Asia’s vanishing savings will bring new risks
By Andy Mukherjee
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Asia’s much-impugned trade surplus is shrinking. After peaking at 7 percent of GDP in 2007, the combined current account surplus in 10 Asian economies, excluding Japan, is expected to narrow to just 2 percent this year. That’s a welcome sign that the global economy is finally reducing its dependence on shopped-out U.S. consumers. But the new equilibrium won’t be entirely benign.
For about a decade, Asia’s large current account surplus with the rest of the world has been a lightning rod for controversy. In 2005, Federal Reserve Chairman Ben Bernanke called Asian surpluses a manifestation of a global “savings glut,” which was responsible for a high and rising current-account deficit in the United States.
Two years ago, U.S. Treasury Secretary Timothy Geithner took aim at China when he suggested that non-commodity-producing nations limit their trade surplus to a maximum 4 percent of GDP. The financial crisis also highlighted how excess savings in Asia had been recycled into Western currencies, depressing interest rates and fuelling a debt binge.
Now the problem is receding. China’s current account surplus was just 2.8 percent of GDP last year, a far cry from the 10 percent it reached in 2007, and may narrow further. If demand in the United States and the euro zone doesn’t revive more meaningfully, Asia’s appetite for imports will catch up – and possibly overtake – demand from the rest of the world for Chinese-assembled flat screen TVs, Korean-built cargo vessels and Indian software services. That might eventually produce a current account deficit, which will need to be plugged by an inflow of foreign capital.
Dwindling savings will also play a role. Some parts of Asia – particularly China, Hong Kong, Singapore, Taiwan and Korea – may struggle to retain past high savings rates because they are ageing rapidly, Morgan Stanley’s Asia economist Chetan Ahya notes.
For many Southeast Asian countries, shrinking trade surpluses are an unwelcome reminder of the 1990s, when an unsustainable boom turned into a debilitating currency crisis. Trade deficits put pressure on currencies to depreciate. Monetary authorities can resist the downward pressure on exchange rates by selling foreign-currency assets. But speculators know those reserves are finite: Indonesia, which is already grappling with a current account deficit this year, spent almost $10 billion, or 9 percent of its reserves, in May and June defending the rupiah.
Letting exchange rates slide should eventually bring current accounts back into balance. But in the short run the problem could get worse. Imports, especially of petroleum products, will immediately become more expensive in local-currency terms, while the benefits to exporters come with a lag. In India and Indonesia, where governments subsidise the cost of imported fuel to consumers, budget deficits may worsen.
Asian countries can probably sustain larger deficits than 15 years ago. First, they have less short-term foreign debt: the Philippines had 2 percent of GDP in such borrowings at the end of last year, less than half the level of 1998. Also, years of surpluses have enabled most countries to build up large reserves, allowing them to finance imports even if exports suddenly collapse.
However, global capital flows are volatile and Asia, too, has new vulnerabilities in the form of its overstretched central banks. Monetary authorities in the region allowed their balance sheets to expand six-fold in the decade to 2011 as they soaked up foreign currency. In order to limit domestic inflation, they simultaneously sucked money out of the banking system by raising reserve requirements and selling central bank securities.
This depressed the supply of credit: every 1 percent increase in foreign-exchange reserves has reduced bank credit growth by 1.3 percent in Indonesia, Korea, Malaysia, Thailand and the Philippines, according to a study by David Cook of the Hong Kong University of Science and Technology and James Yetman of the Bank for International Settlements.
Now, as the $5 trillion reserves stockpile stops growing, bank loans could grow and credit standards could be loosened. One benefit of Asia’s current account surpluses is that the region’s banks are healthier than in the rest of the world. But unless financial supervisors are careful, the industry could get carried away.
Any distress in Asia will have a much bigger impact on the world economy now than in 1997, when it was not as big a part of global trade and capital flows. The West should welcome Asia’s shrinking trade surpluses. But it would be a mistake to let the adjustment go too far.