Cash & Liquidity Management

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Credit Crunch and the Asian Tigers The extent of globalisation and the interdependence of the global financial markets are more evident today than ever before. One could have never imagined the impact of risky home loans in the US on the global equity markets and on the balance sheets of investment banks which invested in these risky assets in the secondary market. With capital troubles hitting the likes of Northern Rock, the demise of Lehman Brothers, Bear Sterns and Merrill Lynch being taken over etc., these underlying mortgage- backed assets were deemed worthless. When the first signs of trouble started surfacing, the jury was divided on the resulting impact on Asia. There were strong proponents of the ĎAsia de-coupledí theory and some economic pundits indeed argued that the Asian economies were less reliant on the west, based on domestic demand coupled with strong growth in intra-Asia trade, resulting in Asia being insulated from the credit crisis in the US. This theory has since been amply disproved. Asset prices in Asia are on a southward spiral as investors become risk-averse and move to safer instruments such as cash deposits or need the liquidity to service their working capital requirements as banks tighten credit lines. Most Asian stock indices have fallen 30-40% from their January 2008 levels and Asian exports seem to be slowing down as demand for Asian goods softens.

Credit Crunch and the Asian Tigers

by Samuel Mathew, Regional Product Head – South East Asia, Transaction Banking, Standard Chartered Bank

US slowdown and the Asia de-coupling theory

The extent of globalisation and the interdependence of the global financial markets are more evident today than ever before. One could have never imagined the impact of risky home loans in the US on the global equity markets and on the balance sheets of investment banks which invested in these risky assets in the secondary market.

When the first signs of trouble started surfacing early this year, the jury was divided on the resultant impact on Asia.

With capital troubles hitting the likes of Northern Rock, the demise of Lehman Brothers, Bear Sterns and Merrill Lynch being taken over etc., these underlying mortgage-backed assets were deemed worthless. Writing these off had huge capital implications for anybody holding them. The world markets watched in horror as banks such as Washington Mutual, and even countries such as Iceland, went bankrupt or were taken over.

When the first signs of trouble started surfacing, the jury was divided on the resulting impact on Asia. There were strong proponents of the ‘Asia de-coupled’ theory and some economic pundits indeed argued that the Asian economies were less reliant on the west, based on domestic demand coupled with strong growth in intra-Asia trade, resulting in Asia being insulated from the credit crisis in the US.

This theory has since been amply disproved. Asset prices in Asia are on a southward spiral as investors become risk-averse and move to safer instruments such as cash deposits or need the liquidity to service their working capital requirements as banks tighten credit lines. Most Asian stock indices have fallen 30-40% from their January 2008 levels and Asian exports seem to be slowing down as demand for Asian goods softens.

Asian GDP outlook, downside risks

In 2007 and early 2008, with buoyant stock markets in most Asian economies and the flow of FDI into Asia, liquidity was in ample supply in countries such as India, China, Singapore etc. Indeed the central bank in China was concerned about the economy overheating and raised interest rates to curb inflation and to slow down the lending portfolio of the local banks. In countries such as Singapore and India, property prices in some segments grew more than 100% and related rental yields sky rocketed. Rising commodity prices added further fuel as costs of construction escalated. In Singapore, fearing a property asset bubble, the government put a stop to deferred payment schemes for mortgages in October 2007.

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