Financial markets could bear the brunt of rising risk aversion while the global economy will probably withstand the US government’s first partial shutdown in 17 years, analysts and policy makers say.
A one-week shutdown of some government services should have a less-than 0.1 per cent impact on US gross domestic product, said Tomo Kinoshita, chief economist at Nomura Holdings Inc in Tokyo. Halting non-essential government services won’t have much effect on imports from Asian economies, said Richard Jerram, chief economist at Bank of Singapore Ltd.
"Investors will likely become more risk-averse due to the shutdown," South Korea Finance Ministry director general Choi Hee Nam said in a telephone interview today before the US government was forced into the shutdown. Any impact on the global economy will be short-lived, he said.
The US government began a partial shutdown at midnight, idling as many as 800,000 federal employees after Congress failed to break a partisan deadlock. Asian stocks pared gains as the lack of immediate plans for further negotiations raised concerns among some lawmakers that the shutdown could bleed into a fight on how to raise the nation’s debt limit to avoid a first-ever default after October 17.
"If it does last two or three days, then the impact should be very limited, but there is obviously a risk that it doesn’t and then we run into the debt ceiling limit as well," said Robert Prior-Wandesforde, a Singapore-based economist at Credit Suisse Group AG. "Given how high the stakes are, as we’ve seen a couple of times in the recent past, it will be resolved, or at least the can will be kicked down the road once more."
A shutdown that lasts at least a month could cause 1 to 2 percentage points being knocked off of fourth-quarter GDP growth in the US, which would impact demand for Asia, he said. Asian economies that are most export-intensive and have the biggest share of exports going directly to the US such as Singapore, Malaysia, Taiwan and South Korea would be most affected, he said.
The MSCI Asia Pacific Index of equities increased 0.2 per cent as of 1.30pm in Tokyo, trimming earlier gains of 0.4 per cent. Standard & Poor’s 500 Index futures added 0.3 per cent as the shutdown became official.
A partial shutdown of the federal government would cost the US at least US$300 million a day in lost economic output at the start, according to IHS Inc. While that is a small fraction of the country’s US$15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers.
Lexington, Massachusetts-based IHS estimates that its forecast for 2.2 per cent annualized growth in the fourth quarter will be reduced 0.2 percentage point in a weeklong shutdown. A 21-day closing like the one in 1995-96 could cut growth by 0.9 to 1.4 percentage point, according to Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia.
Beyond the impact on growth, confidence in US policy makers’ ability to steer the world’s largest economy may be at stake.
"Countries in the region cannot help but be dismayed by the political paralysis that has gripped Washington in the last few years," said Evan Resnick, an assistant professor at the S. Rajaratnam School of International Studies in Singapore. "It can’t exactly fill friends and partners of the United States with great confidence to see the US incapable of actually passing a budget resolution."
Chances of a last-minute deal -- seen so often in past fiscal fights -- evaporated shortly before midnight as the House stood firm on its call to delay major parts of President Barack Obama’s health-care law for a year. Senate Democrats were equally firm in refusing.
Asian policy makers are bracing themselves for increased market volatility.
Indonesia is planning more economic measures to add to a package unveiled in August as authorities struggle to shore up a slumping currency. The government will unveil more policy steps in October to expand on what was announced in the previous program, Bambang Brodjonegoro, head of fiscal policy at the finance ministry, said yesterday.
The impact from the shutdown will be on financial markets as it affects global interest rates and stocks, Philippine Economic Planning Secretary Arsenio Balisacan told reporters in Manila today.
"Its impact is likely quite minimal," he said. "These shocks have been talked about in previous years. But it depends on how long the uncertainty will be. US couldn’t afford to be in that situation for a long time."
The Philippine central bank will remain watchful of excessive domestic market reaction and step in as appropriate, Governor Amando Tetangco said this week. "We can expect some increase in market volatility because of uncertainty in the manner and length of time before resolution," he said.
The fallout will depend on how soon the US can resolve its impasse.
"In the medium to long term, if there is a US slowdown, it will impact our exports," Nandalal Weerasinghe, the deputy governor of Sri Lanka’s central bank, said by phone today. "I am confident that the US, knowing the implications, will come to some resolution, if not today, at least in about a week’s time. So it is not such a matter for concern. But if they fail, it will not only impact Sri Lanka but the entire global economy."-- Bloomberg