Emerging Asia

Malaysia

Interest rates and inflation to remain low

Growth in China will weaken further over the coming year as a downturn deepens in industry and construction. The outlook for the rest of the region is improving. We expect many economies to rebound strongly as governments ease restrictions on the back of faster vaccine rollouts and success reining in COVID outbreaks. Central banks – unlike in much of the emerging world – are in little rush to tighten. Inflation hasn’t emerged as a concern and, with large output gaps set to keep a lid on price pressures, we expect policy rates in most countries to remain on hold over the coming year. In contrast, the consensus and financial markets are expecting central banks to begin tightening in 2022.

20 October 2021

Manufacturing PMIs (Sep.)

While regional PMIs showed that the disruption from large virus waves in the region is easing somewhat, unmet orders continue to pile up, meaning that the resulting shortages further down supply chains are set to remain for some time to come.

1 October 2021

Asian central banks in little rush to raise rates

Over the past month or so, the central banks of Korea, Pakistan and Sri Lanka have all raised interest rates, but we don’t think other countries will be in any rush to follow suit. There is certainly little to worry about on the inflation front. Pakistan, India and Sri Lanka are the only three countries where headline inflation is above 5% y/y. With GDP still well below potential in most parts of the region, underlying price pressures will remain subdued. Similarly, with the exception of Sri Lanka and Pakistan, where large current account deficits are putting downward pressure on currencies, external factors are unlikely to prompt central banks into hiking rates. Although the US Fed is likely to announce plans to taper its asset purchases later this year, large current account surpluses mean Asian economies are well placed to withstand any sudden shift in capital flows that tighter monetary policy in the US could trigger. Meanwhile, unlike in Korea, there is no sign elsewhere in Asia that low interest rates are fuelling a rise in financial risks. Credit growth has slowed in many countries, with policymakers in Indonesia and the Philippines encouraging commercial banks to lend more. Finally, most countries still have large output gaps, and with the virus continuing to cause significant economic disruption across the region, central banks will remain keen to support economic activity.

29 September 2021
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External strains unlikely to ease as tourism slump drags on

Countries across Emerging Asia are making renewed efforts to reopen their borders to boost flagging tourism sectors. However, ongoing travel restrictions and the spread of the more infectious Delta variant mean that tourism will continue to struggle. This will hold back recoveries in places such as Thailand and Malaysia and lead to further balance of payments strains in Sri Lanka.

Debt risks come back to the fore

Problems at Evergrande in China have dominated the headlines recently, but (sovereign) debt risks are brewing in other EMs too. Concerns about higher government spending and rising public debt levels are building in parts of Latin America. Meanwhile, sovereign dollar bond spreads have surged in a handful of frontier markets including Sri Lanka, Tunisia and Ethiopia. These economies all face the worrying combination of large external foreign-currency debt burdens, low FX reserves and weakening currencies. We are most worried about Sri Lanka. While the country will probably muddle through this year, it will face a crunch point in early 2022 when large bond repayments are due. A default is now looking the most likely option.

Encouraging signs in South East Asia

Virus outbreaks across South East Asia are in retreat. Having taken a severe hit from the most recent Delta wave, economic recoveries in the region should now resume. Falling virus cases and reopening should also help ease some of the supply-chain disruption caused by factory closures and workers having to quarantine.
We’re holding a week of online events from 27th September to accompany our special research series. Event details and registration here.

Malaysia: rates on hold until 2023

Malaysia’s central bank (BNM) left interest rates unchanged at 1.75%, and won’t be in any rush to adjust rates soon. Although the economy should start to rebound now that virus restrictions are being eased, output is likely to remain below potential for some time to come.

Korea spending boost, Malaysia rate meeting

Korea’s proposed budget for 2022 indicates that fiscal policy will remain supportive next year. This should give the BoK added reassurance that the economy will be able to withstand further rate hikes. Meanwhile, the central bank of Malaysia’s meeting on Thursday is likely to be a close decision. A rate cut cannot be ruled out, but with GDP set to rebound strongly over the coming months, we think the policy rate will be left unchanged.

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