Asia’s emerging economies started in 2022 with a number of positive surprises to growth. This was the result of a boost to domestic consumption and investment as countries removed pandemic-related restrictions late last year, while exports remained strong for much of the region.
“Our view is that we will see growth headwinds stiffen on the domestic side, and there is clearly a sense that the reopening tailwinds will abate, with a slowdown in consumption due to the shock of higher energy and food prices, along with a cooling in the trade cycle” said Frederic Neumann, Chief Asia Economist and Co-Head Global Research Asia, HSBC.
As a result, central banks in Asia are looking more towards addressing growth risks than calming inflation. They can do this because although inflation is elevated across the region, it is less acute than in other parts of the world. Interest rate moves will therefore not be as aggressive as the Fed’s hikes.
There will be currency implications that arise from central banks not matching US monetary policy, sparking fears of currency depreciation that could exert financial pressure on Asia’s emerging markets.
“We do not think that balance sheets are vulnerable to an FX decline,” said Mr. Neumann. “Compared to the late nineties, the dollar-borrowing component is much more manageable. Asia has higher FX reserves than in the past and there are no signs of financial stress emerging.”
He pointed out several countries in the region. In South Korea, the external headwinds will be strong enough to stop the Bank of Korea’s hiking cycle, with growth expected to be below trend next year. Indonesia has removed energy subsidies, which will add to local inflationary pressure. And in India, there have been concerns over runaway inflation, but there are already signs of stabilisation in prices.