Citi: Asia Laughing As Europe Reels From Crisis

Asian economies shouldn’t be too concerned about a potential European debt crisis according to Johanna Chua at Citi Investment Research.There are three main avenues by which Asia would be affected by a European disaster — primarily via financial linkages, trade linkages, and an investor hunt for fiscal disasters to sell in Asia.

In terms of financial linkages, Mr. Chua sees little contagion from Europe in Asia, except for Vietnam. This is mostly due to strong Asian current account surpluses and foreign exchange reserves, which is where Asia beats other emerging markets around the world.
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In addition, Asian bank exposure to Europe’s PIGS (Portugal, Italy, Greece, Spain) is limited.

Citi: For most of Asia, exposure to European banks is relatively smaller in the 30%-52% range given the larger role of US and Japanese banks, with least exposure in Thailand and Malaysia. The disparity of bank exposure in Asia vis-à-vis fiscally troubled EU countries is more striking if you net out UK banks. European banks net of UK still constitute over three fourth’s of foreign claims on Greece and Portugal, but they account for only a little over a quarter share of foreign claims on EM Asia. Thus, if debt solvency issues in EU remain in peripheral country like Greece and Portugal, we expect the impact in Asia via common creditor channel will be relatively contained.

On the trade front, Asian exposure to Europe’s PIGS economies is also small.

Trade linkages between fiscally challenged EU countries (Portugal, Ireland, Greece and Spain) with the rest of Asia is minimal with exports to those countries representing only a fraction of total exports (0.4% to 2%), and even a smaller fraction of GDP (0.1% to 1.3%).

While a greater European crisis, including France and Germany, would surely effect Asian exports, the U.S. and China provide markets for the lion’s share of Asian exports as shown by the Citi chart below. Thus overall, Asia is relatively insulated from any crisis that remains limited to Europe.
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(For more detail, ask Citi for the full report, Impact of EU Area Fiscal Issues on Asia, Johanna Chua, 10 Feb 2010)

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