Geo-political risks: Taiwan a sticking point, not a danger point yet Covid-19: Omicron variant fuels uncertainty moving into 2022

Highlights from the CAA Weekly Table:

Asian economic prospects improving but question marks remain over policy

  • China’s rate cut shows that the economy is weaker than the authorities anticipated. Expect more easing measures, such as infrastructure spending and higher fiscal spending.
  • India’s recovery continues but sustained higher growth needs a revival in capital spending which is not evident yet. The reform cycle appears to have stalled for now.
  • Korea’s growth prospects are solid: expect the BOK to raise rates again. Indonesia looks set to out-perform. Despite a court ruling against it, Indonesia’s labour reforms remain on track. Malaysia is poised for a strong economic recovery while the Philippines’s prospects have also improved – so long as the omicron variant does not turn out to be deadly.
  • Thailand’s heavily tourism-reliant economy is most at risk if the omicron variant spreads dangerously.

Geo-political risks: Taiwan a sticking point, not a danger point yet

  • The US and Japan have issued a flurry of warnings to China not to step up aggression against Taiwan. Japan’s policy shift is particularly notable for its robust approach to China: higher defence spending and a more aggressive posture to defend against missile attacks.
  • China’s strategic position in Asia has weakened as several key countries – Japan, India and Australia – have adopted a harder line towards China. Even the Philippines appears to be reverting to its traditional pro-US line. The latest Asia Power Index shows China’s position relative to the US weakening for the first time in years.
  • These reverses could persuade China to review its approach. It might take advantage of forthcoming talks with the US to adopt a less provocative approach to its neighbours.

Covid-19: Omicron variant fuels uncertainty moving into 2022

  • Under our baseline scenario moving into 2022, we expect global growth to ease a notch, but remain highly supportive of Asian economies, thanks to solid demand for manufactured goods and commodities, as the bevy of PMI figures goes to show.
  • That has not changed, in spite of the emergence of the Omicron variant, which, anecdotally, appears to be more transmissible but less deadly. The incessant rise in caseloads and hospital admissions in South Africa serves as a foreboding of things to come for Asia.
  • We outline two extreme scenarios, centred on the differing transmissible, mortality and resistance to vaccines. But there is reason to be upbeat, given that viable vaccines and prospective treatment options are in the pipeline. The hit to economic activity has also diminished with every passing wave as the world learns to co-exist with Covid-19.
  • With the Fed set to accelerate the tapering of asset purchases with an eye on raising rates in mid-2022, there are no good options for policymakers if Omicron sparks a new wave of infections, particularly in economies where vaccination rates are sub-par, such as India, Indonesia and the Philippines. Both fiscal and monetary policy are at its limits. Asia could be in for a choppy ride, as it all hinges on the epidemiological behaviour of the new strain.

Key Drivers of Asian Economies



Asian economies:

China: what does the cut in reserve requirement signal?

Central bank cuts reserve requirements

  • The People’s Bank of China (PBOC) will cut the reserve requirement ratio (RRR) by 50 basis points, with effect 15th December. It estimates that the move will inject CNY1.2 trillion of liquidity into the economy.

Assessment: worried policy makers will add further support to economy

  • The PBOC had flagged a shift to greater monetary support in its latest monetary policy report last month. Last Friday, Prime Minister Li Keqiang had mentioned a possible cut in reserve requirements, after raising concerns about the weakening economy in late November.

  • However, all sides had previously shown a reluctance to use aggressive monetary tools to support the economy, given President Xi Jinping’s strictures against credit growth and determination that leverage be reduced in the economy. It is also noteworthy that the decision to ease has come even before the Central Economic Work Conference gets underway next week: one would have expected major turns in policy to have come after that major conclave.

  • All this suggests to us that the debate within China over whether and how much to ease seems to have been finally won by those seeking quick economic relief and who advocate that structural issues such as excessive leverage be given lower priority for now. The economy must have turned out to be weaker than the leaders had expected, tilting the view of the balance of risks towards worrying more about growth.

  • Moreover, we should also expect more easing measures to be announced in coming weeks. The RRR cut by itself will not be enough – surveys showed banks more reluctant to lend because of worries over financial stresses in the real estate sector, so access to liquidity alone will not boost economic activity unless banks’ perception of risks are addressed with more stimulus. Accelerated spending on infrastructure is likely as is some easing of the unusually austere fiscal stance.

India: Signs of sequential and cyclical moderation

Activity indicators point to robust though moderating growth

  • The manufacturing purchasing manager index (PMI) firmed up further in November (57.6) (October: 55.9). New orders expanded for the 5th successive month and at the sharpest pace since February. Export orders were up slightly. Input price pressures persisted at October’s 92-month high, with firms raising prices as well. Employment picked up weakly. Businesses remained upbeat but confidence slipped to a 17-month low as firms worried about rising prices damaging demand.
  • Services PMI edged down to 58.1 in November, from 58.4 in October. New orders rose at a broadly unchanged pace from October. Input prices intensified further in November at the second-strongest pace in a decade. Firms absorbed the rising costs, so output price inflation eased from October. Business confidence climbed to a 3-month high but the overall level of sentiment is still below the historical average.
  • GDP growth eased to +8.4% y/y in 3Q21, from +20.1% in the previous quarter. PCE moderated to +8.6% y/y (2Q21: +19.3%), as did GFCF which eased to a still-respectable +11.0% (2Q21: +55.3%). Government spending was the only component that accelerated (+8.7%), following the uncharacteristic weakness in the previous quarter (-4.8%). Exports were up 19.6% y/y, while imports expanded 40.6% y/y as demand normalised with the easing of curbs.
  • Gross Value-Added (GVA) growth (+8.5%; 2Q21: +18.8%) moderated. By sector, agriculture held up (+4.5%) while manufacturing (+5.5%), construction (+7.5%) and mining (+15.4%) pulled back from the base effects-fuelled highs in 2Q21. The services sector expanded 10.2% y/y, slightly down from +11.4% in the earlier quarter. Domestic trade (+8.2%) decelerated sharply, offset by professional services (+7.8%) and government services (+17.4%) that firmed up.


Source: CMIE

  • GST collections were broadly unchanged for October (INR1.3tr). However, e-way bill generation in the first 4 weeks of November (the final tally, which includes 29th and 30th November, is unlikely to move the needle on the final figure) tailed off sharply to 55.8 million, suggesting GST revenues are set to pull back in the near-term.
  • Non-food credit growth ticked up 6.8% y/y in October, from +6.7% in September. Lending extended to agriculture (+10.2%), industry (+4.1%) and services (+2.9%) firmed up. In the services segment, the domestic trade sector saw a meaningful uptake (+7.1%), alongside a meaningful rebound in credit demand by NBFCs (+1.4%). Household credit growth, however, softened to +11.7% y/y (September: +12.1%), with a broad-based decline in loans for housing (+8.4%), autos (+8.4%) and other personal loans (+17.8%).

The policy side is mixed

  • Halfway through the fiscal year, the deficit came in at just 36.3% of budget estimates, up a smidgen from 35% in September. Stellar revenue mobilisation (with net tax revenues at 68.1% of budget estimates, up 10pp from September). Expenditure realisation, at 52.4% of BE (September: 46.7%) was more sluggish, with capex being the laggard (45.7% of BE). On an annual basis, net taxes climbed 13.0% y/y in October, outpacing the 10.3% increase in public spending. As a share of GDP, the fiscal deficit came in at 2.5%.
  • The government is reportedly deferring implementation of labour code reforms till after the pivotal Uttar Pradesh state elections. This followed their back-down on agricultural reforms in the face of farmer protests. The central government continues to insist that state governments should finalise the implementing regulations for the labour code, which consolidates and simplifies more than 3 dozen archaic laws that hobble growth. Although the labour codes were approved by parliament last year, state government actions are needed for actual implementation – and that has stalled of late.

Assessment: Three downside risks to watch for

  • With the snap-back from pandemic slowdown now over, can capital spending take up the slack?: The moderation in services PMI and e-way bill generation shows that India has passed “peak growth”. As base effects dissipate, corporate capital spending has to be the next driver of growth, since there is not much more excess household savings to draw down and the government is likely to pursue fiscal consolidation in the coming fiscal year starting April 2022. But it is still not clear how much the pandemic has undermined private sector confidence.
  • More fiscal largesse to win state elections? The uncharacteristic concession to the protesting farmers tells us that political leadership is greatly focused on winning the Uttar Pradesh state assembly election. Anything short of an outright victory for his BJP will be construed as a blow to Prime Minister Modi., so we can expect populist measures by the government to shore up its support. With buoyant net taxes keeping the fiscal deficit under control, there could be a temptation to step up spending.

fiscalSource: CEIC. FD = Fiscal Deficit; NT = Net Taxes

  • The reform cycle has probably ended: The Modi government is now about half way through its second term and reform exhaustion is setting in. Moreover, the opposition is now training its sights on the labour reforms in the lead-up to the Uttar Pradesh state elections (held in stages over February and March 2022). Other opposition groups are mobilising to protest against Modi’s controversial citizenship amendment act as well, which has been criticised in some quarters as provocatively anti-Muslim. Modi’s priority will now be on winning the many state elections that are due over the next 2 years and on the 2024 general elections after that.

South Korea: On track for policy normalisation with growth on solid footing

  • The manufacturing PMI edged up to 50.9 in November from 50.2 in October. New orders grew for the 14th successive month, but the pace of increase was the softest in the sequence because of supply chain disruptions. Export orders, however, saw a faster rate of expansion. Employment contracted at the quickest pace in 10 months. Input prices were up sharply amid shortages and bottlenecks while output price inflation rose to its highest since July 2020. The future expectations index rose to its highest since August in a sign that the supply-side bottlenecks will ease further.

  • Export growth accelerated to +32.1% y/y in November from +24.1% y/y in October, taking export value to USD60.4bn in Nov 21, a record monthly figure. 13 out of 15 key sectors posted a further expansion, most notably semiconductors (+40.1%), petrochemicals (+40.1%) and shipbuilding (+237.6%). Imports were equally resilient, clocking annual growth of 43.6%, which is just shy of August’s record-breaking figure (+44.0%). Capital goods imports in the first 25 days moderated slightly to a still-sanguine 27.5% y/y in November (October: +28.4%).

  • Industrial production expanded +4.8% y/y in October, up from the +1.4% y/y in September. ICT Manufacturing (+22.3%) continued to make big gains, while electricity & gas (+4.9%) also recorded a further expansion. Mining and manufacturing (+4.5%) rebounded anew.

  • Retail sales surged +14.4% y/y in October as more consumers spent more due to the holiday season.

  • Business confidence for SMEs rose to 83.5 for December, up 2 points from November. This came after two consecutive monthly slides. The reading is still notably subpar. Manufacturing (84.2; +0.6) was more optimistic than non-manufacturing (82.0; +2.7) SMEs.

  • CPI inflation rose further to a decade-high of +3.7% y/y in November, beating October’s +3.2% y/y. This was led by food (+6.1%) prices, as well as transport (+12.9%). Eating out (+3.8%) also reported further expansions, likely due to the relaxation of restrictions into the “new normal” at the beginning of November. Agricultural products (+18.1%) also marked a significantly stronger uptick. Core inflation however eased to +1.9% y/y from +2.4% y/y.



Source: CEIC. Target refers to the BOK’s inflation target.

Assessment: South Korea to end the year on a strong note

  • All indicators point to an improving economy: South Korea is poised to book annual growth upwards of 4% this year. The record-breaking monthly export figure is an encouraging note, and the holiday season is also likely to encourage spending, and even SMEs are positive on December’s outlook. Easing supply shortages should provide a second wind to Korea’s tech-intensive and chips-oriented economy moving into 2022, where the contrast with Taiwan has been marked, despite the centrality of tech in both economies.

  • Inflation risks will pressure the Bank of Korea (BOK) into tightening further next year: We reiterate our forecast for 3 rate hikes in 2022, starting in 1Q22 before the incumbent governor retires. Signs of overheating remain, with the decade-high inflation print likely to be a further incentive to tighten in the January monetary policy meeting, if not the next. While core inflation was encouraging this time around, and omicron has knocked off more than 10% of crude oil prices, it is likely that demand will remain robust while oil prices will stabilise – leading to a slightly softer, but still elevated, December inflation. And finally, Powell’s recent hawkish comments on the Fed tightening credit earlier than later is likely to prompt the BOK to follow suit.

  • The longer-term question is how high Korean interest rates will go. High debt (household debt has surged past 100% of GDP to rank as one of the highest in the rich world) and lofty property prices argue for monetary tightening. But the cyclical deceleration expected in 2022 raises questions as to how many rate hikes are actually needed. Our view is that Korea’s rate-hike cycle will be a relatively short one, ending around end-2022 with the benchmark rate at 1.75%.

  • The resurgence of COVID-19 in Korea remains a key risk to growth: Caseloads surpassed 5,000 during the past week, a record for the country. However, President Moon is insistent on a return to life without restrictions and appears willing to tolerate a high infection rate. The government is sticking to its guns even with intensive care unit (ICU) utilisation at high levels. However, with doctors at leading hospitals complaining that they have to triage patients in ICUs, the authorities may have little choice but to reimpose some restrictions, especially now that the Omicron variant has emerged. That would hurt growth to some extent but we suspect that strong export growth and highly calibrated restrictions could mitigate the impact on growth.

Indonesia: Primed to outperform in 2022

  • The manufacturing PMI eased to a still-respectable 53.9 in November, coming off the record-high in October of 57.2. New orders rose for the 3rd successive month, but this masked underlying weakness in export orders, which fell for the 5th month running. Employment increased marginally while input prices rose to an 8-year high, and this translated into higher output charges as well. Business sentiment remains positive but slipped to an 18-month low, as respondents were cautious over the longer-term economic scarring from the virus.
  • Inflation was unchanged in November at +1.7%. Food, beverage and tobacco (+3.0%) and information communication (+0.0%) were unchanged; clothing (+1.3%), health (+1.7%) and education (+1.6%) eased a tad while the other components quickened slightly – accommodation (+0.7%), household equipment (+2.5%), transport (+1.4%), recreation and culture (+1.0%), restaurants (+2.7%) and personal care (+1.1%). Core inflation came in at a 5-month high in November (+1.4%) (October: +1.3%), but remained moderate overall.


Source: CEIC. Target refers to the midpoint of BI’s inflation target corridor.

  • Bank Indonesia (BI) hinted at shifting its priorities in 2022 from shoring up growth to safeguarding stability as the pandemic fades. BI Governor Perry suggested that BI’s first move in normalising policy would be to drain excess liquidity in the banking system by offloading some of the government bond holdings, while keeping interest rates low until inflation rose significantly. Separately, BI mopped up IDR58tr of government securities via private placement, bringing its total purchases to IDR201tr out of the projected IDR215tr this year.
  • Fitch affirmed Indonesia’s sovereign rating at BBB, with a stable outlook, citing the favourable growth outlook as well as a manageable debt-to-GDP ratio. Despite the added pressure on the government’s balance sheet stemming from the pandemic, Fitch opined that the tax reforms, particularly the VAT hike that kicks in from April 2022, should help the authorities meet their fiscal consolidation targets. A stronger recovery implies a lower fiscal deficit for this year (Budget estimate: 5.8% v Fitch: 5.4%) and the next (4.9% v Fitch’s 4.5%).
  • The constitutional court took issue with the Omnibus Bill, the flagship reform of the Jokowi administration. At the heart of the matter is the unprecedented use of the omnibus format by the government to revise a bevy of laws at one go, as opposed to individual revisions that would have been onerous and time-consuming. The court also questioned the differences between the final text of the law versus the version approved by lawmakers, even though these differences are not considered material as they were due to typos and formatting errors. In response, Law Minister Yasonna Laoly intends to revise the 2011 Law on Formulating Laws and Legislation to address the procedural deficiencies that the court found troubling. The court gave the government a 2-year grace period to rectify the laws.

Assessment: Indonesia’s prospects look good moving into 2022

  • Economic normalisation underway: The totality of the data points to a healthy economy. However, the persistently low inflation rates do imply significant slack within the economy. This is symptomatic of an economic expansion that is below its potential rate. We retain our full-year growth forecast of 4% for this year and 5.5% in 2022, though the Omicron variant could depress growth a tad in 1Q22.
  • Expect BI to follow the Fed in tightening policy: The Rupiah weakened only marginally, and in line with other Asian currencies as markets priced in the Fed bringing forward the first hike to mid-year following Fed Chair Powell’s remarks on accelerating tapering. This suggests that, so long as the Fed communicates its intentions in advance, the knock-on effects on the Rupiah can be managed. After all, Indonesia’s growth and external accounts fundamentals remain relatively good compared to other emerging economies. BI’s policy reaction to the Fed will be determined by inflation outcomes and whether capital outflows pressure the Rupiah. Inflation will probably remain benign, rebounding to just above 2% as growth rebounds, slack diminishes and as corporate pricing power strengthens with economic recovery. BI will match Fed rate hikes so as to preserve yield differentials with the US, as we argued in previous weeklies. As such, we do expect BI to start raising rates around mid-2022.
  • Court ruling will not reverse vital labour reforms: The Law Minister’s suggested legal amendments will almost certainly satisfy the courts. In fact, his proposed legal changes might even pave the way for more Omnibus Bills which could result in speedier passage of other reform efforts in future. Thus, this legal wrinkle will delay but not derail the beneficial impact of labour reforms on attracting investment and raising Indonesia’s longer-term growth potential.

Malaysia: On track for a strong finish

  • The manufacturing PMI was up marginally in November (52.3) from October (52.2). New orders expanded further, but new export orders fell for the 7th month in a row. There was a fractional improvement in employment – the first since March, though firms also reported difficulty in hiring given restrictions on the entry of migrant workers. Input costs climbed further in November at the fastest pace since May, translating into hefty increases in output charges, which came in at a 7-month high. The level of business optimism rose to its highest since April as firms looked forward to easing restrictions.
  • Inflation accelerated in October (+2.9%) (September: +2.2%). Food (+2.0%), clothing (-0.4%), accommodation (+3.2%), household equipment (+2.1%), transport (+11.3%) and restaurants (+0.6%) firmed up slightly. Non-alcohol beverage (+0.2%), communication (+0.0%), education (-0.1%) and personal care (+0.6%) were unchanged while alcohol (+0.3%), health (+0.2%) and recreation (+0.2%) edged down just marginally. Underlying cost pressures remain soft, with core inflation being range-bound for most of this year (October: +0.7%) (September: +0.6%).
  • Exports firmed up slightly in October (+25.5%) (September: +24.7%), with broad-based strength across machineries (+10.3%), chemicals (+63.6%), petroleum and petroleum products (+115.7%), electronics (+8.8%) and CPO (+44.9%). Imports were also buoyant, rising 27.9% y/y and up further from 26.5% in September. Capital goods import growth (+15.1%) eased, but intermediates (+35.1%) and consumption goods (+10.8%) strengthened. The trade surplus was unchanged at a massive MYR26.2bn in October.

Assessment: 4Q21 growth should surprise on upside

  • With its high leverage to global demand, the economy is set for relative outperformance in the near-term. Covid-19 caseloads have been range-bound after peaking in late-August, and with close to 80% of the population now fully vaccinated, Malaysia should be able to weather new variants such as the omicron one better than other emerging economies. The underlying slack in the economy will keep core inflation under control.

The Philippines: Modest upside surprise this year

  • The Philippines’ manufacturing PMI rose to 51.7 in November, from 51.0 in October. New orders grew for the first time since March, though the pace of growth was anaemic. Voluntary resignations and a paucity of skilled workers meant that job shedding persisted, though only modestly and at the softest pace for four months. Input inflation accelerated to its sharpest since March 2018, bringing the current spell of inflation to 19 months. Selling prices rose too, and at a quicker pace as firms passed on higher costs to consumers. Firms remain upbeat over output expectations, with the level of sentiment at a 21-month high, although it still remains below the historical average.
  • Credit growth picked up further in October (+3.5%) from September (+2.7%). Lending extended to manufacturing (+5.0%), wholesale and retail trade (-0.7%), finance and insurance (+11.5%) and real estate (+7.6%) perked up whereas the reverse is true for accommodation and utilities (+2.1%) and construction (+4.2%). Consumer loans saw a slower rate of contraction in October (-7.2%).
  • Economic managers expect another round of easing restrictions from January 2022, as infections tumble further. Manila, the economic epicentre, is operating under Level 2 of the multi-tiered alert system and the authorities expect the capital region to move to Level 1 with falling caseloads and rising vaccination rates. Bottom-up evidence suggests that consumer psychology is in much better shape, with footfall at retail malls (63%; October: 35%) and fast food chains (78%; Oct: 69%) and air travel (40%; Sep 21: 16%) recovering sprightly.

Assessment: Modest upside surprise this year

  • The economy is set to surprise on the upside albeit modestly with falling caseloads providing a second wind to the economy in 4Q21, alongside the spirited performance by remittances and electronic exports. The rebound in the manufacturing PMI and credit growth is indicative of an upbeat recovery, which we expect to continue in the near-term. Full-year growth of 4.5%-5% appears achievable: Growth could well come in at the upper end of our forecast corridor.
  • But the omicron variant is a risk as another wave of infections would again overwhelm dilapidated hospitals and force the authorities to impose restrictions on activity yet again. Having exhausted its policy space, there would be no good options for policymakers to gin up the economy without jeopardising macro and currency stability, particularly as the Fed is poised to bring forward the normalisation of monetary policy from mid-2022. For now, we hew to our forecast for 2022 (CAA estimate: 6%).



Source: CEIC

Thailand: New variant could defer recovery by several quarters

  • Thailand’s manufacturing PMI softened to 50.6 in November, from 50.9 in October. New orders were subdued, thanks to lingering disruptions induced by the pandemic. Export orders fell at a faster rate by the same token. Employment levels dipped, though this stemmed from voluntary resignations, as opposed to job shedding by employers. Both input and output charges continued rising, with the latter booking a record increase. Business confidence climbed to its third-highest on record on the back of easing restrictions.
  • Private consumption fell 4.3% y/y in October, easing from a -5.9% y/y fall in September. All consumption categories saw improvements when compared to September as the pandemic restrictions are gradually lifted and vaccination rates continue to rise. The decline for durables (-6.9%), non-durables (-6.9%) and services (-1.5%) eased while semi-durables logged positive growth (+3.0%). Sequentially, consumption grew 1.6% m/m sa, slowing from 3.9% in the previous month.

  • Private investment grew 6.9% y/y in October, slowing from +7.4% y/y in September. The decline can be attributed to slowing machinery sales (+12.1%) even though capital imports picked up (+18.8%). Meanwhile, investment permits for the construction sector dipped (-0.5%) in tandem with lower sales of construction materials (-1.6%). Sequentially, investments slipped back into contraction at 1.2% m/m sa, down from +1.5% m/m sa in the previous month.

  • imageManufacturing output expanded anew at 2.9% y/y in October, improving from +0.3 y/y in September. Sequentially, manufacturing grew 2.7% m/m sa, edging down from +6.6% m/m sa in September.

  • Exports grew 17.0% y/y in October, down slightly from +17.8% y/y in September. Manufactured products (+21.2%) and agro industrial goods (+20.8) maintained growth momentum, while exports of mineral products (+157.7%) spiked as commodity prices remain elevated. Imports edged up to +34.6% y/y in October, from +30.3% y/y in September. The increase was led by imports of fuel lubricants (+117.6%) and capital goods (+33.5%), which was boosted by imports of newly released mobile phones. Other categories, such as consumer goods (+42.9%) and intermediate products (+34.9%) held up reasonably well. The trade surplus was USD3.8bn in October, slipping from USD4.0bn in September.

  • Public expenditure continued to support the economy, expanding year-on-year for both current and capital expenditures due to the low base effect coupled with a high disbursement rate this year.

Assessment: Timeline for recovery pushed back by several quarters

  • Within Southeast Asia, it is Thailand’s already-patchy recovery that is most at risk – if the omicron variant turns out to be deadly and if the authorities revert to their old play-book of rigorous restrictions to contain the virus. This resultant blow to consumer confidence, tourism and production activities would undermine our view that the Thai economy could outperform next year. Already, the tepid increase in visitor arrivals from Europe has slipped in recent weeks due to resurgent infections in several European countries. Thailand has already tightened some border restrictions in the past week in response to the Omicron variant. We expect more travel restrictions to be enacted in coming weeks. If sustained for a long period, that would derail prospects for tourism in 2022. Until there is more clarity on the impact of the omicron variant, we are more cautious on the kingdom’s growth prospects moving forward.

Vietnam: Economy remains fragile

  • Vietnam’s manufacturing PMI ticked up to 52.2 in November from 52.1 in October. New orders were up for the second successive month at the quickest pace since April, thanks to the rolling back of restrictions. Similarly, export orders rose again, albeit modestly. A shortage of labour meant that manufacturers were unable to expand staffing despite higher workloads, with employment falling markedly, extending the current streak to 6 months. Input inflation was at its highest since April 2011, and the same can also be said for output charges, which firmed up significantly from October. Business sentiment slid but firms were upbeat over higher output in anticipation of easing restrictions moving forward.
  • Consumer price inflation edged up to 2.1% y/y in November (October: +1.8%). The food component (-0.1%) slipped into the red, led by disinflation in food (+3.9%) and deepening deflation in foodstuff (-1.7%), more than offsetting the rise in restaurants (+2.3%). Other components broadly strengthened albeit modestly – beverage (+2.4%), garments (+1.0%), housing and construction materials (+1.5%), household equipment (+1.0%), transport (+20.7%), telecommunications (-0.7%), recreation (-0.4%) and other goods and services (+1.4%). Health (+0.2%) was unchanged while education (-3.1%) fell further. Core inflation perked up slightly in November (+0.6%) from October’s +0.5%.


  • Export growth accelerated in November (+18.5%) (October: +6.1%), booking the first double-digits gain in 5 months after lockdowns knocked the economy askew. Textiles (+24.9%), computer electronics (+9.0%), wood products (-7.4%) and mobile phones (+22.7%) all quickened while iron and steel moderated to a still-sizeable 112.8% expansion. Imports were more resilient, rising 20.8% y/y and up strongly from +7.8% in October. The trade surplus narrowed to USD100mn, from USD2.7bn in October.
  • Factory output increased for the first time in 5 months in November (+1.6%) (October: -6.1%). Mining quickened, but remained in contractionary territory (-0.7%), as did electricity (-7.1%). Utilities and waste management rebounded 1.5% y/y. Manufacturing also clocked a moderate recovery (+3.0%), led by electronic components (+14.0%), refined petroleum (+10.3%), cement (+10.7%) and steel and iron (+11.8%). Consumer electronics was the main drag on the index, declining 12.2% y/y though that is still the best showing in 5 months.
  • Retail sales shrank 12.2% y/y in November, better than October’s showing (-16.0%). Spending on goods (-5.9%), accommodation (-33.4%), tourism (-55.9%) and other services (-38.0%) all fell but the degree of contraction narrowed from October.

Assessment: New wave of infections could weigh on incipient recovery

  • Backward-looking indicators suggest the economy was on the mend: Activity indicators suggest the economy was making up for lost ground, with an across-the-board improvement, be it in retail sales, PMIs or industrial output. As an up-and-coming manufacturing powerhouse, the key risk stems from the need to impose lockdowns to curtail the spread of the virus, at the expense of growth as a result of the disruptions to trade and manufacturing operations. Compounding the problem further is the shortage of workers in the urban centres following an exodus sparked by the lifting of restrictions in early-October. The labour shortage is the key downside risk to our growth forecast in Vietnam, which could easily hobble the recovery moving into 2022, particularly if the authorities resort to draconian measures to keep mobility in check.
  • New wave of infections could hit growth again, but impact likely more modest: New infections soared to another record-high yet again, but the impact on growth will be more contained. For starters, vaccination rates have climbed sharply – 54% of the total population have been double-jabbed (75% for first jab), and the authorities are already planning the rollout of booster shots this month. Death rates have also trended downwards, after peaking in tandem with the initial wave in September, which is indicative of an improving pandemic management.
  • There is also a realisation that firms and workers alike have coped and adapted to restrictions, implying that every round of tightening restrictions knock an increasingly small percentage points off growth. In that vein, the new Omicron variant will probably spark a fresh wave of infections as is panning out in South Africa at the moment, but is unlikely to entail a hit to growth of the same magnitude vis-à-vis the previous wave in 3Q21.

Geo-political risks in Asia: Taiwan a sticking point, not a danger point yet

The manoeuvrings of the big powers in Asia in recent years have increased frictions and widened the scope for these frictions to escalate into more serious confrontations. Given its strategic value and the emotion it commands in China, Taiwan is the most likely spot where such tensions could intensify and possibly trigger a clash. Whether such risks materialise will depend on the judgements China, the US, Japan and Taiwan will make. Our view is that the net effect of recent developments will be a recalibration of strategy by the main players, which should reduce the chances of a clash over Taiwan for at least the next four to five years.

The US and Japan have stepped up their warnings on Taiwan

In the past two weeks, important statements have been made by American and Japanese leaders, with a view to deterring China from stepping up actions against Taiwan.

  • US officials issued a flurry of statements to warn China against stepping up aggression against Taiwan. Over the weekend, US Defence Secretary Lloyd Austin alerted US allies to the possibility that China’s air incursions into Taiwan’s air defence identification zone could be rehearsals for military operations against Taiwan one day. A day earlier, US Secretary of State Antony Blinken had warned that a Chinese invasion of Taiwan would have “terrible consequences”. But both he and Assistant Secretary of State for East Asian and Pacific Affairs Daniel Kritenbrink stressed that the US was committed to ensuring Taiwan could defend itself. While it is clear that the US is stopping short of committing US forces to the defence of Taiwan should it come under attack, these statements effectively hitch US interests more closely with Taiwan’s – and that makes it more difficult for the US to simply sit passively in the face of Chinese aggression.
  • However, Japan seems keener to provide Taiwan with a clearer commitment and to send a sterner signal to China. Speaking in late November about the growing threats from both China and North Korea, Japanese Prime Minister Kishida ordered a review of Japan’s Medium Term Defence Programme as well as its national security and defence guidelines. He noted that “To strengthen defence capacity, we will not rule out options such as having enemy base strike capabilities…” For Japan, the development of hypersonic missiles by China and North Korea has undermined its security because existing missile defence defences will probably not offer sufficient protection for Japan: that means Japan would need the capacity to attack an enemy base as soon as the missile was fired. Kishida also complained about China’s efforts to “unilaterally change the status quo”. After he took over as Prime Minister, a supplementary defence budget raised total Japanese defence spending for the current fiscal year to 1.09% of GDP, the highest level in ten years. Kishida’s predecessor, Shinzo Abe, was more explicit in his remarks on 1st December. Abe said that “A Taiwan emergency is a Japanese emergency, and therefore an emergency for the Japan-U.S. alliance. People in Beijing, President Xi Jinping in particular, should never have a misunderstanding in recognising this,”

Why China might rethink its approach to Taiwan

There are a number of reasons why China may want to dial back its steadily increasing military and other pressures on Taiwan. First, these warnings by the US and Japan raise the risk for China of any unilateral move on Taiwan. Second, Chinese strategists must be aware that the past year has seen several key countries in the Asia-Pacific region become more actively concerned about China’s intentions – their responses have weakened China’s strategic position:

  • India has decisively shifted against China. It has diverted military forces from confronting Pakistan to the border with China. It has also stepped up construction of roads and other military infrastructure along the Chinese border while acquiring more sophisticated weaponry such as Russia’s S400 missile defence system. India has adopted a hard stance with China in negotiations on easing tensions at their common border.
  • Australia’s membership of the new AUKUS military alliance with the US and the UK is clearly directed at China.
  • In the Philippines, public opinion has become more hostile to China following recent incidents where Chinese maritime militia fired water cannons against Philippine naval vessels attempting to resupply marines based on a reef that China also claims. President Duterte, despite his continuing preference for good relations with China, had little choice but to convey his “abhorrence” at the Chinese move in an ASEAN summit meeting with Chinese President Xi Jinping. The pro-American factions in the Philippines defence and foreign policy establishments have now been emboldened to push for closer ties with the US.

China’s setback was evident in the latest edition of the Lowy Institute’s Asian Power Index (see charts below). The report finds that “China’s comprehensive power has fallen for the first time, with no clear path to undisputed primacy in the Indo-Pacific.” The US has reversed its recent decline and gained on China in some key areas.


Looking ahead: US-China talks could be an opportunity for a temporary relief to rising tensions

Given the setback to China’s strategic position and the need to maintain external peace as China tackles its economic difficulties while preparing for the landmark 20th congress of the Chinese Communist Party, China could be more accommodating during forthcoming talks on strategic issues with the US. These talks could serve to produce a broad agreement between both big powers not to undertake actions that might be destabilising in Asia. The pause in rising tensions might only be temporary but it could buy time for future agreements that would build a more durable modus vivendi in Asia.

Covid-19: Omicron variant fuels uncertainty moving into 2022

Under our baseline scenario for 2022, we expect global growth to ease a notch, but remain highly supportive of Asian economies, thanks to solid demand for manufactured goods and commodities. That view has not changed despite the emergence of the omicron variant: as far as we can tell from current information, the omicron variant appears to be much more transmissible so infection numbers are likely to rise. But it also seems to be less deadly compared to the Delta variant. It also appears that high vaccination rates do offer protection against the variant causing severe illnesses. Add in the new drugs and therapies that are able to significantly reduce the dangers associated with the covid virus and we remain of the view that – omicron notwithstanding – the broad thrust of economic recovery is likely to continue.

A recovery that is broadening out across Asia

First, the current situation in Asia. The recently released purchasing manager indices (PMI) (Table 1) affirm our view for a strong finish to the year, as Covid-19 comes under control.

    • Recovery is still strong, but the pact of recovery in Asian economies is starting to somewhat ease. India is the star performer, posting a strong 57.6 headline PMI in November, up from 55.9 in October. Japan (54.5), the Philippines (51.7), Malaysia (52.3), Vietnam (52.2), and South Korea (50.9) have all posted further expansions, but the rate of growth is rather marginal. Taiwan (54.9), Indonesia (53.9), Singapore (52.0) and Thailand (50.9) have posted weaker expansions, and Myanmar (46.7) trails the region with a contraction (albeit still an improvement from October).
    • China’s manufacturing sector seems to be gaining steam – but only in the larger firms. China’s Caixin PMI (49.9), which is a gauge for the private sector, continued to post lower than the NBS measure (50.1), dipping into a contraction this time. It suggests that the large, government-backed, state-owned firms are performing better than the smaller players.
    • Foreign demand decelerating: 5 out of 12 monitored Asian economies posted a contraction in new export orders – only Singapore and South Korea posted expansions. India, Vietnam, and Taiwan were positive, but eased, with Taiwan still managing to post a strong performance as well. Other economies cited raw material shortages and the lack of orders behind the contraction amid the global shortage of goods and workers.
    • Manufacturers are feeling cost pressures. Out of the 12 observed Asian economies, 9 face accelerating input prices. China, Myanmar, and Singapore also experienced higher input prices, but its growth rate slowed. Notably, Beijing’s efforts to manage raw material shortages are paying off. The NBS index showed input charge decreasing from 72.1 in Oct 21 to a mild 52.9 in Nov 21. Output charge actually posted a contraction of 48.9 in Nov 21, significantly lower than Oct 21’s 61.1. On factory gate prices, all 12 economies posted higher prices, although only 8 posted an faster figure in November, compared to 11 in October.


    • Instead of just raw materials, wage pressures seem to be increasing as well. Myanmar, Vietnam, Singapore, Hong Kong, Philippines, and Malaysia have all reported some staffing issues, labour shortages, or wage pressures. 8 out of 12 observed Asian economies have also noted dips in employment levels. Skilled labour in particular seems to be an issue for manufacturing firms, especially in Singapore and the Philippines.

In short, there has been a cyclical moderation in Asia’s manufacturing PMI, but the fact remains that every economy (save for conflict-ridden Myanmar) is still in expansionary territory. It helps that caseloads have practically collapsed in large economies such as India, Indonesia and the Philippines, while relatively elevated vaccination rates provide a key source of comfort for those that are experiencing fresh waves of infections such as Vietnam and Korea.

Taking stock of Asia and Covid-19 – Where things stand

Before delving into the Omicron variant and its implications, it is prudent to take stock of the Covid-19 situation on the ground for Asian economies. A summary of the new restrictions induced by the variant is listed below:


    • Broadly speaking, caseloads have trended downwards for most economies, save for South Korea and Vietnam which are combatting a fresh wave of infections. On a related note, the second column seeks to provide a more dynamic picture of caseloads, since daily caseloads only offer a static picture. Nevertheless, Korea (1.0) and Vietnam (0.8) stands out on this count, as caseloads are near or have broken fresh records.
    • But death rates have been relatively low in Asia. Taiwan’s (5.1%) death rates appear to be uncomfortably high vis-à-vis the other Asian economies. Given Taiwan’s well-managed healthcare system, more likely than not, Taiwan’s underperformance on this count probably boils down to the accurate and comprehensive testing by the authorities, culminating in more statistical precision over the cause of fatalities. That said, Singapore’s death rate (0.3%) is the lowest in the region, thanks to stellar healthcare facilities in terms of quality (and less so on quantity when it comes to hospital beds). Given the rigorous testing by the authorities, the figure probably puts a floor on the actual death rate from Covid-19.
    • Vaccination rates in the region are clearly converging on the 80%-threshold believed to confer ample protection on large swathes of the population, particularly those unvaccinated either by choice or necessity, from severe illness. Indonesia, the Philippines and India, which were laggards on this front, are playing catch-up while Vietnam, Thailand and Taiwan should be able to hit 80% as soon as 1Q22, supply permitting.

The Omicron variant – more questions than answers

With this backdrop in mind, the emergence of the new variant has fuelled uncertainty over the outlook for the global economy as well as monetary policy. At this point, there are more questions than answers, and we list the key parameters for the Omicron variant, before delving into two tail scenarios.

    • The variant appears to be more transmissibility: Anecdotal accounts imply the new variant is exceedingly transmissible, compared to the Delta or previous strains of the coronavirus. Both caseloads and hospital admissions have risen faster than the Delta variant, and scientists have affirmed that Omicron is driving South Africa’s fourth wave at the moment. Estimates suggest the new variant will eventually account for more than half of all Europe’s caseloads in the coming months.
    • But Omicron appears to be less deadly: The vast majority of caseloads in South Africa show few or no symptoms, reports suggest. But this has to be taken into consideration in tandem with the country’s demographic and genetic profile, which may differ compared to, say, an aging economy such as Japan or Singapore. Worryingly, reports point to a “sharp rise” in admissions of children under 5 years old, which, if true, could make a serious dent in consumer confidence.
    • Risk of reinfection: While it is unclear if the new strain could evade vaccines, the multitude of mutations centred on the spike proteins – 32 out of 50 – has raised the prospect of re-infection. If true, this would be bad news for the poorer and developing parts of Asia, where the healthcare capacity was less-than-stellar to begin with. India and Indonesia’s harrowing experience of successive waves of infections comes to mind. Scientists have hypothesised that the Omicron variant would probably override protection by antibodies (i.e. protein molecules), but not that of T-cells (white blood cells). This has implications for the flurry of novel treatment options in the pipeline, as we detail next.

Clearly, it is not all doom and gloom, with some glimmers of hope as the scientific community learns more about the novel coronavirus.

    • Start with the obvious – viable vaccines are available and governments are already delivering booster shots to ringfence the vulnerable segments of the population from Covid-19. In fact, it is demand that is the binding constraint across the world, such as anti-vaxxers who remain fervent holdouts. Even South Africa, which was ground zero for the new variant, turned away vaccines as early as late-November because of a flagging inoculation drive just before the new variant emerged.
    • Besides, mRNA vaccines can be easily re-configured to address future mutant strains: Pfizer and Moderna have assured that their flagship messenger RNA vaccines can be retweaked in a matter of months if they so seek. It is this expeditious quality that sharpens the contrast with the traditional adenovirus vaccines manufactured by AstraZeneca and Chinese firms, which takes significantly more time to grow the cell cultures.
    • Things do not happen in a vacuum, as economic agents learn to co-exist with Covid-19: As economic agents update their information set with every successive wave of infections, this limit the economic damage wrought by the coronavirus and its mutant variants. The shift to e-commerce, and the growing digitisation drive, are some of the ways in which Covid-19 has expedited longstanding shifts that were already ongoing prior to the pandemic. The view is that stringent lockdowns are a thing of the past, so long as hospital and healthcare systems can withstand and weather the transitory rise in caseloads. If so, lockdowns and restrictions that disrupted supply-chains are unlikely to be repeated again.
    • More treatment options should be available soon, further blunting the threat posed by Covid-19: As we mentioned previously, the missing ingredient in the fight against Covid-19 lies with viable treatment options. Even here, this is a distinction with a difference. Treatments that target the antibodies on the spike protein – these are made by Regeneron and Eli Lilly -will probably be less effective. On the other hand, treatment options that target the underlying enzyme key to the replication of the coronavirus will work regardless of the mutations – this apply to both Pfizer and Merck’s antiviral pill, though the downside is that both have to be administered within days of infection to be effective at keeping severe illness at bay.

We should stress that there is still a lot the scientific community does not know about the Omicron variant (i.e. the unknown “unknowns”) till it circulates more widely in the general population. In that vein, governments’ effort to stop or restrict international travel will probably buy them time to get protocols in place and prime healthcare systems for the new strain. But it also means it will take weeks or even months before scientists can get to the bottom of what it really means in terms of transmissibility, fatality and the prospect of vaccine resistance. Next, we sketch out two scenarios consisting of both tail outcomes – the optimistic and pessimistic view.

Optimistic Scenario – Business as usual and recovery continues without a wrinkle

Under this scenario, it is assumed that the virus is no more transmissible or resistant to vaccines vis-à-vis the dominant Delta strain. This will be in line with the evolutionary behaviour of viruses: to be less lethal, but more infectious so as to proliferate and propagate itself between hosts. Caseloads will probably rise sharply across the world, but come down as quickly, as the experience of the Delta variant illustrates. Assuming the variant is less deadly, governments, fully aware of the trade-offs between lives and livelihoods, eschew harsh lockdowns to keep economic activity going. The global economic upturn continues uninterrupted for the most part, and external demand for Asian manufactured goods remain robust.

In this setting, the Fed doubles down on its normalisation of monetary policy quite literally, starting with the dialling back of asset purchases, ending the program in March 2022, as opposed to June 2022. With inflation running way above the Fed’s 2% target, the central bank proceeds to tighten the monetary spigot with the first rate hike in June, followed by two more rate hikes in September and December. Asian currencies will probably wobble somewhat, as rising US yields trigger a bout of capital outflows and risk-off appetite. The Philippine Peso and Indian Rupee will probably be most at risk (Indonesia Rupiah less so, given the low foreign ownership of government securities as the mitigating factor).

Pessimistic Scenario – variant is resistant to vaccines, bringing the world back to square one

Under the downbeat scenario, the new variant is resistant to vaccines and antibodies, implying that past immunity cultivated by prior infection is next to useless. In effect, this brings the world back to square one, as economies have to go through the gruelling cycle of the rise-and-fall of caseloads. In this setting, vaccine makers will have to reverse course quickly and engineer a variant-specific vaccine, which is something they have refused to do, given the associated risks of putting all their eggs in one basket as well as the perpetual non-zero probability of future mutations down the line. It may take Pfizer and Moderna months before they can ramp up production, which implies the world is left in an awkward limbo as governments seek to maximise the roll out of booster shots in the interim. In the meantime, governments will lift up their drawbridges and put a stop to international travel, in effect gutting the tourism industry once more.

In this setting, governments will re-impose harsh lockdowns and restrictions, chilling economic activity and wiping out price pressures at one go, derailing the Fed’s timeline for monetary normalisation. The world’s lender of last resort will have no choice but to reverse course and embark on more extraordinary measures such as pumping more liquidity to safeguard global financial stability. This also provides the necessary cover for other emerging market peers to do the same. Governments will contemplate with more fiscal stimulus to tide their economies through this rough patch. Under this scenario, the USD will strengthen amid the flight to safety (i.e. the starting point of what is known as the Dollar smile), and all Asian currencies will be hit by capital flight and portfolio outflows.

In all likelihood, our baseline scenario veers closer to the view espoused by optimists, and the reality is likely to fall somewhere in between. What is key here, is the ability of Asia to manage the inevitable wave of caseloads. Recall the false sense of calm in India, when caseloads practically collapsed in February 2021 before rearing its ugly head two months later.

Preliminary studies peg the relative risk of reinfection for the Omicron variant at 25%, double that of the Beta variant (12%) or even the Delta variant (9%). In other words, the mutations imply natural immunity will not count for much, leaving vaccination rates to do the heavy lifting. As such, economies where the rate of inoculation are way off the 80% required to keep deaths to a minimum, will be most at risk – this is particularly true for India, Indonesia and the Philippines. When push comes to shove, policymakers in the trio may be left with no choice but to re-introduce restrictions that hit economic activity and defer the recovery to 2H22 or 1H23 at worst.

Policy Implications – No good options for Asia if caseloads surge

First, there is simply less policy space for Asian central banks to cut rates again without imperilling currency stability if caseloads revive with a vengeance. Save for Korea, policy rates are at record-lows across Asia, with little room to dig further into the unconventional toolkit, unless the Fed provides cover by doing the same. All eyes are now turning to the G3 central banks, particularly the Fed, which will convene for the final meeting in mid-December; prior to that, November’s CPI print for the US will be released on coming Friday. Our view is that the Fed will accelerate the tapering of asset purchases and bring forward the end of the program by March/April 2022, leaving the Fed with a clear pathway to raise rates, if it so desires.

To be sure, this hinges on the impact of Omicron on the US economy and global supply chains. But if the new strain proves to be more transmissible but less deadly, as is the consensus’ view, the Fed will likely persist with its plans for normalisation, particularly after a jobs report that pegged the unemployment rate at 4.2% with just 3.9 million unemployed workers, down from a crisis peak of upwards of 20 million. In this instance, central banks in Asia would be hard-pressed to keep conditions accommodative even as the economy feels the chills of a new wave of infections. Policy dilemmas and the trade-offs involved would be extremely salient.

Second, highly-indebted governments may have to resort to further fiscal largesse. Taking the cue from the US, Asian governments went on a spending spree to shore up growth and doled out fiscal largesse as far as possible to enforce social distancing measures and keep workers at home. Fiscal deficits and debts have ballooned across this region and elsewhere (see Charts 1 and 2), with some going so far as to amend the laws just to permit a temporarily relaxation of budgeting rules (e.g. fiscal cap in Indonesia, escape clause in India, debt ceiling in Vietnam, Malaysia and Thailand etc).

This time is different, however. The mood in the US has clearly moved on from another massive relief package, particularly with inflation on the up-and-up. Governments in this region are also thinking of life post-pandemic. Singapore and India, which will table their budget in February 2022, will outline plans for fiscal consolidation moving forward. Indonesia has approved a set of tax reforms that will enable it to keep the deficit under the 3% cap by 2023. If Asia were to be buffeted by a new wave, governments will no good options to keep economic activity going with public purse-strings ravaged by previous waves of infections and depressed economic activity.

Bottom line

There is considerable uncertainty over the landscape for global growth and inflation. On the one hand, chilling activity from future lockdowns will dampen price pressures. But it also exacerbates the shift in spending from services to goods, straining supply chains further. Workers, wary of contracting Covid-19, stay away from their workplaces or quit en masse, entailing significant shortages in the labour market.

It all hinges on the epidemiological behaviour of the new strain. Going by the experience of South Africa with the new strain, which is confronting a fourth wave of infections, and the implications for Asian policymakers are clear – fiscal and monetary policy are already at its limits, and raising the vaccination rate will be the most cost-affordable option to mitigate the fallout from the new strain.



Table 2: Summary of new restrictions spurred by Omicron variant