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Emerging Asia


Pakistan edges closer to IMF deal

Talks between Pakistan and the IMF ended last week without agreement, but the subsequent decision by the government to cut back fuel subsidies has cleared one of the major hurdles towards a deal being agreed. Financial markets in the country reacted well to the news, with equities and the currency climbing and CDS spreads falling back. As we have outlined before, an IMF deal is essential to putting the economy back on a more sustainable footing, but there is still a lot that could go wrong. Cutting subsidies will cause inflation, which hit 13.4% y/y in April (which is more than double the central bank’s target), to climb even higher. In addition to cutting back on spending, the IMF are likely to demand monetary policy is tightened further. All of this will weigh on living standards and could prompt renewed political unrest. The recently deposed prime minister, Imran Khan, has threatened to hold renewed protest rallies, while there is a mounting risk that some parties could start to pull out of the governing coalition, which may lead to early elections. The IMF will be wary of entering into an agreement if they think the government will not be around for long enough to complete the programme.

30 May 2022

Three positive stories from frontier markets

There has been plenty of doom and gloom surrounding the outlook for frontier economies over recent months, particularly Sri Lanka and Tunisia. But there are some places where we hold more upbeat views. Frontier economies in the Gulf will benefit from high oil prices, while manufacturing should drive strong growth in Morocco and Vietnam.

12 May 2022

Tightening cycles to be gradual

Central banks across the region have recently turned more hawkish. Over the past month or so, policymakers in Korea, Taiwan, Singapore, Sri Lanka, India and Pakistan have all tightened policy. Governor Benjamin Diokno in the Philippines has also hinted that the central bank there will raise interest rates soon, and we have adjusted our interest rate forecast. We now expect the BSP to hike rates by 50bps this year. The main concern in most places is inflation, which is now above target in around half of the countries covered by our Emerging Asia services. However, while headline rates have increased in recent months, inflation across the region remains much lower than elsewhere in the world. And unlike in other parts of the global economy, we expect inflation in Asia to drop back to target by the end of the year as base effects become more favourable. This supports our view that tightening cycles will be relatively gradual compared with other regions. Our interest rate forecasts are more dovish than the consensus and what is being priced in by financial markets. EM Drop-In (5th May, 10:00 EDT/15:00 BST): Join Shilan Shah for our latest monthly session on the big macro and markets stories in EMs. This month, Shilan and the team will be talking Russian gas, FX weakness and surging food prices. Register now

29 April 2022
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New headwinds emerge

Our GDP growth forecasts are generally above the consensus, but with higher commodity prices and weaker global demand set to weigh on economic recoveries, growth across much of Emerging Asia will be slower than we had anticipated in our last Outlook. Most central banks in the region are likely to raise interest rates this year – the exceptions are parts of South East Asia and China (where we expect a rate cut). However, with growth set to slow and inflation relatively subdued, Asian central banks will tighten policy less aggressively than those elsewhere, and our interest rate forecasts are more dovish than most.

China COVID outbreak a large risk for the rest of Asia

So far, the spill overs from the COVID outbreak in China to the rest of Asia look to have been relatively minor. But the possibility of major disruption to supply chains remains a large and growing risk.  

Manufacturing PMIs, Korea Trade (Mar.)

While Korean trade data show exports remained buoyant, regional Manufacturing PMIs point to lost momentum. With headwinds to export-focussed industry mounting, there are tougher times ahead.

Omicron recedes, but other headwinds emerge

Successful vaccination campaigns allowed governments to keep economies open during the recent Omicron waves, and our Mobility Trackers suggest that activity held up much better than we had originally anticipated. Indeed, GDP figures for Vietnam published earlier today suggest the economy brushed off the impact of Omicron this quarter. However, while the risks to growth from COVID-19 are fading, new headwinds are emerging. The war in Ukraine and the surge in global oil prices will drag on the purchasing power of consumers, while a slowdown in the global recovery will weigh on the region’s exports. We recently cut our 2022 forecasts for regional GDP growth by 0.5%. Meanwhile, rising virus cases in China and the lockdowns that have been introduced in some major cities in the country raise the risk of further disruption to global supply chains. Vietnam’s close integration into Chinese supply chains makes it the most vulnerable country in Asia to problems in China.

Vietnam GDP (Q1)

Vietnam’s economy recorded solid growth in the first quarter of the year as the economy brushed off the impact of the Omicron wave, but while we expect the recovery to continue over the coming months, new headwinds to growth are emerging.

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