Inflation Is Asia's Top Risk: Aussie Economist

Source : The Business Times, April 22, 2008

Region has enough in its tank to ride out global downturn, he says

INFLATION is the No 1 risk for Asia, ranking even higher than the current credit squeeze and global economic slowdown, a top Australian economist said yesterday.

But inflation can be managed if countries allow greater appreciation of their currency, according to Roger Donnelly, chief economist of the Australian Export Finance and Insurance Corporation (EFIC).

Although the likes of Singapore and China have recently strengthened their currencies against the US dollar, this has to be seen in the 'broader context of the US dollar sinking against every other currency', he said.

'Asian currencies are still very weak, and in many people's judgment there is scope to combat inflation by allowing greater exchange rate flexibility,' Mr Donnelly told reporters during a discussion here yesterday while on a two-day visit.

The EFIC - the Australian government's export credit agency - has been supporting the international growth of Australian businesses for 50 years. It also provides finance and insurance to Australian companies exporting and investing overseas.

Acknowledging that a stronger currency can hurt competitiveness, Mr Donnelly said: 'Yes, it will not help export industries. But domestic demand will be supported, and that will cause a re-balance in these economies, which is healthy.'

On how the global economic slowdown could affect growth in Asia, and particularly Singapore, he said: 'I'm a cautious optimistic. I think Asia will be able to weather the storm. Back in 1997 you were a big importer, but this time round you are suppliers of capital to the rest of the world. And since 1997 your relative economic weight in the world has increased.'

Asia, as a whole, has enough in its tank to 'ride out' the international downturn, said Mr Donnelly, thanks to increasing intra-regional trade making up for a dip in exports to the US.

Singapore is Australia's seventh-largest trading partner, with Japan topping the list.