Asia's tiger economies falter as global downturn bites

BANGKOK/SEOUL (Reuters) - Asia's tiger economies took a bigger hit from the global slowdown sooner than expected as South Korea's industrial output fell sharply in October and Thailand posted its slowest export growth in six years.

The economic crisis that has gripped the developed world has started to bite in what had been one of the world's fastest-growing regions and a rise in political risk in Thailand and India could exacerbate the growing economic problems.

Although Indian annual economic growth between July and September came in stronger than expected in a Reuters poll at 7.6 percent, data on Friday showed, it marked the slowest pace of expansion in almost four years.

Malaysia's economy grew at 4.7 percent in the third quarter from a year ago, above analysts expectations, but far slower than the 6.7 percent pace of the second quarter and its slowest pace since mid-2005.

"People are beginning to realize the extent to which the unprecedented financial crisis in the West is having an impact on many Asian economies. The picture is looking ugly though Asia should, on the whole, still outperform the rest of the world," said Alvin Pontoh, economist at Capital Economics in London.

He forecasts that Asia, excluding Japan, will grow by 5 percent next year compared with an average of 8 percent over the past five years, which would mark the biggest slowdown since the region's financial crisis in 1997-98.

Indonesia, South Korea and India have been caught in the credit crunch due to large external corporate indebtedness. Falling foreign exchange reserves in South Korea and a swelling current account deficit in Thailand only add to financial vulnerabilities as they increase exposure to external shocks.

"We know Asian economies would be caught in the direct headlight of two oncoming trains; the global credit freeze and the weak global demand," investment bank UBS said in a report issued on Friday.

"While these aren't unexpected factors, what has surprised us was the extent and speed at which these shocks have hurt what we still maintain were/are strong Asian fundamentals as the credit storm approached," the investment bank said.

KOREA RECESSION?

Industrial production data for South Korea, Asia's fourth-largest economy, showed that output contracted by 2.3 percent in October from September, against expectations of a 1.3 percent expansion in a Reuters poll.

"The output data is really disappointing, signaling that the economy is slipping into a recession, a deep and long one," said Lee Sang-Jae, economist at Hyundai Securities in South Korea.

In Thailand, exports grew 4.7 percent on an annual basis in October, way below the 5.5 percent forecast in a Reuters poll.

Thailand's current account deficit widened to $1.13 billion, increasing the country's dependence on external financing and the October trade deficit surged to $964 million versus a $142 million surplus in September as imports rose 23.5 percent from a year ago, more than expected.

In the wake of the Asian financial crisis a decade ago, countries in the region built huge foreign exchange reserves to protect themselves from a repeat.

But those buffers are being eroded and data earlier this month showed South Korean reserves had fallen by $52 billion to $212.25 billion between the end of March and the end of October.

In Malaysia, the latest data shows that foreign currency reserves fell to $99.7 billion by mid-November, down from $122.6 billion at end-September.

RATE CUTS?

Policymakers across Asia have scrambled to cut interest rates to unfreeze credit lines and boost domestic demand at a time when demand for exports is slowing.

China cut rates by 1.08 percentage point this week, Malaysia trimmed rates by a quarter of a percentage point on Monday, its first cut in five years and central bank Governor Zeti Akhtar Aziz said on Friday it would act again if needed.

The Reserve Bank of India (RBI) is expected to follow suit, especially after the attack on Mumbai by Islamist militants in which at least 121 people were killed.

The question is whether those rate cuts will help firms who need access to credit..

"The RBI is trying its best to ease liquidity conditions. The main worry at this stage is that the private sector is really not seeing the benefits of that. I think anytime, any day now we will see further interest rate cuts," said Robert Prior-Wandesforde, economist at HSBC in Singapore.

HSBC sees the repo rate which currently stands at 7.50 percent, being cut by 150 basis points.

In Thailand, anti-government protesters are blockading the airport, adding to the woes of a country whose economy is growing much more slowly than expected.

Thailand had been the only Asian nation predicting growth would actually pick up this year after a lackluster performance in 2007. But data this week showed that economic growth was at a 3- year low in the third quarter and the government slashed its growth forecasts.

"Slowing exports is a signal, telling us that our economy is heading down and that it could be a steep fall that we should be concerned about. The Bank of Thailand should act and I think the action should be an aggressive rate cut of 50 basis points," said Nuchjarin Panarode, economist at Capital Nomura Securities.

The central bank reviews policy on Wednesday. The outlook for Thai exports looks even gloomier with the closure of Bangkok's airports by protesters.

Kasem Jariyawong, president of the Thai Air Freight Forwarders Association, told Reuters that outbound air cargo through the main Suvarnabhumi airport was usually around 1,500 metric tons a day worth some 3 billion baht ($84.8 million).

(Additional reporting by Surojit Gupta in New Delhi; Writing by David Chance; Editing by Neil Fullick)