A true test for Asian markets

The congress came as focus began to shift from the fallout of the banking crisis in the West to the implications of a downturn in the real economy in the East. The reaction couldn't have been worse as the region's heavy dependency on export-led industry became exposed. The rapid deleveraging forced a sharp deterioration in the region's markets, despite the flurry of announcements to stabilise sentiment.

The region's financial markets are in a state of flux, as government authorities and industry assess the true impact of a global slowdown on the real economy. Views expressed at the conference varied widely. Some were extremely pessimistic, forecasting conditions comparable to the Asian financial crisis in 1997-98. JP Morgan lowered its growth forecast for Singapore for 2009 from 6% to 0.5%, although David Fernandez, chief economist at the US bank for the region, said it is not growth that is significant, rather, it is the change in capital flows - the sudden stop of inflows into the region - that is concerning.

Others were more optimistic, claiming the local markets are in much better shape than they were 10 years ago. According to Enrico Tanuwidjaja, an economist at OCBC, the Asean countries, characterised by huge local markets, consumer-driven growth, being less leveraged and with milder liabilities, could cushion the global impact.

Interestingly, it was a local markets trader that said the region's permanent complacency is the greatest risk. He said emerging markets benefited from a wave of euphoria early this year, based on theories such as decoupling and viewing reserves as a cushion. This led, for example, to Korean companies putting on bad risk/return hedges that later blew up. And in the last two weeks of September, Malaysia used $10 billion of its reserves to stabilise the market. South Korea used more.

He said that, in 2009, Asian reserves will implode and, ultimately, poor export demand from the US and Europe will have a detrimental impact on the region. He bleakly forecasts four to five years of weak growth, adding "sometimes the games end, and now is the time".