July 27, 2022 (MLN): Emerging Asia's economies will still grow this year, but inflation will be a bigger hurdle as these economies have done so well to intact the growth. However, the road ahead will be a rocky one as central banks rush to recalibrate policy, a report by Moody’s stated on Tuesday.
“Low-inflation Asia is in for a rude awakening—and in many parts of the region, a new dawn of fast-rising consumer prices has already come,” the report read.
Long exempt from the price pressures plaguing the rest of the emerging world, emerging Asian economies are now face-to-face with the sharpest rise in consumer prices in more than a decade.
Though inflation has taken longer to manifest in emerging Asia than in other emerging regions, its ugly knock-on effects will take a larger toll as the year progresses, weighing on growth for the remainder of this year and into the year to come, it added.
The report further stated, “Not all is bleak,” adding to it, it said, “Even with the hit to China’s economy from its zero-COVID policy and headwinds to growth in the U.S. and Europe, we still expect emerging Asian economies to grow this year and to do so with more haste than the rest of the emerging world.”
Inflation in most advanced and emerging Asian economies tends to be low, to begin with. Abstracting from the currency crises that rippled across Southeast Asia in the late 1990s, consumer prices tend not to fluctuate very much.
This is partly due to gains on the supply side of the economy, with growth in labor productivity helping the region absorb the pressures of a rising consumer class.
The main reason, however, is that emerging Asian economies tend to accumulate the kinds of macro imbalances that hold prices down. Think large trade and current account surpluses: With the exception of India, most Asian economies export more than they import.
This means that on the net they also save more than they spend, sending surplus savings abroad instead of spending them down at home.
This is not to say that emerging Asia is a total stranger to inflation. The last time global food and energy prices surged, in the runup to the 2008-2009 global financial crisis, inflation rose as well.
With regards to the intervention of central banks, the report noted that central banks in emerging Asia have kept rates lower for far longer than their emerging market peers. That they have done so is a credit to decades-long efforts to make debt and currency markets more resilient.
Now, with inflation rising fast, they are snapping into action. In the latest action, the central bank of the Philippines hiked the benchmark rate by 100 basis points in an unscheduled meeting earlier this month. Moody’s now expects that the Bank of Thailand will raise rates at its meeting in August, leaving only the State Bank of Vietnam in the dovish camp.
Where rising rates will bite first is on government debt. Debt loads across emerging Asia are not as high as in other troubled regions, but they are not low either. And political turmoil has left leaders unwilling or unable to rein in spending, putting hard-won records of fiscal sustainability at risk, it said.
“All of these factors have pushed us to lower the forecast for growth in the rest of this year and the first half of 2023. While we still expect emerging Asian economies to grow this year, easily outshining peer economies in Latin America, emerging Europe, and the Middle East,” it added.
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