Editor’s Letter – November 2008

Asia feels the global squeeze

Across emerging markets, businesses are being hit hard by the sudden evaporation of credit that the world’s liquidity crisis has brought.

Did you hear? The theory of economic decoupling is dead. It died in October after the near-collapse of the banking system, whose wake left the world facing a big slump. Of course you’ve heard. Everyone has.

In the end it was a fairly quick demise, but the pain lingers. The financial crisis may have been the result of financial mismanagement in the world’s wealthiest economies. But the consequences are universal. As a result, the idea that certain emerging markets might escape them – the core idea of decoupling – is now discredited. Its proponents have fallen silent. Told you so, say the critics.

Across emerging markets, businesses are being hit hard by the sudden evaporation of credit that the world’s liquidity crisis has brought. Stock markets have lost more than 50 percent of their value since May.

In China, economic growth is slowing, as export-driven businesses experience falling demand for their wares. Suddenly headlines of failing Chinese companies proliferate. Unemployment is rising. There are fears that Western governments adopting protectionist policies in response to the slump will amplify the problem. Similar fears are spreading in India, too.

In the Middle East, policy makers and investors are trying to get to grips with the implications of the collapsing oil price. By the time of this edition of PEI Asia going to press, crude had dropped to below $70 a barrel. This in itself is an extraordinary fact and speaks volumes about what’s happening in the world today. It also helps explain why Asia’s prospects of escaping the crisis are dim.

What remains to be seen is how severe and how extended the downturn in the region will be. As Rob Abbanat, our China columnist in Shanghai, argues on p. 6, China has options to boost domestic consumption, which might be enough to enable a softish landing. In India, the recent emergence of an affluent middle class could have a similar effect. If the two giants can consume their way out of trouble, their neighbours might benefit as well.

For private equity investors, Asia’s near- to medium-term economic performance will be critical as well. A downturn means many things, including falling asset valuations, so funds invested in the coming months stand to deliver strong results. More broadly, the future of the industry depends on investors still seeing long-term strategic value in allocating capital to the region. If they do, Asian private equity will carry on growing.

Its evolution won’t follow a straight line. Things will likely get worse before they get better. But private equity’s long-term time horizon makes it appropriate that general partners in Asia should think about the beginning of a new cycle already. Just don’t talk to them about decoupling. That idea is no longer relevant.

Enjoy the issue.

Philip Borel