European debt contagion unlikely to have big impact on Asia: CIMB

THE growing sovereign debt risks in Europe may provide some headwind to economies like Malaysia in consolidating their fiscal deficit, but economists do not think that it will be severe.

CIMB Investment Bank (1023), in a recent report, says fears of a sovereign debt contagion spreading to Asia are "buffered by strong economic and financial fundamentals".

Public debts to gross domestic product (GDP) for Malaysia, Thailand and Indonesia are manageable and their budget deficits are projected to narrow in the medium term.

The market is hopeful of a credible fiscal consolidation plan out of the European Union (EU) to help boost investor confidence and strengthen currencies and to avert any debt crisis arising from the swollen budget deficits of Greece, Portugal, Ireland, Spain and Portugal.
In the case of Greece, its government debt to GDP ratio is 124.9 per cent, while its budget deficit is 12.7 per cent of GDP, which is considered to be more than the limit allowed by the 16-nation euro bloc.

There are mounting pressures on Greece to have additional measures in place by mid-March, after a meeting of EU finance ministers.

Inter-Pacific Research head of research Anthony Dass said rising government debt in the eurozone's advanced economies could lead to a sovereign debt crisis in 2010.

"The new sovereign debt risk may force policymakers to withdraw from their stimulus measures earlier than expected."

To avert this risk, it is vital for the falling output as opposed to contraction in stimulus spending which appears to be the root cause of widening deficits to revive.

He said the most vulnerable Euro members will have to address the crisis without the option of devaluing their currency or exercising an independent monetary policy as they would benefit from the relative stable euro region.

The euro shrank to a nine-month low last week on the back of the debt crisis.

"We believe the impact on the ringgit is limited. The reason being we expect euro will provide the necessary assistance to stabilise the scenario," he said.

The ringgit declined against the euro to RM4.6628/6676 yesterday from last Friday's close of RM4.6546/6594.

Anthony said however, the risk of contagion may start to rise and hurt, to some extent those economies sitting on huge fiscal deficits.

For instance, Malaysia's fiscal deficit in 2009 was 7.4 per cent of GDP and is projected to ease to 5.5 per cent of GDP in 2010. As such, it could experience some level of headwind, "but the adverse impact may not be severe".

CIMB chief economist Lee Heng Guie however felt that although Asia's credit default swap spreads (CDs) have risen in the wake of the Greece's problems, it would be temporary.

"Given Asia's well-managed financial prudence as well as sound macroeconomic management, we do not expect international rating agencies to flash their concerns on potential sovereign debt risk in the region," he said in a report.

Malaysia's budget deficit is also largely funded from domestic liquidity given the high national savings of 32.5 per cent of GDP in 2009, added Lee.