Global sovereign debt is not Asia's concern

In a world of deficient demand, Asia continues to fend off the fallout from the global sovereign debt crisis, participants in a panel discussion say.

As the rest of the world picks up the pieces from the global sovereign debt crisis, Asia seems to be weathering the fallout. On a country-by-country comparison, Asia's top dogs (India and China) are growing despite the stagnant US economy and the shrinking peripheral European states. And, for the time being, the healthy economic performance in Asia does not appear to be slowing.

"Asia is in a strong position to weather another wave of economic slowdown," said Elena Okorotchenko, managing director of sovereign and public finance ratings for Asia at Standard and Poor's.

Okorotchenko was a part of a panel discussion at yesterday's Asia-Pacific Debt Investor Forum, arranged by AsianInvestor and FinanceAsia, that discussed Asia's resilience against the current global sovereign debt crisis. She was joined by Owi Ruivivar, senior portfolio manager of emerging markets fixed-income at Goldman Sachs Asset Management in Singapore, and Diana Choyleva, a director at Lombard Street Research.

Over the past two years, the only country in Asia to be downgraded by Standard and Poor's has been Pakistan. In the same period, the rating agency has downgraded the sovereign ratings of 13 European countries.

If risk was to seep into Asia, Okorotchenko identified three key channels of contagion -- risk by association, risk through funding availability and funding costs, and economic risk through inter-regional trading flows.

In the first instance, the countries most vulnerable are the highly indebted sovereigns such as Japan, India, Sri Lanka and Pakistan. The debt-to-GDP ratios of all other sovereigns in the region are well below 50%. Given that the largest of the potentially vulnerable countries, Japan and India, tend to seek funding domestically and have relatively stable onshore capital markets, the impact on these markets from the global sovereign crisis is believed to be minimal.

In relation to the other channels of contagion -- funding availability and economic risk -- any slowdown in Europe or tighter fiscal policies introduced abroad would have an effect on the trade flows between the two regions. If Europe remains in recession, the funding costs could go up as the availability of funds dries up.

However, given that Asian markets are highly reliant on domestic capital for funding, all these risks are stable despite the doom and gloom being experienced over in Europe and the US.

Goldman Sachs Asset Management looks at a country's short-term debt coverage as another way of measuring risk. The cut-off point is 1.0, which Ruivivar said all of Eastern Europe falls below. In comparison, Asia's most vulnerable countries (Indonesia and South Korea when measured this way) have foreign exchange reserves that are 1.4 times their respective short-term debt, while the highest performing countries (Taiwan, Malaysia and China) have a coverage ratio of between four and eight times.

Another way to measure the potential impact is to look at the creditors that have direct exposure to the peripheral European countries. "Quite frankly, there are no Asian economies that would be impacted by creditor channels," said Ruivivar. With Singapore being the region's fixed-income banking hub, it would be expected to be the most impacted in Asia, but the effect is deemed to be negligible.

However, a country-by-country assessment may lose sight of the risks apparent when looking at the issue from a more global perspective.

"The links are much more complex and the overall story is not that positive," said Choyleva.

According to Choyleva, the sovereign debt crisis has impacted Asia in two important ways -- the strength of the US dollar (on the back of the collapse of the euro) and what she views to be an over-reactive response from China.

Over the coming months the dollar is likely to maintain its strength relative to the euro. If this is the case, it is bad news for the very fragile recovery of the US economy as it can hurt profits in the business sector.

And, according to Choyleva, China's determination to engineer growth in its domestic economy could result in a protectionist backlash from the US. "It will be a lot more difficult for the US to accept China having a bigger piece of the global pie now that the global pie is not growing," said Choyleva.

"Revaluing the yuan would've [provided] a much better boost for China and the global economy to get out of this current crisis," said Choyleva. "It is better to make external adjustments [to the economy] instead of having to hammer domestic demand," she added.

In any case, Asia's number hasn't come up yet and there are no immediate risks that will topple growth in the region, the panel concluded.

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