Salient to Investors:
- China, Hong Kong and India are in a high-risk danger zone because their monetary policies have stayed too loose over the past 4 years.
- The average ratio of domestic private debt to GDP across Asia had risen to 167 percent in 2012 and most of the region’s property markets are frothy. The debt ratio has increased by over 50 percent in Hong Kong and Singapore and between 30 and 40 percent in Malaysia, South Korea, China and Thailand.
- Interest rates have been persistently below what economic models suggest, and even more so if the financial cycle is accounted for.
- Indonesia is at the lower end of the high-risk zone, South Korea, Malaysia, Singapore and Thailand are in the middle, ahead of Japan. The Philippines and Taiwan seem the least prone to any economic crisis.
- Investors will begin preferring sustainable expansion over fast growth once the Fed tapers.
- Asian policy makers risk falling into the same trap as the US and Europe did prior to the global financial crisis and as Asia did in the 1990s: keeping policies too loose by focusing too much on the standard business cycle and low inflation and not enough on the financial cycle.
Charles Robertson et al at Renaissance Capital says Egypt has a 3 percent chance of losing democracy in any given year because its per capita GDP of $5,000 puts it in a similar position to Tunisia in 2003 or Turkey in 1975. A study of 150 countries with a population above 500,000 from 1950 to 2009 found that democracy is only immortal once income tops $10,000 per capita. Robertson said Egypt has energy to export but its high budget deficit and public debt ratios may worsen as newly elected governments may not feel comfortable reducing subsidies.
Zuzana Fungacova and Laura Solanko at the Bank of Finland and Laurent Weill at the University of Strasbourg found that from 2002 to 2010 bank market power has a significant impact on monetary policy effectiveness.
Adam Fremeth, Brian Kelleher Richter and Brandon Schaufele found that from 1991 to 2008 becoming the CEO a S&P 500 company increased their political contributions by 137 percent.
Julian Jessop at Capital Economics said the BOJ may replace the Fed as the world’s leading provider of liquidity as soon as Q1 2014. Jessop said the BOJ’s plans is yet another example of how global monetary conditions will remain loose even if the Fed tapers.
Jan Dehn at Ashmore Investment Mgmt said countries that have successfully transitioned to high income status have typically invested between 30 percent and 40 percent of GDP in infrastructure when their GDP per capita ranged from $2,000 to $15,000. Dehn said the average in emerging markets is currently 32 percent.
Silvia Del Prete and Maria Lucia Stefani at the Bank of Italy found that the number of women at the top is greater in banks belonging to major banking groups with larger and younger boards and in banks that are more cost-efficient – credit policies are more stringent when women are on the board, possibly due to their higher risk aversion.
Benn Steil and Dinah Walker at the Council on Foreign Relations say testing the law of one price, identical goods should trade for the same price in an efficient market – by The Economist magazine’s Big Mac Index is weak in that the absence of cross-border flows of burgers means prices won’t align internationally. They say that using the iPad mini is better because it is a global product that travels – they found no major violations of the law of one price in the global market.
Click here to receive free and immediate email alerts of the latest forecasts.