Investment banks downplay impact of eurozone woes on RP

MANILA, Philippines – Europe’s debt crisis would not pose a large risk to emerging markets in Asia, including the Philippines, that have broadened beyond export-led growth and towards domestic demand, economists from leading investment banks said.

In a study, Barclays Capital said the parts of the eurozone experiencing the sharpest growth contractions are less important for emerging markets (EM) in Asia.

“While the sovereign debt crisis has increased the downside risks to EU growth, we do not think that it represents a large risk to EM Asian growth for now. The global economy is not experiencing a synchronized slowdown,” Barclays Capital economist Prakriti Sofat said.

The investment bank sees the global gross domestic product (GDP) growing as much as 4.6 percent this year after contracting -0.8 percent in 2009 but pointed out that the importance of Europe in contributing to the global growth recovery this year and next would be negligible.

“It is worth highlighting that in the global context the importance of Europe in contributing to the global growth recovery in 2010 and 2011 is negligible – based on our forecasts. Therefore, the impact on Asia of a slowdown there is likely to be relatively muted. Further the world economy is not experiencing a synchronized slowdown; on the contrary, it is seeing a synchronized upswing,” Sofat said.

She said, Asian growth may be affected through lower demand for exports either because of direct links or indirectly through a third country. Under 20 percent of Asian exports go to Europe of which less than five percent are shipped to vulnerable countries including Greece, Portugal, Spain, Ireland, and Italy.

She added that the second possible source of impact could be through the financial or risk aversion channel while the third could be through incoming foreign direct investment, remittances and tourism-related flows from Europe.

Exports continue to benefit from stronger-than-expected demand from the US. The sharp turnaround in the global electronics cycle is supporting exports from Korea, Taiwan, Malaysia, Singapore, Thailand and the Philippines.

Sofat added that the EU debt crisis has potentially increased the risk of delays to further policy normalization in China, Korea, India and the Philippines,

On the other hand, Swiss-based UBS AG pointed out that the direct exposure of EU does not appear to be high at around 10 percent to 15 percent of the members of the Association of Southeast Asian Nations.

UBS economist Edward Teather however warned that the persistent euro weakness would impact ASEAN producers’ competitiveness in home and third markets.

He said a weaker euro would translate to a more expensive exports for ASEAN countries including the Philippines resulting to a slowdown in the real GDP growth.

“This suggests the more significant impact on growth will be observed in Singapore, Malaysia and Thailand. Philippines and especially Indonesia should prove more resilient,” Teather said.

Nonetheless, UBS said the increased competitive pressure suggested by a weaker euro will influence the exchange rate policies of Indonesia, Malaysia, Thailand and the Philippines – making appreciation against the US dollar less desirable and perhaps spurring foreign exchange market intervention. –Lawrence Agcaoili (The Philippine Star)