Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Strategy Overview: Asia Equity
(Malaysia and Thailand, mainly) deficits reached 8%-10% of
GDP.
That changed in mid-97. When the baht broke from its basket,
capital flight ensued in earnest and deficits turned to surplus
overnight. Foreigners no longer wanted to lend and locals no
longer wanted to borrow. Deficits jumped to surpluses
equivalent to 8% of GDP in the Asia-8 (10% in the crisis-4)
and averaged about 5% for the next decade.
Although China garnered the headlines, it’s important to note
that Asia’s current account surpluses were just a China affair –
as a percentage of GDP, Asia’s surpluses were about the same
whether China was included in the calculations or not.
So what about the conventional wisdom that Asia’s growth
has relied on running surpluses? And that absent those
surpluses, growth will fall?
Asia’s experience says the conventional wisdom has it
backwards. Asia ran big deficits in P1 and its growth was
above-average. It ran big surpluses in P2 and growth was much
lower. The truth is, you don’t need surpluses to generate fast
growth. In fact, they hold you down. Why? All that surplus
output could be driving local investment and faster growth at
home rather than abroad. If you want fast growth, borrow
from foreigners, don’t lend to them.
Capital inflow: Asia might have run big deficits in the precrisis
period but inflows more than financed them. Foreign
reserves rose in spite of the deficits and currencies faced
substantial appreciation pressure.
In the post-crisis period, capital flowed out of the country, first
as investors fled and later as locals paid down as much external
debt as they could (chart right top). Current account inflows
turned to capital account outflows almost on the spot.
More recently, current account surpluses more than offset
capital outflows and currencies have once again faced upward
pressure. Indeed, between 2003 and 2007, reserve increases as
a percentage of GDP were even greater than during the go-go
pre-crisis years (chart right center).
finance its current account deficits) and the high domestic
leverage ratios that came with it, then damn the torpedoes,
Asia didn’t need the IMF or anyone else telling it that things
had to change. Asia itself went about cutting external debt –
and the baggage that went with it – to the greatest extent
possible.
Over the next ten years, Asia’s debtor countries cut their
external debt from a peak of 40% of GDP to nearly zero by
2007 (chart bottom). Notably, Malaysia and Thailand became
net creditor countries during this decade, thanks to high
current account surpluses that funded the reduction in external
debt.
Asia -8 – capital outflow post - 1997
capital account balance as % of GDP
4
2
0
-2
-4
-6
-8
Risk aversion owing to US financial crisis
90 92 94 96 98 00 02 04 06 08
Asia 9 - buildup of foreign reserves as % of GDP
USD terms, official + fwd commitments, simple avg
12
10
8
6
4
2
0
-2
-4
90 92 94 96 98 00 02 04 06 08
Asia – net foreign debt as % of GDP
ext debt less reserves as % of GDP
50
40
Below, we explain why reserve accumulation and upward
pressure on currencies will again be key features in Asia over
the next 10 years.
External debt: The financial crisis drove home to Asia
Polonius’s adage to neither a borrower nor a lender be. If this
kind of crisis was the result of cheap foreign funds (foreigners
were, after all, sending far more funds to Asia it needed to
30
20
10
0
-10
-20
-30
net debtor
net creditor
Asia* ex-CH
Asia*:
CH, KR, MY, ID,
TH, PH, IN
90 92 94 96 98 00 02 04 06 08
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