EFIC pinpoints key threat to the Asian economy

Although the Asian economy has been relatively resilient in the face of growing credit market turmoil, there are signs that the region will become increasingly susceptible if the crunch continues, according to Australia's Export Finance Investment Corporation (EFIC) chief economist Roger Donnelly.

"Asia will be vulnerable if the global credit squeeze intensifies and worsens the OECD downturn,” comments Donnelly.  

He pinpoints rising inflation and the fallout from the rising fuel and food subsidies as two “home-grown risks” that will make Asia increasingly at risk.

Headline inflation is now 11% in Vietnam, and 9% in China, while food subsidies in Indonesia could reach US$14.3bn in 2008 if oil prices continue to average around US$95 a barrel.

EFIC's forecasts mirror the projections of multilaterals such as IMF, World Bank, the Asian Development Bank, and ESCAP, an Asian arm of the UN, all of which are cautious about the region’s continued resistance to the effects of a slowdown in the OECD countries.
All the bodies have forecasted more conservative predictions about the region’s potential for growth, seeing slower but relatively strong growth of 7.6% and 8.5% in 2008.

Adding in an official EFIC release, Donnelly comments: “Inflation and subsidies will hinder the scope of Asian governments to cushion the blow of any export shocks. More flexible exchange rate regimes and better targeting of subsidies are needed to counter these problems.”