Emerging Asia


Omicron fears stall plans to reopen borders

Amid all the uncertainty caused by the arrival of Omicron, one thing we can say with some conviction is that the new variant is further bad news for the region’s beleaguered tourism industry. Up until last week, countries across Asia had been making slow but steady progress in reopening their international borders, and it is notable that Singapore and Malaysia today pressed ahead with plans to reopen their land border for the first time in nearly two years. Elsewhere in the region, however, countries are closing their doors again. Indonesia has reintroduced quarantine for all inbound travellers, while the Philippines and Japan have banned foreign visitors from entering the country. Singapore has also put on hold plans to open vaccinated travels lanes with the UAE, Qatar and Saudi Arabia. Most countries in the region have also introduced travel restrictions with southern Africa. The worsening prospects for regional tourism reinforce our view that after an initial reopening bounce in the final quarter of the year, economic recoveries will start to lose momentum in early 2022 and that policymakers will look to keep monetary policy loose for the foreseeable future to support demand.

29 November 2021

Recent rate hikes not the start of a trend

Attention over the past week has been on the region’s more hawkish central banks, following rate hikes in Korea and Pakistan. Both countries, along with Sri Lanka (which unexpectedly left rates unchanged at its meeting on Thursday) are likely to raise interest rates further over the coming months. But these countries are very much the exception. For the rest of the region, we think interest rates will remain on hold as central banks look to keep monetary policy loose to support recoveries. Meanwhile, virus cases are rising again in Vietnam. While restrictions have been tightened, they have so far been fairly light touch, including a closure of bars and nightclubs and capacity limits on restaurants in some southern provinces. Nevertheless, the jump in cases will be watched closely by global carmakers, which were hit hard by the disruption from previous factory closures.   Drop-In: Why is Asia sitting out the global inflation surge? 09:00 GMT/17:00 HKT, Thursday 2nd December https://event.on24.com/wcc/r/3546145/A9D34EF592141BEFCAC819ADB40359D5?partnerref=report Drop-In: India – How much scarring will the pandemic leave? 10:00 ET/15:00 GMT, Wednesday 1st December https://event.on24.com/wcc/r/3535749/63CC51718846E8FF3D871827AC84AF1E?partnerref=report

26 November 2021

Why is inflation different in Asia?

Inflation hasn’t emerged as a concern across Emerging Asia in the same way it has in the rest of the emerging world, in part because food price inflation in Asia is much lower, but also because the region has experienced much less disruption from the pandemic than other EMs. Whereas central banks in Latin America and Emerging Europe will tighten monetary policy further over the coming months, interest rates in most of Asia will remain on hold.

22 November 2021
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Pakistan: further rate hikes coming

Pakistan’s central bank (SBP) today raised interest rates by an aggressive 150bp and with inflation set to remain above target and the currency likely to come under further downward pressure, further hikes are likely over the coming months.

South East Asia bouncing back

The near-term outlook for South East Asia has improved dramatically over the past month or so. Daily cases of COVID-19 have collapsed and are now less than one-third of the level they were at in August. With vaccination rollouts also making good progress – almost 30% of the region’s population is now fully vaccinated – governments have begun easing restrictions. Our Mobility Trackers have rebounded strongly, and in the case of Indonesia and the Philippines are now at their highest level since the start of the pandemic. Although the Q3 data due to be published over the coming weeks will likely paint an ugly picture, growth should rebound strongly at the final quarter. Given the improving outlook, we have taken out the rate cuts that we had originally pencilled in for Thailand and the Philippines. That said, with inflation still low, rate hikes are still some way off. Finally, with factories being reopened, industrial production is also starting to recover, which should also help ease some of the supply shortages which are hobbling the world economy.

GDP to rebound after gloomy Q3

The next few weeks will see the publication of a host of third quarter GDP figures from across the region. While the data are likely to paint a downbeat picture, output should rebound strongly in the final quarter of the year. That said, the recovery is coming from a low base – GDP in most countries is still well below pre-crisis levels – and the region will enter 2022 with lots of spare capacity. This will help keep a lid on underlying price pressures and is a key reason why we think central banks in the region will be in little hurry to tighten policy.

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.

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.

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