Mumbai: Asian governments have to urgently initiate crucial structural reforms to lift investment and create productive job opportunities which can help raise savings and aid a more sustainable growth, says a Morgan Stanley report. (Agencies)
The report also warns of a slower growth for the region in the near term due to the rising commodity prices and the resultant inflationary expectations. The report projects oil at USD 120-130 for the near term.
In a report titled ‘Asia Pacific Economics: Need to get back the productive dynamic', Morgan Stanley says, it is less benign about near-term growth prospects saying many headwinds are up in the horizon and the region as a whole will have to settle for a lower growth trajectory.
On the urgently needed reforms, it says, "So far Asian policymakers, particularly those in India and China, have relied largely on pushing growth by using loose fiscal and monetary policies.”
At the onslaught of the crisis, this was justified. But we believe they relied on this rather less productive growth dynamic for too long, pushing inflation up.
"We now believe there is a need for policymakers to refocus on the difficult structural reforms, bringing back the productivity dynamics and more sustainable growth. For some countries, the reconciliation process needs to happen to ensure that policymakers do not push for pre-credit crisis growth rates with mere support of fiscal and monetary policy," the report said.
Though Asia is moving in the right direction, the report says the pace of reform is still slower than desirable. Hence, in the near-term, the productivity dynamic is likely to remain weak, it added.
Calling for long-term structural reforms to provide and support sustainable growth path for the region, the report says global credit crisis and its attendant implications for the outlook for external demand led Asian policymakers to push for stronger growth in domestic demand.
On China, it says Beijing needs a sustainable growth plan that could boost consumption and ensure that manufacturing businesses start moving towards higher value-added products.
In some parts of the Asean bloc, particularly Thailand and Malaysia, structural reforms are needed to boost the relatively low investment to GDP ratio, says the report.
It recalled that as the global recession unfolded, Asian governments relied more on the easier path of deflating domestic demand via monetary policy easing and fiscal expansion to offset the collapse in external demand, which was very visible in the fall of exports. Asian exports, excluding Japan, declined from the pre-crisis peak of 100 in July 2008 to a trough of 70 in February 2009 as the crisis unfolded.
In response, Asia, excluding India, cut policy rates from a peak of 6.6 percent in August 2008 to 4.4 percent in August 2009, while India cut its rates from 9 percent in August 2008 to 4.75 percent in April 2009.
Correspondingly, fiscal deficits for the region expanded from the trough of 0.3 percent in 2007 to 2.1 percent in 2008 and 4.4 percent in 2009, it noted. In India it still stands at 5.1 in FY11.
"Policymakers have doled out fiscal incentives to encourage consumer spending. This played a key role in stimulating domestic demand across the region, with China, India, and Indonesia recovering the fastest because of their strong structural growth dynamics," the report says and notes that reflecting the relative strength of domestic demand, the current account surplus in the region has already almost halved to 3.8 percent during the four quarters ending December 10, from the peak of 7.1 percent in 2007.
But, the report notes that at the heart of this domestic demand rise was a government-driven growth dynamic. For instance, in India, the government lifted its overall expenditure to GDP by 4 percent while the Reserve Bank left real policy rates in the negative territory for too long since the crisis.
Similarly, China focused on boosting domestic demand with the support of loose fiscal and monetary policy. Its bank lending rose by USS 3.6 trillion since December 2008 (80 per cent of pre-crisis GDP). Although a large part of this borrowing was used for investment, creating highly productive fixed investment at that rampant pace is difficult, the report said.
Moreover, unlike the position after the 2001-03 credit boom, increase in working age population is likely to be much smaller in future. In other words, productivity gains from the built capacity in low value added manufacturing and attendant infrastructure spending will likely be lower in China.
On the growth conditions, the report presents a less benign picture saying many headwinds up in the horizon and the region as a whole will have to settle for a lower growth trajectory.
First, on the supply side, supplies of commodities like steel and oil have become tighter and this is reflected in higher commodity prices. Given Asia's high oil intensity, such high commodity prices will inevitably have an impact on how the region grows.
Secondly, Asia now faces less favourable demographic trends, with more countries experiencing increases or likely to see increases in their dependency ratios.
Thirdly, post the credit crisis, investment to GDP has fallen in most countries especially in India, but excluding China, which reinforces the fall in potential growth rates. This must now imply that the potential growth rate of the Asian economies could be lower than the 2004-07 period.
Fourthly, external demand is now likely to be weak in the medium-term due to post-bubble burst growth dynamics in the developed world.
Mumbai: Asian governments have to urgently initiate crucial structural reforms to lift investment and create productive job opportunities which can help raise savings and aid a more sustainable growth, says a Morgan Stanley report.