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Asian economies should brace for financial aftershocks ; Malaysia: Despite new cabinet line-up, political risks remain high

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Four themes are driving the global economy:

  • Accelerating global response to the coronavirus crisis: Central banks across the world have eased monetary policy and injected liquidity into the financial system. Fiscal policy support is also being ramped up. Our view is that these actions are not enough to help absorb the shocks, more policy support will have to be added.
  • China’s economy is returning to normalcy: China’s stringent policies have brought the pace of new coronavirus infections down sharply, allowing the authorities to more aggressively ease the restrictions on activity. Although the rebound will be modest, it will provide progressively greater support for the world economy.
  • But the US is likely to be a source of growing risks to Asia: The poor initial handling of the coronavirus crisis coupled with the weak social safety nets in the US raise the chances that the virus will spread alarmingly in the US, adding to the panic and restrictions that could slow the economy.
  • Oil prices will remain lower for longer: The Saudi-Russian stand-off will persist for some time, which in combination with demand destruction, will keep oil prices low. However, the benefits of low oil prices will take time to emerge while its downsides will be more immediate.

Asian economies should brace for financial aftershocks

The escalating loss of confidence in the US and Europe over the coronavirus crisis and the abrupt fall in crude prices led to a swift collapse in financial market sentiment. The ongoing financial turbulence could unleash further adverse impacts on Asian economies:

  • First, emerging Asian currencies, equities and bonds are at further risk should capital inflows reverse and capital outflows accelerate.
  • Second, Asian economies potentially face a USD funding squeeze as the global risk aversion leads to a desperate “dash for dollars”.
  • Third, Asia faces a wall of debt that is due to mature in less than 12 months, a period when refinancing is expected to be difficult.
  • Fourth, there is a risk of a negative feedback loop established between the real and financial sectors as tightening financial conditions dovetail with a deepening growth slowdown, pushing up default risks.

Malaysia: despite new cabinet line-up, political risks remain high 

  • The announcement of a new cabinet has reduced uncertainty: The appointment of technocrats such as the new Finance Minister and the Minister in the Prime Minister’s Office supervising key economic agencies will be welcomed by investors.
  • However, infighting within the coalition could undermine its coherence: The parties within the coalition are making demands for position while factional strife within parties, including the largest component, UMNO, and Prime Minister Muhyiddin’s own party could create new sources of instability.

How well-positioned are Asian economies to absorb this shock? ; How will the oil price collapse impact Asian economies? ; The Philippines: Duterte’s tirades against oligarchs will spook investors

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Highlights from the CAA Weekly Table

What has changed?

3 big changes: oil price collapse; virus hits global economy more severely; rising political risks.

  • Asian economies face these risks with different levels of resilience: The Chinese economy re-activates but stressed SMEs make for a slow return to normalcy. The trade-reliant Singapore economy is more vulnerable but has sufficient policy space to counteract the worst of the crisis. More stimulus measures have been announced in Thailand, but their effectiveness is blunted given sapped confidence and reduced policy capacity. Both monetary and fiscal tools were deployed in Indonesia to contain the fallout from the Covid-19 virus, but their efficacy remains questionable. The Philippine economy is relatively resilient but growth will nevertheless be tested as electronic exports to China take a hit.
  • Asian political risks: Taiwan risks an even harsher pushback by China as even the once pro-China Kuomintang opposition party adopts a position on reunification that will anger Beijing. Delays to the formation of the new cabinet in Malaysia point to intense tussling for ministerial portfolios; the new coalition’s shaky start raises risk of greater instability.

How well-positioned are Asian economies to absorb these multiple shocks?

  • Key components of demand have weakened across the region. External demand has flagged everywhere; consumption is depressed and weakening – worsened by an outsized slump in tourist arrivals; but investment is a mixed bag with countries such as Taiwan & Singapore helped by strong inward investment.
  • On the upside, internal and external stability conditions remain benignwhich reduces the chances that the external shocks from the global economy might be amplified – while also creating policy space for countercyclical stimulus.
  • Policy response, especially how quickly fiscal spending can be disbursed will be key to the near-term growth outlook, but this continues to be a challenge for Thailand and Indonesia.

How will the oil price collapse impact Asian economies?

  • The Saudi-Russian standoff will keep prices low for several months – both are determined to diminish the US shale industry while Russia is bolstered by huge fiscal savings which will enable it to face down the Saudis. Oil prices are likely to stay on an extended bearish run.
  • As a net oil importing region, the implications for Asia are mostly positive; the falling cost of crude can be thought of as an ‘automatic stabiliser’ amid the current step-down in growth, helping to support growth whilst keeping a lid on inflation and buttressing the region’s external and fiscal accounts.

The Philippines: Duterte’s tirades against oligarchs will spook investors

  • The President has decided to pivot away from his War on Drugs to burnishing his credentials as a “Man of the People” leader with tirades against “oligarchs”, the landed families which have long dominated the country.
  • While the President’s rhetoric has won him favour among the electorate, due in large part to the highly unequal Philippine economy and society, the attacks will also dampen the investment and business climate, at a delicate time when the economy is in dire need of foreign funds to finance its flagship infrastructure drive.