The greatest risk to the outlook for Asia is a global economic and financial environment that does not stabilise and recover by 2010, according to Tony Tan, deputy chairman and executive director of the Government of Singapore Investment Corporation (GIC).
"Downside risks remain high, despite signs of stabilisation," Tan says. "If the US economy turns out to be worse than expected, requirements for banks' capital will be higher and the US administration might need to go back to Congress to ask for additional funding."
Tan made the comments at a speech before a dinner of the Economic Society of Singapore, which was held in conjunction with the Singapore Economic Review Conference. The GIC is Singapore's biggest sovereign wealth fund and is among the most influential in Asia.
Tan's risk assessment does not come as a surprise, considering that in April 2008 -- before the current financial crisis hit its peak -- he warned that the world could be facing the worst recession it has experienced in three decades due to the lingering effects of the subprime mortgage crisis on the US and global economies.
A second risk, Tan says, is that US consumption fundamentals have deteriorated. Weak demand and deflation risk are still significant problems and sustained deflation could cause private consumption and investment to contract further due to higher real interest rates and real debt burdens, he says.
"The US could relapse into recession and losses and capital needs escalate again," he says.
A third risk, Tan says, is protectionism. Protectionism is not just a developed country phenomenon, he notes, pointing out that several developing countries are using import restrictions to mitigate the impact of slowing global demand and weaker current account balances.
"Clearly there is a danger -- probably highest if there is no recovery next year -- that protectionism could rise dramatically," he says.
Looking ahead, Tan notes that a major challenge is the uncertainty raised by the apparent failure of Western or American models which, at the extreme, put financial markets above other sectors of the economy.
He ponders: Will there be a structural change in how savings are mobilised and allocated in the West? Will the state-guided models of the East do better?
"It will take time before we will know the answers to these questions but the balance between private and public sector as the prime economic driver is shifting towards the latter, likely in significant and long-lasting ways," he says.
Having said all that, Tan notes that Asia's fundamentals remain strong even though the region has experienced a dramatic slowdown. He adds that as the global economy stabilises, Asian economic growth will recover. China and India, in particular, will do relatively better but cannot be the drivers for the world economy in the short-term, he says. Over time, he adds, growth in China and India will anchor both the region and a global economy that is likely to see more balanced and sustainable growth.
"The greatest risk to the region is a failure of policies in the developed world and a return to isolationism or protectionism," he says.
Tan notes that there are serious unanswered questions about the role of markets and the state, including the appropriate level of regulation and state intervention. In this environment, he says, Asian banks and capital markets will face both a tremendous challenge and opportunity to intermediate huge regional savings to meet massive capital demand from Asian growth and the integration of major Asian emerging economies into the modern global economy.