Asia saddles up for a rough ride through Horse Year
January 04, 2014 00:00 By William Pesek
As we head into 2014, one thing is clear about the outlook for Asia: No one really has a clue what's in store for this increasingly eclectic, cacophonous and unpredictable region.
That includes prognosticators whose annual forecasts are drawing lots of attention, including “Dr Doom” himself, Nouriel Roubini. The New York economist who called Wall Street’s 2008 meltdown predicts that 2014 will see asset bubbles inflating in Australia, China, Hong Kong, India, Indonesia, New Zealand, Singapore and Turkey. If he’s right, many of us will be homeless scavengers come 2015.
A guru known by an even darker moniker – Hong Kong’s “Dr Gloom, Boom & Doom”, Marc Faber – is down on everything from art to bonds to collectibles to commodities to equities. He also worries the zero-interest rate policies of the Federal Reserve and other central banks may bankrupt the world.
It’s enough to make me want to flee to a cabin in the woods, buy guns and find God. But first, allow me to address four themes that I think will dominate the year ahead.
An Asian Spring
No, I don’t expect governments to fall as they did in Tunisia and Egypt. But from Beijing to Hanoi and New Delhi to Kuala Lumpur, growing discontent could generate epochal demonstrations. Widening rich-poor divides, rising prices and high-profile corruption cases have alienated not just the masses but also the middle classes across the region. Vicious political splits in Thailand and Bangladesh have already led to street violence. Japan’s Shinzo Abe will run into a firestorm if he tries to restart the country’s nuclear reactors. China’s Xi Jinping can’t even get a handle on the country’s shadow banking system, let alone its unchecked state enterprises, entrenched special interests and choking smog. Even hyper-stable Singapore could see rumblings if the government doesn’t get a handle on rising resentment toward foreign workers.
You can bet Xi is already making a list of ways to retaliate for Abe’s visit last week to the controversial Yasukuni Shrine, which houses the souls of 14 Class A war criminals from World War II. That should worry Japanese automakers, electronics exporters and travel agents. The real fireworks may involve an accident between aircraft or vessels at sea near disputed islands Japan calls Senkakus and China calls Diaoyu. China’s new air-defence identification zone raises the odds of conflict. I wouldn’t bet on war, but several tense days in the East China Sea that rock global markets shouldn’t be ruled out.
The odds favour Hindu hardliner Narendra Modi replacing Indian Prime Minister Manmohan Singh, charismatic Jakarta Governor Joko Widodo replacing Indonesia’s Susilo Bambang Yudhoyono and Thailand’s Yingluck Shinawatra quite possibly being shown the door. Modi would bring significant baggage with him to New Delhi, given his lack of contrition for anti-Muslim violence in 2002 that claimed more than 1,000 lives on his watch as Gujarat chief minister. Wildly popular as a clean and efficient administrator, Widodo would be quite the wild card to take Yudhoyono’s anti-graft efforts to the next level. And while the baby sister of living-in-exile former prime minister Thaksin Shinawatra should easily win elections that her opposition is boycotting, many Thais appear to be souring on democracy. A quiet coup could well push her out before or after the polls.
Asia’s bond bust
As Federal Reserve tapering gains momentum, the region’s debt markets are set for a brutal reality check. It’s not just Chinese companies over-leveraging balance sheets. According to Standard Chartered, the average corporate debt-to-gross-domestic-product ratio in Asia excluding Japan jumped from 76 per cent in 2007 to 97 per cent in the first quarter of 2013, never mind all the borrowing since then. That’s 20 percentage points higher than the United States and markedly above Latin America and Eastern Europe. And what about Japan, home to the world’s largest debt burden? If quantitative-easing efforts drive inflation toward 2 per cent by late 2014, as the Bank of Japan hopes, look out. At some point, markets will realise that 10-year government bonds yielding just 0.70 per cent don’t compute given Japan’s shrinking population. The year ahead could see the laws of finance reassert themselves.
Many other things are sure to surprise us in 2014 – from North Korea’s erratic Kim Jong-un to the US pullout of Afghanistan to a renewed European debt crisis. And that’s on top of the laundry list of risks offered by the Roubini’s and Faber’s of the world. For anyone hoping for a tranquil year in Asia, let me just say this: Get ready to be disappointed.
William Pesek is based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.