Asian Insights

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China recalibrates its Belt and Road Initiative ; Indonesia: Cause for cautious optimism with more clarity on labour reforms ; India: BJP’s setback in Delhi elections will set off political reverberations

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Highlights from the CAA Weekly Table

What has changed?

  • Global economy: The global recovery that was taking shape before the COVID-19 outbreak hit it will now be delayed: the key to the economic outlook will be the trajectory of the virus crisis and the policy responses in China and elsewhere in Asia. Countries with more policy space will outperform.
  • Asian economies: Chinese policymakers’ determination to achieve overly ambitious growth targets raises the risks of macro-financial instability. The Thai budget has finally been passed but a strong rebound is unlikely. Malaysia’s GDP growth in 4Q19 was underwhelming, prompting policy makers to telegraph a rate cut and a stimulus package. In the Philippines, wrangling over CITIRA will likely persist till late-2Q20 but other less controversial tax reforms should progress. There are tantalising hints of a recovery in India.
  • Asian political risks: President Duterte scrapped the Visiting Forces Agreement (VFA) with the US, executing a pivot to China that will be fiercely resisted by the pro-America, anti-China military-political establishment within the country. Duterte remains politically dominant for now but he is making too many enemies with the clout to hit back.

China recalibrates its Belt and Road Initiative

  • China has recalibrated its Belt and Road Initiative (BRI) which has quietly regained traction. The Chinese have addressed concerns over debt sustainability and shown more awareness of the financial and reputational risks it faces should BRI loans go sour. However, the BRI continues to fall short in delivering positive spillovers to local economies.
  • The BRI’s advance into the Eurasian continent is being met with increasing alarm by US and European political leaders while their businesses have chafed at the lack of openness to foreign participation. The West is pushing back against China by offering promising alternatives in development finance to the Belt and Road Initiative.

Indonesia: Cause for cautious optimism with more clarity on labour reforms

  • The proposed overhaul of labour laws does away with overly generous severance pay packages; improves the ease of hiring-and-firing; provides a useful balance against the authority of regional governments; and allows more flexibility in setting minimum wages.
  • However, several concerns still dog the new labour law: caps on the employment of foreigners are still intact; details on setting the minimum wage for labour-intensive sectors have not been released, and the reform bill could still be stalled in the constitutional courts.

India: Setback for BJP in Delhi state elections will set off political reverberations

  • The opposition Aam Aadmi Party (AAP) retained power in a landslide victory in the Delhi assembly polls. While the BJP remains dominant in Indian politics, the setback has exposed the chink in its armour, viz., its over-reliance on Modi’s star power and a dearth of charismatic local leaders to win over the electorate when local issues are more salient.
  • Re-orienting the emphasis away from its controversial Hindu nationalist agenda to bread-and-butter issues is key for the BJP as it faces more state elections against formidable opposition parties in 2021. But there are few signs to suggest that the BJP will do so.

WTO breaks down: Asia left to fend for itself

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Highlights from the CAA Weekly Table

What has changed?

  • Geopolitical risks: A North Korea, emboldened by a thaw in ties with China and a resilient domestic economy, could find it expedient to create more tensions in the region.
  • Global economy: Further nascent signs of global demand firming up have emerged, such as upbeat semiconductor sales and a surging jobs market in the US. As fears of a global recession recede, and OPEC makes deeper production, oil prices have crept up but are unlikely to reach levels that could threaten Asian economies.
  • Asian economies: The Chinese economy is decisively turning around, with both manufacturing and services sectors gaining traction. Brace for unexpected twists and turns in the budget talks in the Philippines after Congress opted to start budget deliberations from scratch. While stability indicators augur well for Indonesia, economic growth remains tepid. The Singapore economy is in the first innings of a recovery: despite being hostage to global risks, activity indicators and business confidence are recovering. The recovery scenario we envisaged for Thailand will take a longer time to pan out. The Malaysian economy will sustain its relatively good performance so far this year, with prospects for 2020 strengthened by a recovery in global demand, production relocation, and further monetary accommodation.
  • Asian political risks: Indonesia’s President Jokowi has re-asserted his power, firmly slapping down efforts by vested interests to amend the constitution to dilute his powers. His ally in the Golkar party, was re-elected its leader after direct intervention by Jokowi’s key trouble-shooter – all good signs for further reforms. Malaysia’s ruling coalition is barrelling toward a re-alignment, after a raucous party congress made the splits within its main component, the PKR, irreparable.

Asia is left to fend for itself as the global trade order breaks down

  • Over the past week, the US dealt fresh blows to the global trade regime by unilaterally imposing import tariffs on trading partners over a variety of issues, ranging from allegedly unfair exchange rate devaluations to a mooted digital tax that has gained traction globally.
  • This comes as US-China trade talks over a limited phase one deal have stalled. Contestations in the diplomatic arena threaten to complicate trade deliberations though the broader concern is the balkanisation of the tech world as the geostrategic competition intensifies.
  • The rules-based global trade regime which protected Asian exporting nations is now on the brink of collapse. The WTO’s Appellate Body will cease to function once the mandates of 2 out of 3 members lapse by 10 Dec 19, while the US has stonewalled attempts to appoint more judges to the 7-member body.
  • The US has stepped up bilateral trade negotiations, as it leverages on its own economic heft to extract concessions from smaller and more vulnerable states. Asia has to step up and fortify its defences.
  • More clarity on contentious areas, fostering domestic growth engines, undertaking more structural reforms and cultivating comprehensive partnerships will serve as mitigating factors in a hostile global environment.