Here's what could help Asia battle the impacts of QE3 pullback

Analysts are positive that Asia will survive this.

United Overseas Bank Group (UOB) said that stronger economic fundamentals, healthier balance sheets and rising intra-regional trade will help to counter the potential of US$1.4 trillion in capital outflows from the pending reduction in the US Federal Reserve’s quantitative easing (QE) programme.

UOB’s Head of Research and Investor Relations, Mr Jimmy Koh said, “We believe that though QE tapering will be a short-term destabilising factor in Asia, the economic fundamentals of the region have strengthened due to the prudent economic policies implemented since the 1997 Asian Financial Crisis.

“Asia’s foreign reserves and current account levels are strong and will help mitigate the impact of any liquidity outflows. Similarly, Asian companies and financial institutions have built stronger balance sheets and healthier gearing levels, which will make them more resilient against market volatility. Asian policy makers are also more proactive and pre-emptive in managing asset price inflation and consumer credit. We are confident that Asian economies today are equipped to ride out the current economic and interest rate cycles.

“Additionally, Asian economies have benefitted from rising intra-regional trade, investments and consumer affluence – trends that will continue to drive the region’s economic growth and cushion it from possible global capital outflows.”

Though the announcement of the QE pullback has put pressure on Asian currencies, which have been weakening since May 20132, Mr Koh said that the depreciation in Asian currencies is not a reflection of economic weaknesses in the region but a result of improving growth prospects in the US. 

According to Mr Koh, the US Federal Reserve will only raise short-term interest rates in 2015 in view of the modest pace of the US economic recovery. This will give time for Asian central banks to adjust their monetary policies and for investors and businesses to manage potentially higher borrowing costs.