ADB CHIEF ECONOMIST DR. IFZAL ALI DELIVERS KEYNOTE ADDRESS AT EMTA FORUM IN SINGAPORE
Dr. Ifzal Ali, Chief Economist of the Asian Development Bank, delivered the keynote address at EMTA’s Second Annual Singapore Forum. The event took place at the Fullerton Hotel on September 26, 2007 and was sponsored by ING Wholesale Banking.
Dr. Ali began his discussion of the outlook for Asian growth by asserting that “the story for 2007 is that growth is soaring.” He added that he remains optimistic about Asian growth while acknowledging that the “level of haziness” had recently increased, explaining that Asia will not be immune to a global growth slowdown. Dr. Ali’s base case was that US growth will slow down but will not go into recession.
The outlook for Asian growth has in fact increased since Dr. Ali spoke at an EMTA Forum in New York in April, he pointed out, with India and the People’s Republic of China the main drivers. Dr. Ali cautioned that the inflation outlook for Asia has also increased. “This is the China story,” he stated, with “definite signs” that the long-anticipated “overheating” of the Chinese is now taking place.
South Asia, which has traditionally been the laggard in Asian growth, is showing signs of vast improvement…so much so that Dr. Ali believes it will be the new growth pole over the next decade. Dr. Ali also described India’s “inclusive growth challenge,” warning that if the benefits of economic improvement are not widely distributed, political instability might result.
“The Philippines is a country that performs well, and then falls apart,” Dr. Ali observed. The country’s challenges include raising investment rates, increasing public infrastructure and social spending and improving the business climate.
Dr. Ali emphasized that credit market turbulence was not a replay of the 1997 Asian crisis. Central bank reserves provide a strong buffer, domestic financial institutions are stronger, the corporate sector has reduced its debt exposure, and asset valuations are in line with fundamentals.
Will Asia catch pneumonia if the US sniffles? “A most resounding NO!” concluded Dr. Ali, although developing Asia would also not be immune to a US slowdown. In addition to a US economic slowdown, other risks include avian flu, a move towards greater trade protectionism, geopolitical risks, political uncertainties and a slowdown in the reform process.
EMTA Members may Click Here for the full text of Dr. Ali’s presentation.
Tim Condon (ING Wholesale Banking) led the sell-side panel discussion, which immediately followed Dr. Ali’s presentation. Claudio Piron (JPMorgan) summarized his firm’s forecast for the global economic outlook, which called for a further 25 bp US FOMC rate cut in the fall while also expecting the Fed to “take back” cuts in the second half of 2008. Piron was cautiously optimistic about the global environment while acknowledging that the chances of a recession are not negligible, at 25-30%.
Martin Hohensee of Deutsche Bank announced that his firm’s house view was similar, while wondering aloud if the sub-prime debacle was “the issue” or “the canary in the coal mine.” Bear Stearns’ John Stuermer expressed concerns both that banks will all cut credit lines at the same time; and that the Fed will add too much liquidity to the global economic system. Finally Damien Wood of Credit Suisse agreed with the majority of his Asian clients who expected the markets to tighten. Pushed by Condon to elaborate on whether the sub-prime crisis would usher in a permanent “repricing of risk,” Wood believed the sub prime turbulence would have no long-term effects, while Hohensee predicted that the Asian markets would prove more resilient than others.
As for the future of corporate bond issuance, Wood voiced optimism that the new issues market would re-open gradually, and be in full swing by the first quarter of 2008. Compared to their US counterparts, Asian corporates are more attractive and more likely to be upgraded because of their stage in the credit cycle, he reasoned.
Asked how far de-coupling could go, Piron opined that it would be “foolish” to assume that the People’s Republic of China could overtake the US as the leader in global growth. At the same time, Piron observed that there is a de-coupling in Central Bank policies, with Asian central banks hiking rates.
What is the best way to make money in EM debt? Stuermer took several opportunities during the session to underscore his bullish view on Pakistani sovereign debt. Piron spoke positively on Indonesia.
The event ended with an investor panel discussion, moderated by Aaron Low of Lumen Advisors. Low initiated the session by inviting speakers to comment on the macro-economic outlook.
Liew Tzu Mi (Government of Singapore Investment Corporation) reasoned that with the upside on EM sovereign debt so limited, it was no longer logical to take the risk with so little potential reward. On the other hand, “long-term emerging equities make sense,” she affirmed. She noted that a lot of money has been parked on the sidelines since market turbulence began.
Goetz Eggelhoeffer (Rohatyn Group) was certain that liquidity would take a meaningful hit during the current crisis. “Good corporate issuers will be ok, though they will have to pay a higher price to issue debt, while the poorer-quality corporates will have to struggle,” he stated. Steve Evans (ING Private Banking) expected that the sub-prime crisis would take “weeks, if not longer, to work its way through.”
As for favored investment plays, Liew found Brazilian and Turkish local instruments more interesting than sovereign debt, an opinion seconded by Barry Field of Ashmore Investment Management. Evans spoke positively on local currencies including the Turkish lira, Argentine peso, Russian ruble and the Ukrainian hryvnia. He added that Venezuela appears to be oversold. The trend to local markets is “irreversible,” Eggelhoeffer noted, and seconded Stuermer’s optimism on Pakistani debt.