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Can Asia ex-China continue to be resilient? ; India: This is as good as it gets for the economy


Can Asia ex-China continue to be resilient?

  • Asia ex-China has been relatively resilient this year despite the harsher global environment. We believe that the re-opening of the developing Asian economies ex-China will outweigh the headwinds, thus allowing this resilience to continue.
  • As the pandemic eases, restrictions are being relaxed, and domestic demand reviving. Open borders will allow tourism to recover and labour market frictions to ease. Continued firmness in tech exports and higher commodity prices plus growing foreign investment and infrastructure spending will also add to growth momentum as the year progresses.
  • China is the single biggest risk: it can succeed in suppressing covid infections but only at a high economic cost. But with the labour market poised to weaken further, and growing social discontent, the authorities will have no choice but to shift away from covid-zero policies and to implement much more aggressive stimulus measures – eventually. More monetary tightening is another risk as it will slow global demand and create financial market stresses.
  • Overall, growth in developing Asia can remain relatively resilient. Those that pursue credible policies will be able to buffer themselves better against higher financial risks.

India: This is as good as it gets for the economy

  • Corporate India booked a robust earnings season for 1Q22, which is a product of the sanguine macro backdrop and the release of pent-up demand with the easing of most restrictions. However, this may be as good as it gets for the economy.
  • The bevy of backward-looking indicators – manufacturing and services PMI, GST collections and mobility trends – suggest the economic momentum will hold up in 1Q22.
  • However, several headwinds loom large. The heat wave has exacerbated the coal and power shortages, impinging on industrial activity. It also threatens India’s wheat output, and export restrictions are increasingly a possibility.
  • There are also concerns that the monsoon season could disappoint with the proliferation of extreme weather conditions. Last, capacity utilisation rates remain low, holding back the capex drive, despite the buoyant earnings season. We present our revised forecast for India:

Implications of Recent Developments:

  • Asian political risks: Results of today’s Philippines presidential election will be known in a few days’ time. In Hong Kong, a new Chief Executive opens the possibility of a reset in the city after three tumultuous years. John Lee appears to appreciate the importance of re-establishing re-opening Hong Kong’s links with the world. He will act to stop the exodus of talent and business functions to competitors such as Singapore.
  • Asian economic prospects: High-frequency data point to improving vigour in the Philippine economy with the release of pent-up demand following the easing of restrictions. With inflation overshooting its target, expect the central bank to raise rates beginning in June.

China: Mounting challenges to compel far-reaching policy changes; Malaysia: Solid fundamentals to cap Ringgit weakness


China: Mounting challenges to compel far-reaching policy changes

Severe internal and external challenges are compelling China’s leaders to make fundamental policy changes.

  • Near term: There has been a clear shift in favour of greater stimulus, with the focus not on maximizing growth but on ensuring stability.
  • There are four reasons why the announced measures lack potency. The changes do not go far enough to restore consumer confidence. Neither do they provide incentives for local governments to implement stimulus actions swiftly. Private enterprise is not likely to be convinced that Xi will really turn away from suspicion of the private sector. And signs of divisions within policy circles are also a worry.
  • Longer term: China will place greater emphasis on securing its geo-strategic position rather than on prioritizing growth. It will engage in a range of measures to solidify its position in southeast and central Asia while accelerating the inward turn in policies so as to reduce reliance on external demand.
Malaysia: Solid fundamentals to cap Ringgit weakness
  • The Ringgit fell 3.6% against the USD in April, outpacing declines in the Thai Baht (-3.1%) and Singapore Dollar (-2.5%).
  • Three factors explain why the Ringgit has weakened more than its peers in the region – the Ringgit’s significant correlation with the CNY, belated policy tightening by the central bank, and limited currency market intervention.
  • Nevertheless, solid fundamentals will cap Ringgit weakness. The favourable trade position from the broad-based rally in commodity prices and relatively quiescent inflation will prop up the Ringgit, which we expect to come back to 4.2 against the USD by end-2022.

Implications of Recent Developments:

  • Korea: Consumption and investment have slowed. The central bank’s rate hikes are cooling the overheating housing market which the incoming Yoon government has vowed to tackle.
  • Indonesia: Investment data show that Indonesia is progressing in its efforts to accelerate economic growth. But policy flip-flops such as the ban on palm oil exports could undermine confidence in policy making.
  • Singapore: Worries about rising inflation could prompt further policy tightening in October.
  • Taiwan: Despite headwinds from China, strong tech exports and investment spending should help Taiwan achieve a robust 4% growth in 2022.
  • Thailand: Both consumer spending and investment decelerated significantly in March. The recovery in tourism has also been sub-par.
  • Vietnam: A strong recovery is underway, led by investment and exports. Domestic demand is also supporting retail sales growth. An anti-corruption crackdown is underway, with senior political and business figures implicated.