MANILA, Philippines?The US financial crisis has spawned speculation that it could push emerging economies like the Philippines on a downturn, but a senior academic from Singapore believes otherwise.
According to Kishore Mahbubani, the dean of the Lee Kuan Yew School of Public Policy, the turmoil in the West could be a source of optimism for Asians.
?Actually, the effect of the crisis in the United States could be the opposite. The crisis could in fact lead to a change in the mindset of foreign investors in favor of emerging economies,? he told the Inquirer in an interview.
Mahbubani, who visited Manila last week to deliver a talk on economics and public policy at the Asian Development Bank headquarters in the Ortigas Center, is a former ambassador of Singapore to the United Nations and a former president of the UN Security Council.
He is the author of the recently published book ?The New Asian Hemisphere,? which discusses the rise of Asia as co-driver of the world economy together with Western countries.
Mahbubani encouraged Filipinos and other Asians to be positive amid the turmoil in the West.
He said any negative effects on emerging economies could simply be knee-jerk, short-term impacts, and that in the long term, investors would see the benefits of doing more business in these economies.
Mahbubani praised China?s optimistic view on any crisis, saying it should be emulated by other Asian countries.
China, with a population of over one billion and now the world?s fastest growing economy, views crisis not as a cause for fear but as a source of opportunities, he said.
US proved it?s prone to risk
It used to be, Mahbubani said, that investors favored developed economies like the United States despite the fact that interest rates on investment instruments like treasury bills and bonds were lower there than in emerging economies.
He said this was because developed countries were perceived to be less risky as investment sites.
On the other hand, he said, yields from investments in the Philippines and other emerging economies were higher, but investors perceived these sites to be riskier for business.
?But now that developed countries like the United States are proved to be prone to risk as well, if not perceived to be even riskier, investors could see emerging economies as preferable sites for doing business,? he said.
Lax credit policies
The US financial crisis, which began in the middle of last year, stemmed from the defaults experienced by banks and financial institutions with substantial loan exposure to the subprime mortgage market.
This market is composed of high-risk borrowers of housing loans.
The crisis has been attributed to the lax credit policies of the members of the US banking and financial sector.
The latest victims of the crisis are Lehman Brothers, Merrill Lynch and American International Group (AIG).
Not to worry
Lehman has filed for bankruptcy, Merrill Lynch was bought by Bank of America, and AIG was bailed out by the US government.
According to some analysts, the US financial crisis could have spillover effects to the Philippines and other emerging economies. Distressed banks and financial institutions in the United States might decide to pull out their investments in emerging economies as a way to boost liquidity.
But Mahbubani said he did not see any reason to worry too much. He said emerging economies had developed over the years to be able to withstand volatility in the external environment.
Southeast Asia, in particular, has learned its lessons well from its own financial crisis in the 1990s, he said.
He said the Philippines and other economies in the region had implemented credit policies that would minimize the exposure of their financial systems to undue risk.
BSP intervention
As well, governments in the region have also accumulated dollar reserves sufficient to help them cushion external shocks on the value of their currencies.
In the case of the Philippines, the Bangko Sentral ng Pilipinas (BSP) normally intervenes in the foreign exchange market to guard against the peso?s sharp appreciation or depreciation.
BSP intervention is in the form of buying or selling dollars. In times of peso depreciation, such as what was seen this year, it taps into the dollar reserves to buy pesos. The resulting increase in the demand for pesos helps temper the depreciation of the local currency.
According to the latest report of the BSP, the Philippines? gross international reserves reached $36.7 billion in August, up from $30.5 billion in the same month last year.
Although the Philippines? foreign currency reserves are small compared with those of neighboring countries, these have consistently grown over the years.
Mahbubani also noted the increasing intraregional trade in Asia. He said rising exports and imports among neighboring countries had somehow protected the region from the ill effects of the US crisis.
Now just a cold
?Before, when the US catches a cold, the rest of the world suffers from pneumonia. But now, when the US catches a cold, the rest of us simply catch a cold as well,? Mahbubani said.
The United States used to account for the bulk of the export earnings of the Philippines and other emerging economies in Asia. Now, the United States is still the biggest export market of the Philippines, but its share in the total export income has dwindled over the years to only about 17 percent.
A depressed US economy could still cause a slowdown in exports growth for the Philippines and other emerging economies, but this would not necessarily result in contraction, Mahbubani said.
He said that as far as the Philippines was concerned, it could further take advantage of the benefits of intraregional cooperation by opening more airports, thus also attracting more tourists from its neighboring countries.
?You have a lot of places that could be good for tourism. Take advantage of that,? he said.
