Interactive Graphic: How Euro Crisis Affects Asian Economies
Counting Contagion
Asia won't be spared the fallout of an intensified euro crisis. But not all economies are built the same. Some rely on Europe for export demand and others for bank lending and investment. Some have fragile economies and financial systems ill prepared for a global storm. Others have deep government pockets that provide a buffer to economic shocks. Here is an economy-by-economy assessment of exposure to euro pain.
Australia
Australia is well positioned to withstand a euro meltdown. It has responded to slower growth with interest rate cuts and has room to cut more. Government debt is low and inflation tame, so fiscal stimulus would be possible. It can also rely on China’s stimulus to pass through to its booming mining sector, though falling commodity prices are always a risk. A drop in lofty housing prices could exacerbate a slowdown.
China
China is in decent shape to respond to a euro crisis. It is less trade dependant than in 2008 thanks to increased domestic demand and investment. The U.S. displaced Europe as China’s largest export market this year. Government debt is low and foreign reserves are massive. China has started to boost its economy with an interest rate cut and other moves, though some question the viability of a big 2008 style stimulus package given the overhang of questionable loans in the banking system. With a closed capital account, there’s minimal exposure to European lending.
Hong Kong
International trade and finance hub Hong Kong will be on the front lines of a European meltdown. But it has the weapons to fight back, with massive rainy-day funds equal to more than three years' worth of government spending. Its banking system has weathered crisis after crisis with little harm thanks to a deep deposit base and strong government oversight. The frothy property market is a wild card. A drop in prices would sap confidence among Hong Kong consumers.
India
India is weaker than most countries heading into a euro mess. Its worst growth trajectory in a decade combined with persistent inflation and falling reserves have prevented the central bank from acting aggressively. Swelling government deficits make a big stimulus program difficult to pull off. On the plus side, weaker commodity prices would help alleviate its current-account deficit by lowering imports and reduce government debt problems by lowering the bill for fuel subsidies. Another plus: exports play a small role in the economy.
Indonesia
Indonesia's outlook is mixed when it comes to euro trauma. It has relatively limited ties to Europe and its banks. Its economy is driven by domestic demand and consumers who are largely insulated from global markets. Government coffers are flush. But high foreign ownership of government bonds and modest currency reserves mean its financial system is vulnerable to bouts of global financial panic, as seen with the recent slide the rupiah. Indonesia's central bank has been proactive to spur growth, cutting rates three times since September, citing the uncertainty from Europe.
Japan
A global panic would be another blow to beleaguered Japan. The yen would likely rise higher, making a slowdown in demand from European customers even worse for Japan's exporters, as a stronger yen makes Japanese goods more expensive. With interest rates already near zero and government debt the highest in the world, Japan has limited room to react to a crisis with a big stimulus or monetary easing.
Malaysia
Malaysia’s reliance on trade and European bank funding make it more exposed than most countries. Foreign ownership of government bonds has risen to 39% of the total, a record high. Some fear a spike in borrowing costs if investors leave in a global panic. Malaysia does have large currency reserves to fight such a capital flight. And while government debt is higher than some, it has the firepower to continue sizeable government spending projects.
Philippines
The Philippines is better positioned than in the past to withstand a downturn, with a stronger government balance sheet and a robust domestic economy. Foreign reserves are high enough to fight capital flight. A weakness is exports, which are heavily concentrated in the electronics sector with a heavy reliance on Europe as an end customer. Critical remittances from overseas workers showed resilience in the last crisis. As an energy importer, a fall in commodity prices would aid growth.
Singapore
Singapore will bear the brunt of a euro meltdown as this trade- and finance-dependent economy has more exposure to European banks and European trade than most nations. As a regional banking hub, financial services alone constitutes 12% of its GDP. The recent sharp increase in tourism could reverse, causing further pain. But Singapore is also used to wild swings in demand and has deep pockets to keep workers employed and businesses alive.
South Korea
As a prolific global exporter, South Korea is exposed more than most countries to a meltdown in European demand. Half of its GDP in 2011 was from trade. But Korea has shored up its exposure to foreign financial markets, a weakness that caused its currency to plunge in 2008. Korea has boosted its reserves and banks have lowered dependance on short-term foreign loans. Ties to China could help if Beijing pushes a big stimulus, boosting demand for Korean-made construction machinery, engines and steel.
Taiwan
A euro collapse and global recession would hit Taiwan’s technology-export-oriented economy hard. Close to 7% of its GDP is made up from European exports and that doesn’t count the chips and processors Taiwan sends to China and elsewhere that get re-exported to Europe. Taiwan’s foreign-currency reserves are a fortress--like 83% of GDP--providing protection from a global capital shortage.
Thailand
Thailand will feel a chill with nearly 7% of its GDP derived directly from European demand and a high ratio of exports to GDP. Yet Thailand has made a conscious push to lessen that dependency on trade by boosting domestic demand. The government hiked minimum wages as much as 40% to put money in consumers' pockets. Banks are strong and ample currency reserves will alleviate financial market gyrations.
Vietnam
Vietnam is in a weak position to withstand a euro meltdown, relying heavily on Europe for exports and for foreign direct investment. Growth slowed substantially in the past year, leaving the banking system weak and unable to deliver a big lending boost like it did in 2009. While foreign reserves have risen lately, they are still relatively low. Vietnam’s persistent shortage of capital has led to several currency devaluations, a situation that could repeat. Inflation has eased significantly over the past year, which at least gives policy makers some room to cut interest rates.
