Eurozone crisis to hit Asian economies and markets hard, says Nomura report

The euro zone debt crisis has intensified after the recent Greek elections. According to a research report by Nomura there are significant downside risks to the euro area and the crisis is expected to peak in the second and third quarters. It has forecast euro zone GDP growth rate at -0.6% for 2012. A deeper recession in the euro area would likely have serious knock-on effects for the UK, US and Japan. One tipping point is a decline in Asian exports to the point where firms are forced to cut capex and jobs. The other will be when financial markets melt down, eroding wealth and confidence.

The report looks at the worst case scenarios and estimates how hard Asia’s economies will get hit by the global financial crises. In 2012, GDP growth will weaken the most in those Asian economies that are most exposed to exports and/or have large financial hubs—namely Hong Kong, Malaysia, Singapore, Taiwan and Korea. By contrast, GDP growth would be relatively resilient in China, Indonesia and the Philippines. However, Nomura believes that Asian economies have the ability to bounce back due to powerful tailwinds. Unlike the US and Europe, most of Asia still has lots of room for significant policy responses, both in cutting interest rates and fiscal stimulus.

China: In the worse-case scenario, Nomura sees China's GDP growth slowing to 7.8% in the second half of 2012. It expects a more aggressive policy response on consumer goods subsidies, infrastructure investments and public housing. The pace is likely to be faster than in 2008, as the government is aware of the risks and has made contingency plans.

South Korea: If Greece exits the euro zone and there is a massive global credit crunch, Nomura believes that Korea’s FX authorities would do whatever it takes to stabilise KRW volatility, including providing FX liquidity to the banking system. As a result, after the initial shock from a Greek exit, the Korean economy would eventually recover, led by exporters gaining from a weaker KRW.

India: In the event of a European slowdown, India would be severely hit through the external channel. Bank deleveraging, portfolio outflows and an inability to roll over repayments due to risk aversion would make financing of the current account deficit difficult and weaken the rupee. If the RBI defends the rupee, domestic liquidity could tighten and impair monetary policy transmission. On the policy response, there is no space for a stimulus as a slowdown would worsen the government’s finances.

Hong Kong: Under the worse-case scenario, Hong Kong's financial and international trade service industries would be hit very hard, leading to a slowdown in private consumption, investment and exports. Sizeable fiscal policy measures are likely to be implemented, such as additional infrastructure spending and personal income tax relief.