US, EU Slowdown Could Draw More Capital to Asia

The Asian Development Bank says evidence of slowing growth in Europe and United States will draw more investors to better-performing Asian economies. While analysts remain upbeat over Asia's economic outlook in the coming year, a weaker U.S. dollar and contracting economies in Europe and the United States will hurt Asian exports - a key driver of growth.

Despite the recent volatility in global stock markets, the Asian Development Bank remains upbeat for growth for Asia. In an annual report on Asian capital markets, bank analysts forecast seven per cent growth in the region for 2011 and 2012.

Iwan J. Azis, head of the ADB’s Office of Regional Economic Integration, expects Asia’s recent consistent economic growth will make it favored by investors. But he says that an inflow of capital also poses challenges.

“As the dust settles I strongly believe that capital inflows will continue to come into the [Asia] region and that creates problems that create challenges for the region," said Azis. "Right after the global recession of 2008 and [investment bank] Lehman [Brothers’] collapse massive capital inflows into the region created havoc and that can be repeated after the dust settles.”

Any inflows of funds will push up the values of the region’s currencies against the U.S. dollar, undermining industries that depend on exports to the United States and Europe.

“That translates into problems or challenges for export oriented economies in Asia like Thailand for example," said Azis. "They will have to work very hard on how to deal with these issues from both sides - the quantity side and the price side - the exchange rate.”

Azis says that until recently, bank economists were mainly concerned over inflationary pressures in Asia due to rising commodity and food prices. But he says now those concerns are shifting because lower global demand eases price pressures on commodities such as oil.

Narongchai Akrasanee, a former Thai commerce minister and board director of the Export Import Bank, says that since Asia’s financial crisis in the 1990s, the region has become less dependent on European and U.S. markets and more linked to China’s and India’s economies.

“What has happened is that starting from 2007, 2008 we have been able to be less dependent on the western markets compared to the period before," said Akrasanee. "That’s why we were able to recover more quickly after 2009. I think at the moment the Asian market is a big help for us for the time being.”

Asian Development Bank economists say the region’s central banks may need to review policies such a capital controls to manage a new flood of funds.

But Tuesday’s report says a pattern of slow growth in the advanced economies is likely to continue beyond 2011. While Japan’s recovery is boosted by reconstruction from the March earthquake, sluggish job growth in the U.S. and the fiscal challenges in Europe are expected to "keep a lid on growth for some time to come."