Asia slowly losing its luster – Nomura

MANILA, Philippines - Strong economies in the Asian region are slowly losing their luster as the low interest environment here and abroad is beginning to cause some problems, an investment bank said.

“We are becoming more concerned that Asia’s once solid economic fundamentals are deteriorating,” Nomura economist Rob Subbaraman said in the bank’s Asia Economic Monthly report.

Growth in emerging Asia —  including the Philippines — is seen to slow down this year, he said, in part because of an expected pick-up in the US and European economies as well as that of Japan.

The US, Japan, and European Union have all implemented loose monetary policies characterized by near-zero interest rates and billions in asset purchases in a bid to boost demand and economic growth.

The goal was to encourage more borrowing of credit to finance economic activity and strengthen economic output, in the process. Such policies though, Subbaraman said, have caused huge inflows to Asia where rates are relatively higher.

As a result, some of the region’s economies are experiencing challenges ranging “from frothy property markets to a high or rapid build-up of debt.”

Problems of large trade deficits and high inflation rates were also noted as some Asian nations resorted to lowering their own interest rates in a bid to shun some capital flows.

Too low interest rates allow easy access to credit and thus push up demand for goods and in effect, result into faster inflation. “Overheating” then becomes “apparent,” Subbaraman said, as higher consumer prices slow growth.

The economist suggested that instead of keeping rates at floor, the region should begin to implement “supply-enhancing” structural reforms such as the removal of subsidies and relaxing restrictions on foreign direct investments (FDI).

“The time is approaching for other Asian countries to follow Singapore’s example of relying less on accommodative monetary and fiscal policies and focusing more on structural reforms…,” he pointed out.