Asian Insights

Highlights from the CAA Weekly Table

What has changed?

• Global risk environment – further worsening: Capital spending, key to Asian exports, will continue to be tested as both Presidents Xi and Trump commit to toughing the trade war out and as a no-deal Brexit becomes more likely. A febrile geopolitical backdrop in the Middle East translates into an elevated risk premium in oil prices, though this will be offset by plentiful supplies and faltering global demand.
• Asian economies are stepping up their policy responses: The Chinese economy is poised to slow further as domestic demand begins to slip; it is also storing up trouble for the future as leverage grows again. Key growth indicators are flashing red for the Korean economy; while an expansionary budget is welcome, it needs to be more surgical in focus. Singapore is likely to avoid a recession in 3Q19 off the back of pockets of resilience though the outlook remains murky beyond that. The Thai economy appears to have found some footing after a bruising first half of the year. Fiscal support will help to keep the Malaysian economy on an even track after a spirited performance in 2Q19.

Hong Kong: Devoid of good scenarios, the long term can only see decay

• A bloody crackdown is unlikely to materialise, as Beijing is more likely to resort to calibrated repression to stifle the protest movement. Deft manoeuvring by Beijing will help contain the near-term impact on Hong Kong, China and the rest of Asia.
• But there are poor portents for the longer-term. Hong Kong’s appeal as a global hub will be eroded gradually as Beijing enacts legal and regulatory changes to prevent more protests, but which will chip away at the unique status that has hitherto underpinned its appeal.
• The only plausible winner from Hong Kong’s travails is Singapore, as it benefits from the out-bound diversion of financial services and tourism. The overall impact is unlikely to be substantially positive as both cities spur the other on through a modicum of competition.

India: Heading into a perfect storm as growth takes a battering

• India’s economic growth slowed in 2Q19 to its weakest pace since 1Q13 as investments and household spending remained anaemic. Ditto for exports in view of a parlous external environment.
• The immediate trigger for the downturn stems from the fallout within the non-bank financial company (NBFC) sphere. NBFC lending to the commercial sector dived in FY19, following the Sep 18 default by IL&FS, a large player in the market. Progress in resolving bad loans in the banking sector has slowed as the economy tumbled.
• Withering rural and urban demand conditions are also weighing on the economy. Auto sales are in free-fall, factory output has flatlined and another year of bumper harvest will depress crop prices with ramifications for incomes and demand in the rural sector.
• Further monetary easing is in the offing, but the spillovers to growth will be limited by deposit-starved banks to lower lending rates further. The government’s hands are tied, however, as it commits to fiscal consolidation and reforms of public sector banks to consolidate the banking industry.

Highlights from the CAA Weekly Table

What has changed?

• Two conflicting forces are at work in the global economy: Geopolitical risks in the Middle East could worsen, raising oil prices further, which will take a toll on global growth. But, major central banks’ policy shifts have produced easier monetary conditions which will offset some of this weakness.
• Policy reaction in Asia is critical: The beleaguered Indian economy has been further beset by a delayed monsoon and the deepening liquidity crunch, stronger fiscal support is likely when the delayed budget statement is issued in July. Indonesia is set to step up monetary and fiscal stimulus. However, the Philippines central bank refrained from another rate cut, pausing to assess the impact of previous easing. Thailand’s political challenges appear to have weakened its capacity for effective action just when the it is needed to support growth.
• Asian political risks: Continued protests in Hong Kong could end in tears unless protestors avoid further provoking the Beijing authorities. In Malaysia, Anwar Ibrahim’s chances of smoothly succeeding Prime Minister Mahathir could be in jeopardy as the ruling Pakatan Harapan coalition is at risk of being rent apart by internal schisms.

Prospects for the second half of 2019: How have risks changed for emerging Asian economies?

• The global economy has become more fragile of late, with the recent deceleration reinforced by the US-China trade spat, headwinds to China’s growth and geo-political tensions.
• The most likely scenarios for each of these dangers, however, suggest that global demand for Asian exports should recover in the second half, though the rebound is likely to be muted as global capital spending will remain patchy. A limited agreement between US and Chinese leaders to resolve some of their trade frictions at this week’s G20 summit meeting could improve business confidence and release some of this pent-up demand for investment.
• Another key to Asia’s prospects will be the tepid recovery we see in the troubled Chinese economy. This should generate positive spillovers by way of outbound tourism growth, a rally in cyclically-sensitive commodities and improving risk appetites of global investors.
• The dangers to Asia come from geopolitical flashpoints. Be it the standoff between the US and Iran in the Persian Gulf, or protestors in Hong Kong dangerously testing the Beijing leadership’s patience, the risks seem skewed to the downside.

The Philippines: Geared for take-off as reforms pay dividends

• Tax reform has broadened the revenue base and increased the tax share of GDP. The debt ratio has halved from 90% in 2014, with external debt/GDP falling. This in turn has allowed a surge in infrastructure spending which is boosting economic development.

The Administration now has the numbers in the Senate to ensure passage of the remaining tax packages by 2020. This will help raise the government’s contribution to national.