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A populist turn in Asian policy making? India: Farmers’ protests could complicate any future reform agenda; Singapore: Sizable labour market slack likely despite growth rebound

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Highlights from the CAA Weekly Table: what has changed?

  • Geopolitical risks: US-China ties are off to a rocky start, with Taiwan a flashpoint. Chinese air force intrusions into Taiwan’s airspace have forced the Biden Administration to make an early and forceful commitment to Taiwan’s defence. Expect several months where each side tests each other, creating episodic tensions but probably nothing more serious.
  • Asian economies: Global demand for the region’s exports remains intact despite new waves of virus outbreaks around the globe. As we warned, lockdowns were extended in Malaysia and Indonesia, whose central banks are likely to cut rates soon despite holding off in January. Indonesia’s reform agenda appears to be gaining traction: bureaucratic reforms are now expected, in addition to improved conditions for foreign investors announced earlier. Bumper investment commitments will burnish Singapore’s medium-term outlook.

A populist turn in Asian policy-making?

  • Elements of policy changes in Asia that reeked of populism have raised eyebrows. It is in China where such moves have aroused the greatest concerns, such as the crackdown on the near-monopolisation of online payment system by such fintech behemoths as Ant Financial.
  • A growing backlash against big tech is evident elsewhere too. Korean leaders are talking about getting platform companies to share profits with mom-and-pop stores. In Southeast Asia, there is growing traction for digital taxation as governments eye a share of the spoils from irreversible digitisation.
  • The trend will intensify: Policymakers fear an overly light-touch regulation of fintech will foster financial instability. Policymakers are also uncomfortable about the growing market and political power of big tech companies and are more conscious of the need to demonstrate that they are acting to address widening inequality.

India: Farmers’ protests could complicate any future reform agenda

  • The pushback against agrarian reforms is a symptom of a broader problem. The ruling BJP party was clearly caught off-guard by the tenacity of the farmers, which has upset their earlier calculation that the protests would fizzle out.
  • The government is now dithering on its response. It offered to suspend the reforms, only to walk back from its initial promise. This sets a poor precedent for future reforms.
  • Even Premier Modi’s stratospheric popularity has failed to calm tensions. This dearth of trust in the political class will plague future efforts to obtain popular buy-in for reforms.

Singapore: Sizable labour market slack despite growth rebound

  • We studied the historical relationship between output and unemployment (Okun’s law) in the Singapore context to forecast labour market outcomes in 2021.
  • Our estimates imply that the labour market would have avoided a “cliff” effect upon the expiration of policy support measures in the second quarter – a key downside risk that we had flagged early on. However, our forecasts still imply significant slack in the labour market by the end 2021 consistent with a modestly large negative output gap, that will pose headwinds to consumer spending for some time.

US-China: New dynamic of action-reaction escalation bodes ill; Weaker USD heralds extended upturn for selected Asian currencies

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What has changed – highlights from recent developments:

  • Asian economies need more vigorous policy responses: India’s Reserve Bank has used its annual report to plead for more structural reforms especially in land and labour markets. The RBI injected a sense of urgency into its plea by warning that India’s potential growth could be undermined otherwise. In Indonesia, crucial labour market reforms made further headway in parliament but improvements to the tax regime needed to expand the tax base do not seem feasible. The Philippines is likely to see further monetary easing in October but more fiscal support is also needed for the economy.
  • Asian political risks: Despite substantial efforts over 20 years to contain it, terrorism remains a risk in Southeast Asia. Two suicide blasts killed 15 people in the Philippines. In Indonesia, however, timely action by security forces nipped a potentially serious attack in the bud. In the Philippines, there is more speculation about President Duterte’s health.

US-China: A new dynamic of action-reaction escalation bodes ill for regional stability

  • In recent weeks, the US and China have engaged in military and political actions which risk triggering an escalation, each reacting against perceived mischief-making by the other.
  • Regional countries are responding to China’s increased assertiveness. Alliances are forming against China – the US, Japan and Australia in one clear alliance which India and Taiwan are likely to discreetly support while Vietnam and India appear to be cooperating more closely. Malaysia and the Philippines, which had initially tried to be friendly with China have recalibrated their approaches in different ways to adopt a more robust stance towards China.

A weaker USD heralds an extended upturn for Asian currencies with strong fundamentals

  • We maintain our above-consensus view on the CNY and expect recent weakness in the MYR, THB and KRW to be short-lived.
  • Sustained US Dollar weakness is unlikely to be a salve for the INR, IDR and the PHP which remain vulnerable due to their less-than-favourable fundamentals.
  • The region’s safe haven currencies, the TWD and the SGD, are also poised for further gains.

Forecast table for currencies against the USD

Economy

2019

2020f

2021f

Vulnerability Metric

YTD (%)

Local currency versus US Dollar

Indonesia

13,866

14,500

14,300

-1.28

-5.52

India

71.4

74.0

73.5

-0.98

-2.83

Philippines

50.7

49.0

49.5

-0.82

4.32

China

6.96

6.85

6.78

-0.63

1.40

Malaysia

4.09

4.1

4.0

-0.20

-1.78

South Korea

1,158

1,180

1,130

-0.17

-2.48

Vietnam

23,173

23,120

23,010

0.08

0.03

Hong Kong

7.79

7.78

7.78

0.28

0.53

Thailand

29.7

31.0

30.2

0.44

-4.69

Taiwan

30.0

29.7

29.4

1.07

1.93

Singapore

1.35

1.36

1.34

2.20

-0.91