Asia is just beginning to feel the effects of shrinking export demand and capital flight while the worst of the economic crisis has yet to arrive even for the U.S. and Europe. As consumer sentiment declines, purchasing slows, and new orders shrink, most export dependent countries in Asia will feel the brunt of the downturn. The next few months will give a clearer indication of the depths of the recession as consumer spending leading into the U.S. holiday season becomes clearer and corporate quarterly results are announced. Asian countries will need to shift from financial-system intervention to more fundamental economic support measures as the crisis worsens.
The first wave response has been to concentrate on liquidity even though Asian banks were not exposed to toxic assets like Western financial institutions. Fear by association in terms of dollar-denominated debt obligations, rapidly falling currencies, and investments abroad affected Asia's financial markets. India's central bank pumped $4 billion into markets to ease difficulties as investors pulled out of mutual funds. South Korea has pledged $30 billion for its financial markets. China, anticipating slowing growth, reduced lending rates by 27 basis points, lowered reserve ratios for commercial banks and eliminated personal taxes on interest income.
The second wave of the crisis, a far broader slowdown, is just beginning to appear. China reported slower third-quarter growth with more expected by year's end. Singapore has entered recession with much of Southeast Asia's export dependent economies likely to follow. Dramatic declines in Western demand will hit export-dependent countries with already high inflation the worst.