Subprime Fallout: Risks for Asia

United States Subprime Fallout: Risks for Asia

While East Asia is “better prepared to adjust to economic downturns in the United States and other industrialized countries, the region faces three key risks,” ADBI Dean Masahiro Kawai explained in his keynote speech at the NEAT Conference on East Asian Financial Cooperation on 12 April 2008. To prepare for such risks, East Asian economies need to strengthen regional financial cooperation.

1. Risk of a sharper and more protracted global slowdown. This could be driven by a deeper and more prolonged recession or slowdown in the United States than expected. The negative international spillovers from such a downturn could dampen growth prospects in many industrialized countries—including Europe and Japan. From there, the impacts could cascade to emerging East Asian economies.

2. Risk of a continued rise in oil and food prices. With precarious supply conditions and inventory rundowns, further oil price increases remain a possibility. The recent hike in the price of rice, the main staple of the region, also raised anxiety across East Asia, highlighting the urgent need to address medium- to long-term food security. With oil, food, and other commodity prices at record highs, any further increases in costs could trigger persistent price inflation that can generate a wage-price spiral.

3. Risk of a surge in short-term capital inflows. This could cause upward pressure on the value of regional currencies. Several countries including Thailand and Viet Nam had been experiencing excessive capital inflows until the US subprime crisis broke out. As the US financial system restores its stability and the credit crunch eases, capital inflows to East Asia may resume and in a massive way. These inflows will generate significant appreciation pressure on East Asian currencies. If not managed properly, this can cause macroeconomic and financialsector instability.

Read Mr. Kawai's speech.