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VIETNAM - Asian Economies Remain Vulnerable   DinarDailyUpdates?bg=330099&fg=FFFFFF&anim=1

VIETNAM - Asian Economies Remain Vulnerable

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Post by lexie Wed Mar 07, 2012 11:46 am

March 7, 2012

Asian Economies Remain Vulnerable

Plans by Vietnam's central bank to cut interest rates in the coming days serve as the latest reminder that Asia's smaller economies remain highly vulnerable to a weakened global economy, despite recent signs that growth is firming up in the region.

Vietnam's central bank said late Tuesday it plans to cut its main policy rate by 1 percentage point to 14% in the coming days. That follows rate cuts in recent weeks in nearby Indonesia and the Philippines as growth rates around the region slow, even as some economists worry inflationary pressures could be building again because of higher oil prices.

There could be additional pressure for Asian central banks to further cut their policy rates, despite inflation fears, after China announced Monday that it was lowering its customary 8% annual growth target. Chinese Premier Wen Jiabao told China's legislature the government is aiming for 7.5% growth this year, a move many economists interpreted as a sign that Beijing is easing off the gas pedal in order encourage a more balanced, sustainable growth model.

India's economy, too, recently posted its slowest quarterly growth rate in more than two years, while Brazil narrowly escaped recession in the fourth quarter of 2011.

The uncertain outlook in parts of Asia raises questions about whether emerging markets can sustain the growth pace they have achieved since the 2008 global financial crisis.

That's especially true in parts of Southeast Asia, where growth in natural resource suppliers such as Indonesia and the Philippines strongly correlates with what happens in China. Both countries were buffered from 2008's global crisis in part because China's economic engine kept humming—and kept needing raw materials—but they are vulnerable if China slows further.

"I think what is happening in India and China is something that rings an alarm," said Pahala Mansury, managing director and chief financial officer of PT Bank Mandiri, Indonesia's largest bank by assets.

Although he said the bank still expects Indonesian growth to be more than 6% this year, the situation in China and India does present a wild card.

"The reason why in 2009 we were able to still grow at about 4.5% is because both India and China continued to be quite resilient," he said.

One possible response, economists say, is further interest rate cuts.

"We're not done yet. I think there is more to come," said Tim Condon, a regional economist with ING in Singapore.

It's not clear when further rate cuts could come, if at all. Indonesia last month surprised financial markets with a 0.25 percentage-point cut. Bank Indonesia's next policy meeting comes Thursday, and some economists expect it to keep rates where they are for the time being until the growth and inflation outlook become clearer as the government proceeds with plans to reduce fuel subsidies in the coming months.

The Philippines' central bank, meanwhile, cut interest rates 0.25 percentage points last week and isn't due to make its next policy move until April.

There are signs from various parts of Asia that manufacturing might be picking up as Europe works through the worst of its debt crisis. China's official Purchasing Managers Index—a key gauge of manufacturing activity there—rose to 51 in February from 50.5 in January, the highest reading since September.

Looking ahead, though, there might be room for interest rates to fall if global and Chinese demand weakens.

"I think that by April we will see more interest-rates cuts in Indonesia and the Philippines if growth is still sluggish and inflation still looks relatively subdued," said Mr. Condon at ING.

He noted that the recent rises in the value of the Philippine peso and the Indonesian rupiah have also helped contain inflation, giving policy makers a little more leeway.

Indonesia's consumer price index moderated slightly in February to 3.6% on-year from 3.7% on-year in January. In the Philippines, inflation eased to 2.7% on-year in February compared with 3.9% in January. But many economists worry inflation will begin ticking upward again once the impact of higher oil prices ripples through.

HSBC economist Leif Eskesen wrote in a research note to clients that Bank Indonesia is likely to keep interest rates steady at its meeting Thursday, but that it will be close call. Further ahead, the bank could again cut rates, he wrote.

Vietnam's central bank is widely expected to continue cutting rates after a long series of interest-rate increases, which it introduced to help cope with one of Asia's highest inflation rates. The State Bank of Vietnam introduced a cumulative 6 percentage points in interest-rate increases last year.

In February, though, inflation fell to 16.4% on-year after peaking last year at 23% in August, prompting some forecasters to predict more rate cuts to buoy growth, especially as weakened demand from the U.S. and Europe continues to be a problem.

London-based Capital Economics told clients in a research note that it expects two more rate cuts of 1 percentage point each over the rest of the year.

Not all the region's economies are in the same boat, however. Bank of Thailand Gov. Prasarn Trairatvorakul said in an interview with The Wall Street Journal last week that after cutting interest rates twice to help the Thai economy to recover from last year's debilitating floods, the central bank will likely keep its main policy rate at 3.0% until the third quarter.

Mr. Prasarn stressed, though, that he was ready to further cut rates or raise them if the external economic situation requires it.

"We can't tell what will happen, so we have to be flexible," he said. (Wall Street Journal)


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