《Asia Focus》.pdfVIP

8 UOB Economic-Treasury Research Quarterly Global Outlook 4Q2011 Asia Focus Asia: Impact From Euro Area Debt Crisis - Possible Liquidity Dry Up, Or Extended FX Weakness • Our call has been that this part of the world will be impacted through the interbank liquidity and credit channels. Recent developments in SGD SOR, and Asian FX weakness clearly reflected this. Another indictor is the Euribor TED spread which signals stresses in the US dollar funding market especially among European banks. So far, the general reading is that we are worse off than the Bear Sterns episode, but not as severe as Lehman’s situation in 2008. However, we have to watch developments on this front closely. If liquidity does dry up, the situation in Asia could change materially. • Another channel is extended FX correction leading to an FX crisis. We believe the recent move in the FX market is a currency adjustment rather than a currency crisis in the making. Short-end yields in Asia have not risen significantly but that will be something to watch for signs of greater distress in the coming months. • Since the start of August, Asian currencies have depreciated by around 5% against USD. The comparison drawn against 2008 suggests that there could be more downside to the Asian FX given that the Asian currency index fell around 11% back then. However, we maintain that this is not another FX crisis in the making. • Our calculations indicate that the FX reserves in the emerging Asian countries are significantly higher compared with the foreigners’ investments in the country’s government bonds and equities (since 2002). From the FX perspective, this is some reassurance that the impact from larg