front for October are in line with our soft landing assumptions."

In other Nymex trading, heating oil fell 1.1 cents to $3.04 per gallon and gasoline futures slid 1.0 cent at $2.66 per gallon. Natural gas was steady at $3.61 per 1,000 cubic feet.

Okto could play in Europe: ESPN

The Jakarta Post, Jakarta | Sun, 01/02/2011 9:40 PM | Headlines

Indonesian Ryan Giggs: Indonesia's Oktovianus Maniani (right) battles for the ball against Philippine's goalkeeper Neil Etheridge center, and Emelio Caligdong, rear left, during the second leg of their AFF Suzuki Cup soccer semifinal matches at Gelora Bung Karno stadium in Jakarta, Indonesia, Sunday, Dec. 19, 2010. (AP/Dita Alangkara)

ESPN soccernet has selected Indonesian winger Oktovianus Maniani as an Asian soccer player that could play in Europe thanks to his entertaining dribbling ability, which looks similar to Manchester United star Ryan Giggs.

Okto burst onto the regional scene at the recent AFF Suzuki Cup, in which Indonesia made the final before being defeated by Malaysia, ESPN columnist John Duerden said Sunday.

"Oktavianus is certainly fun to watch as he hares down the left flank, and, at the tender age of 20, is only going to improve. If the “Indonesian Ryan Giggs” is to match up to the original, he needs to follow in his footsteps and find a consistent end product. Still very raw, but that just makes him all the more exciting," Duerden wrote on the ESPN website.

Other Asian talents on Duerden’s list include Deng Zhuoxiang of China and Koo Ja Cheol of South Korea.