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Stuck in the slowdown, Asian economies must steer different course

Is the era of double-digit growth in Asia over? Participants at a two-day seminar, "The End of Double-Digit Growth - Implications for Economic Sustainability in Asia", will attempt to dig into this issue. Konrad-Adenauer-Stiftung (KAS) in cooperation with Chulalongkorn University, will host this seminar on Monday and Tuesday at the Sofitel Bangkok Sukhumvit. On Monday, I shall be moderating one of the sessions with speakers from Cambodia, Bangladesh and Sri Lanka.

Apparently, the export-fuelled era of high growth in Asia has already come to an end. Even China has admitted it can no longer sustain a high level of economic growth based on exports. So instead, it is focusing on comprehensive economic reform to bring income distribution. Over the next five years, Beijing will be happy enough if it can maintain an economic growth rate of 5 per cent. China is now looking to its domestic economy for growth. Yet it is also facing the challenge of asset price bubbles under its shadow banking system.

Since China is the "anchor" of Asia, Beijing's policy offers clues to development in other Asian emerging-market economies, including Thailand. Thailand and the Asean have deepened their trade with China. If China were to experience a slowdown, it would hurt everyone. With growth uncertainties and simmering crisis in the Group of Three - the euro zone, the US and Japan - Asian and other emerging economies cannot rely on these traditional markets for their exports.

Thailand's exports, in spite of diversification, fell flat last year with a growth rate of zero per cent. Thailand's current account has been deteriorating significantly over the past two years, with back-to-back deficits in 2012 and 2013. If not vigorously tackled, such macroeconomic deteriorations are the prelude to a crisis.

Asia might be far from reaching crisis point. But if trade and commerce here continue to deteriorate, while spending and indebtedness continue to rise, we will eventually run into a brick wall. Already the level of debt-to-GDP in Asia is rising. Malaysia's total debt-to-GDP level (including private, government, household and financial institution debt), is around 200 per cent according to the World Bank. China follows close behind with total debt of almost 200 per cent of GDP. It is facing a shadow banking crisis. Thailand's total debt is also rather high at 180 per cent of GDP. Of this, 80 per cent is household debt, 46-48 per cent is government debt, 45 per cent is private and 10 per cent belongs to financial institutions.

Asia has fallen into a debt trap. Export earnings have fuelled the high growth rate in the past, but credit growth has also been another important contributor. Take Thailand, for example: economic growth has been averaging 4-5 per cent over the past eight to nine years, yet credit growth has outpaced the economic growth rate by a much higher margin. In particular, credit growth since 2009 has been in double-digit territory. Credit growth creates inflation and drives up asset prices. Since its growth doubles or triples the economic growth rate, it means that we are building up financial or asset price bubbles in the economy. If the economy were to slow down in the coming years, the credit growth will turn into bad assets. Already Thailand is facing a slowdown. Last year the economic growth rate struggled to reach 3 per cent. This year many are expecting a higher rate, but the engines of growth - from exports to government spending to household consumption - are all sputtering.

So with an export slowdown and economic slowdown, it is necessary to bring down credit growth. The challenge ahead is not to maintain the high economic growth rate but to undertake drastic reform, first to prevent asset bubbles and crisis, and second to achieve healthy growth through internal growth. Without a strong political mandate, this task of structural reform will be impossible to achieve.


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