'Subprime unlikely to spare Asian nations'

MUMBAI: Global economy is going to be very challenging over the next couple of years and the current subprime crisis is an indication that the US will be going into recession in 2008, said Morgan Stanley Asia chairman Stephen Roach. Addressing a conference in Mumbai on Friday, Mr Roach said that Asian economies, although fundamentally terrific, are bound to get affected as they are heavily exposed to US in terms of exports.

“Asia cannot be an oasis of prosperity in a scenario of weakening global demand and even the equity markets of the region are bound to get affected,” he said. According to him, while equity markets in this region are discounting a rosy picture of ‘decoupling’, it is a fact that China and India cannot fill the void that will be created by a US slowdown. “The bottomline is that the faultlines have been opened up, courtesy subprime. Asian stock markets are vulnerable. We could see significant correction in equity markets here”, cautioned Mr Roach.

The Morgan Stanley chief also highlighted the fact that many Asian countries have a huge share of exports in the total GDP that will hit a rough patch when the US economy slows down. “Of the total GDP of China, exports account for 36.6%. For Korea and Taiwan, it is pegged at 36.7% and 59%. Hence, the theory of Asian decoupling is a myth”, emphasised Mr Roach, who is counted among the most influential economists of Wall Street.

According to Mr Roach, US has a trade deficit with 40 countries of which China has the biggest share. While the trade deficit with China is $230 billion, for the remaining 39 countries it is $600 billion. “The whole equation will change. The growth rates of the Asian economies will fall. For instance, Japan may go down from 2% to zero. Taiwan and Korea might fall to 2.5%. India will not be spared either,” he said.

Mr Roach also spoke about the recent SEBI clampdown on participatory notes to limit the inflow of foreign capital. “I think this is fine as a stopgap measure. Having said that, I feel that the move isn’t the right instrument to control global capital inflows in the long run”. On a different note, he said that prices of crude oil, currently at elevated levels, could see ‘significant cyclical reduction’ in the event of a moderation in global economic growth.