Debt crisis dominates finance talks

BANGKOK: Senior finance officials from Asia and Europe met yesterday for talks on the global economy in the face of growing nervousness about the worldwide fallout of the euro zone debt crisis.
The meeting in Bangkok comes as Asia’s economies — for years seen as a bright spot in a gloomy world economy — show increasing strains from Europe’s financial turbulence.
“With the ongoing economic difficulties of some countries in the eurozone, I believe that our cooperation is even more crucial than ever,” Thai Finance Minister Kittiratt Na-Ranong said in opening remarks.
“Because Asia and Europe are closely knitted in terms of international trade and investment, one spark of crisis could cause turmoil in the other side of the world,” he added.
With Europe gearing up for a crunch summit on Thursday, many finance ministers sent their deputies to attend the biennial meeting in Bangkok, which sets the scene for an Asia-Europe (ASEM) summit in Laos next month.
The meeting follows signs of discord within Europe about whether austerity or pro-growth measures are the answer to the region’s troubles.
Officials “expect that the European economy will gradually recover from the current crisis,” according to a statement released by host Thailand after the morning session.
Participants agreed that Europe needs to pursue “growth-friendly fiscal consolidation as well as growth-enhancing policies and further structural reforms,” it added.
“Ministers stressed the role of emerging economies in the global effort by further strengthening private consumption and implementing structural reforms to help boost domestic demand and growth,” the statement said.
Hopes that Asia’s economies would largely shrug off the West’s economic troubles have been doused by a slew of weaker-than-economic data in recent weeks.
Experts say that Asia’s trade-dependent economies are vulnerable to any further turmoil in the West.
“A sudden and rapid deterioration of the global economy would hit Asia hard,” analysts at the London-based research firm Capital Economics warned in a research note.
But while the region will not be immune to the eurozone crisis and weak global demand, “healthy fundamentals and plenty of scope for policy easing mean growth should hold up relatively well over the next couple of years,” they added.
As powerhouses China and India slow more than many had expected, the Asian Development Bank and International Monetary Fund both recently lowered their growth estimates for the region’s emerging economies.
The IMF said recently that growth for developing Asia would come in at 6.7 percent this year and 7.2 percent in 2013, compared with July’s estimate of 7.1 percent and 7.5 percent.
The IMF’s director for the Middle East and North Africa, Masood Ahmed, said uncertainty over the euro zone debt crisis is now showing signs of restraining business and household spending in the Middle East.
Ahmed told Reuters the uncertainty was adding to already existing concerns over political transitions in Arab Spring nations, and a heavy election and legislative calendar in 2013 in the region.
He said the message from the region’s finance leaders during the IMF meetings in Tokyo was that Europe’s debt crisis was seeping into businesses and household spending plans.
“It’s not simply a question of the direct impact in terms of the rest of the world buying less of their products or sending less investment, but they feel the uncertainty (over Europe’s debt crisis) is also spilling over into their economies,” Ahmed said in an interview.
Ahmed said the region was mostly immune to the effects of European banks reducing their debt because of limited financial ties with euro zone markets.
“Even where there are subsidiaries of European banks in the region, these subsidiaries are generally funded from local sources, so the deleveraging of European banks hasn’t had the same impact,” Ahmed added.
Ahmed said some companies in the region were finding it more expensive to refinance debt.
In some cases, refinancing of syndicated loans was being converted into refinancing through bonds because banks were less keen to lend.
Ahmed said the transition to democracy underway in Morocco, Tunisia, Jordan, Egypt, Yemen and Libya was still not complete. Over the next 12 months, many of these countries will hold elections or plan constitutional revisions.
“For many investors and decision-makers, they are holding back waiting for this process to define the future policy directions,” said Ahmed.
A sharp drop in tourism revenues and business activity after the Arab Spring forced many countries to increase government spending to avoid further protests. Higher food and fuel prices have also meant that government subsidies have risen.
Ahmed said increased spending had drawn down reserves and it was time for governments to reduce spending and make investments more effective.
“We’re saying you have to consolidate now because financing pressures and the reserve buffers have been used up, and if you don’t consolidate there is a risk of increasing your vulnerabilities. The last thing you want is to have a crisis in the middle of a political transition,” he added.
Some 60 percent of benefits on subsidies are going to the top 30 to 40 percent of the population who do not need it, Ahmed said, urging government to target subsidies to the poorest.