KUALA LUMPUR: The implications of the European sovereign debt crisis to the Asean region are not likely to be “shallow or short term”, according to Institute of Strategic and International Studies (ISIS) senior director Steven CM Wong.

Among the options to get out from the crisis is either to cut debt and spending, or get out of debt with modest spending.

“The risk of contagion to the rest of Europe can escalate from serious to virtually intractable,” Wong said at the Malaysian Institute of Accountants-Asean Federation of Accountants conference. Already, enormous political and financial capital is being spent on bailouts and not on plans for longer-term economic growth.

Wong: ‘There’s a need to seriously look at increasing potential output and growth trajectory.’

“There’s a need to seriously look at increasing potential output and growth trajectory,” he said.

Asean economies do not have the sovereign debt problems like their European counterparts. However, Wong said Asean economies were not without their vulnerabilities.

Wong said the fear now was that Europe’s sovereign debt crisis would spread to Asean through trade and investment.

“Asean economies are strong but there should not be a sense of complacency,” he warned.

However, the question remains if Asean economies have done enough to avert the risks of a global economic downturn.

Wong said on present course, most Asean countries seemed unable to weather a moderate to severe downturn without tipping into recession.

“Public debt levels in many cases are fairly large (40% to 60%) and will need spending restraints or cuts to stay out of trouble,” he said, adding that Malaysia was one of the countries which had national debt above 50% of gross domestic product.

Wong said external debt had been growing for Indonesia, Thailand and Malaysia. Debt service ratios, however, are mostly in the single digit except for Indonesia.

In Thailand, Malaysia and the Philippines, public investments seem to be filling the gap left by the private sector. But it is also imperative to encourage private equity and not public debt-driven economic growth.

Commenting on the Asean Infrastructure Fund, Wong said the amount of US$400mil was still small but expected the fund size to hit US$1 trillion in few years. “It is still early days but the fund is a good start. There’s a need to ramp up its size to make an impact.”

The fund, to which Malaysia has pledged US$150mil, is aimed at supporting infrastructure projects in Asean to catalyse economic integration.

Meanwhile, KFH Research Ltd managing director and vice-chairman Baljeet Kaur Grewal said advanced economies had retreated sharply but Asian economies would remain resilient, boosted by strong domestic growth.

Should the contagion from the European debt crisis hit, the impact would be on the Asia trade channel, resulting from reduced growth in some European countries on import demand for Asia-Pacific goods and services, she said.

Asia had become slightly more dependent on China’s economy which, in turn, depended on the world economy, Baljeet added.