ASEAN Bubble? The Investment Cycle & The Consumption Cycle

20120430-headCentral banks in countries including Japan, the United States and Britain have been pumping out cheap money which has driven investors to seek higher returns in emerging economies around the world, and many ask if “Asset Bubble” will emerge.

“We shall remain vigilant on the unintended negative side effects stemming from extended periods of global monetary easing,” the ASEAN group of Southeast Asian nations, along with Japan, China and South Korea, said in a statement after a meeting in India, on May 3, 2013, adding they were prepared to adjust economic policy and if necessary adopt prudent policies, which aim to build resilience in financial systems.

The current periods of rapid credit growth have sparked memories of the 1997 Asian currency crisis that led to economic collapse in much of the region mean policymakers are sensitive to the risks of volatile fund flows. “The Asean ‘tiger cubs’ are heating up rapidly and are set to bubble over in due course despite varying degrees of structural progress,” Credit Suisse said in a report on Asia published this week.

  • But not all are talking bubble; take Thailand for example:

Carl Berrisford is an analyst for UBS CIO Wealth Management Research says: “ Thai equities are a juggernaut. The MSCI Thai Index has been on an inexorable multi-year rise. Four of the top five performing equities funds sold in Hong Kong are invested in Thai stocks, according to the information company Lipper. The strong rally in Thai equity markets over the past year has left many battle-scarred investment veterans scratching their heads. There is a sense of déjà vu about the strong capital inflows, rising financial leverage, and red-hot property markets that Thailand is witnessing. In 1997, it was precisely these trends that precipitated the massive devaluation of the baht, which then triggered the Asian financial crisis and left Thailand virtually bankrupt. So the question investors might ask is, is Thailand’s rally sustainable, or it is just undergoing another bubble that will eventually burst? I would argue the former. To get to that view, you need to appreciate the strength of investment trends under way in Thailand, and the powerfully positive effect of the recent stabilization of the country’s political situation.Thailand is at the start of a new investment cycle that is expected to last at least until 2020. The most important driver is a government infrastructure spending programme to the tune of 1.9 trillion baht (HK$498 billion), with the peak of the spending outlays occurring in 2016-17.”

  • Financial Times Reports:

When a team of analysts at Credit Suisse visited Indonesia a few weeks ago to take the temperature of Southeast Asia’s biggest economy, they were startled by what they were told by one of the country’s biggest property developers. Ciputra Development, which builds luxury condominiums, said that while prices in central Jakarta, the capital, had been growing at a rapid clip – about 30-40 per cent a year – a new trend had emerged. Demand had started to spill over to greater Jakarta and even to so-called second-tier cities, where Ciputra had seen property prices jump 50 per cent last year.

“We felt this was evidence of a property bubble,” says Robert Prior-Wandesforde, director of research in the bank’s Singapore office.
Financial Times says, quote: “For some, anecdotal evidence from the region tells a worrying story. While the economies of the 10-nation Association of Southeast Asian Nations grew an average of 5.6 per cent last year, making the region a standout performer amid global economic wobbles, there are dark clouds gathering. The price of key assets, such as property, is rising fast as monetary easing in developed countries continues to send “hot” money from advanced economies in the west, chasing anything that will produce yield.”
That is not to say that the region’s fundamental strengths are at immediate risk. This week, the Asian Development Bank, in its annual economic outlook, pointed out that Southeast Asia was the only “subregion” in Asia to see growth accelerate year-on-year in 2012, led by a recovery in Thailand and strong public spending in the Philippines.

  • The Wall Street Journal reports on Asean Leaders Address Capital Flows Into Asia:

By Natasha Brereton-Fukui

A key topic at this week’s gathering of the Association of Southeast Asian Nations (Asean) in Brunei was the flow of capital into emerging Asia, spurred by global investors’ hunt for yield in one of the world’s fastest growing regions.

Cesar Purisima, Philippines finance secretary, on capital flows into Asia:

“This is a challenge that all emerging markets will continue to grapple with. In the case of the Philippines, we’re coordinating closely – the finance ministry and the central bank – and our desire is to direct these flows to infrastructure investments. That’s why we’re accelerating the processing of our projects, because I think this will allow us to emerge out of this period of global liquidity with improved efficiency and competitiveness of our economy, rather than letting it flow directly to real-estate assets and other financial assets that can create disruptive bubbles.”

Naoyuki Shinohara, International Monetary Fund deputy managing director, on real estate risk:

“I don’t want to speak about specific countries, but the low-income Asean countries tend to enjoy higher growth rates. On average, Asean economies are growing around 5% to 6%, but so-called frontier Asia is growing faster. In some of the economies, credit growth is very high, and we see some heating up of real-estate sectors. Since the growth rate is high, it’s quite natural that those kinds of movements will emerge. I do not think the risk is imminent, but once these things start moving, it is very difficult to unwind. So policymakers should be careful in monitoring how the market develops, how the economy grows, and take necessary measures as the situation develops.”

Tharman Shanmugaratnam, Singapore finance minister, on overheating risks:

“I think for now we now can cope with the capital flows. Macroprudential policies are now part of the toolkit of policy management in all our economies. It means occasionally unconventional measures using stamp duties, tightening your loan-to-value ratios for the property market in particular, and things which 10 years ago were unconventional are now becoming conventional because of the reality of ample liquidity.”

Abd Rahman Ibrahim, Brunei second finance minister, on monetary easing:

“The massive monetary easing in [major industrialized] countries can have unintentional adverse impacts on the region. But we’re confident that our central bank colleagues have monitored this issue closely and have addressed potential vulnerabilities.”

Krirk Vanikkul, Bank of Thailand deputy governor, on the rush of money into Asean countries from quantitative easing in advanced economies:

“Let’s say if the U.S. is going to do QE2 for another two years, if Japan is going to do something as well, if Europe is not seen to be settled and everyone is pumping the money — the Fed, the Bank of England and various other places — where would the money go? So it seems to be a long-term trend, because they say it’s going to be two years, it’s not going to be two months from now. You have to live with it … The world may not be fair but you have to get used to it.”

Amando Tetangco, Bangko Sentral ng Pilipinas governor, on growth in advanced economies:

“Growth in the advanced economies has not been convincingly established, and therefore it’s likely that the advanced economies will continue to follow easy monetary policy. Of course, that has implications for capital flows, particularly to emerging markets — including those in Asia — in terms of the liquidity implications, the exchange-rate implications, the inflationary asset-bubble implications. So countries in Asia have to be able to address the potential negative effects of these developments, and I think we have been able to do precisely that.”

  • ASEAN Bubble, A Self Fulfilling Event?

What many economist have in fact pointed out, is that with the monetary easing by the likes of Japan, comes with it, a currency war. Apart from asset prices in ASEAN, is also their currencies. With hardening ASEAN currencies from like Japan easing, the real sector becomes less competitive and vibrant, leaving the economy more to grow on the back of consumption and not production. Thailand is a prime example of this, where export is falling and the real sector GDP is being hit hard.

And if not careful, measures to tame inflation, to stop the bubble, will not only harden the currency further and hurt the real sector further, but will also reduce investment. The talk of measures to curb asset bubble and inflation, therefore, in itself, can be the trigger, of a severe asset bubble situation.

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