FUELING STRONG FINANCIAL LIQUIDITY IN ASIA

Jimmy Koh, Head of Economic-Treasury Research (Global Markets and Investment Management), shares his views with Privilege Times on decoupling between the East and the West, and liquidity driving growth in the region. The West remains in a serious debt crisis and they seem to be trying to solve that with more debt. Although it is a less painful way, it may not be the most ideal as debt has to be paid...

Privilege Times: How decoupled are we in Asia?
Jimmy Koh: In the thick of the credit and subprime asset crisis of 2007, it seemed as if we, in Asia, will not be spared. Two years later, while we have already picked up the pieces and are spearheading growth, the West is still struggling with domestic problems; while the US government is using quantitative easing to restore economic growth, Asia is seeing liquidity flooding in and prices rising. Despite government measures, prices don't seem to be cooling off. Although there is a general slowing down in transaction volume in Singapore, prices have not re-adjusted much. Maybe it is more accurate to say that there is less coupling?

PT: A repeat of the 1990s?
JK: Yes, it's like a repeat of the early 90s when stock markets in Asia was doing very well due to the flow of liquidity into this region. I see the current run in equities continuing for another 2 to 3 years unless Europe and/or the US go through a series of severe shocks. I'm not saying that prices will continue to rise, but rather the economic environment will remain very conducive. The same has happened to Thailand from 1992 to 1994. The Thai stock market was the top performer before some countries had to grapple with current account deficits in 1996. Similarly, we are finding pockets of bubbles in the Asia, though I think it is still too early to be overly concerned about it.

PT: Currency rises in the Asia exacerbating the problem?
JK: Singapore is unique as the exchange rate is the 'preferred tool' for the control of inflation. We do not foresee a spike in local interest rate unless the rates in the US start to go up sharply. Recovery in the US economy and the sovereign debt issue in Europe are two areas we must be mindful of. Still, unless the US suffers from a very bad cold, Asia should be fine for the next 12 to 18 months.

PT: Bank lending freezing up?
JK: The inflow of capital to this region is due to the malfunction of credit in the West. The West is struggling with a structural problem in the banking system. Liquidity is simply not being translated into credit because banks are cautious about lending and corporations shying away from borrowing. So while some companies in the West are adjusting their balance sheet, others are simply cash-strapped due to the unavailability of funds. This is not an issue in Asia. In a nutshell, as long as the West is still struggling, more liquidity will be pumped into their systems to stimulate growth. This will continue the vicious cycle of excess funds (from the West) being invested in higher yielding assets in the East. Whether this will result in bubbles the scale of what Japan has gone through in the 80s is debatable.

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