How resilient is Asia to global shocks? Manu Bhaskaran considers how investment spending in emerging economies along with sound policies could help the region
This article was first published in the September 2019 China edition of Accounting and Business magazine.
The world economy is slowing and its impact is being felt hard in developing Asian economies. With business confidence hurt by geopolitical concerns, a trade-technology war between the US and China and fragility in the latter’s economy, firms have cut back on investment and hiring.
The smaller trade-dependent economies outside China and Japan face a hostile environment of slowing demand for their exports and downward pressures on the prices of commodities they sell, as well as potential turbulence in their currency, equity and bond markets which could create financial stresses. Nevertheless, there are a number of reasons why we believe much of Asia can weather the global difficulties.
First, with major central banks such as the US Federal Reserve and the European Central Bank signalling that they will ease monetary policy, the monetary authorities in Asia now have the flexibility to cut interest rates more aggressively. India’s central bank has already started the process and we see more rate cuts in countries such as Indonesia, Malaysia and the Philippines. Other countries – such as Singapore and Korea – are likely to use fiscal measures to boost domestic demand as well.
Second, countries such as Indonesia, the Philippines and Thailand have ambitious plans to ramp up infrastructure construction. These projects are ‘shovel-ready’ and can be expedited so as to provide an earlier boost to their economies.
Third, foreign direct investment has picked up substantially across the region except in India. Malaysia, the Philippines and Vietnam especially have seen growing foreign investor interest. Some of this is due to accelerating production relocation out of China.
Assuming that the US and China can avoid an escalation in their trade war, the main vulnerability in Asia is the external accounts in places such as India, Indonesia and the Philippines. As investment spending speeds up in these countries, imports will tend to rise as much of the infrastructure spending involves imports of heavy duty equipment such as power generation turbines and railway rolling stock. However, financial markets tend to nervously watch current account deficit trends in emerging economies, taking fright if the ratio of the current account deficit to GDP exceeds 3% – even if the rise is temporary and driven by investments that will improve productive potential.
The role of policy responses will be critical in determining how resilient Asian economies will be in a more turbulent global environment. Judicious use of monetary easing and stepped up fiscal spending can help offset the downturn in export demand. Reforms aimed at removing obstacles to investors will also help raise long-term growth potential. So far, the portents are good that sound policies will bolster Asian resilience in the coming few years.
Manu Bhaskaran is CEO of Centennial Asia Advisors in Singapore.
"The role of policy responses will be critical in determining how resilient Asian economies will be"