Bigger external surpluses put Asia under US spotlight - Capital Economics
Emerging Asia Economics

Bigger external surpluses put Asia under US spotlight

Emerging Asia Economics Update
Written by Gareth Leather

The COVID-19 crisis has led to a ballooning of current account surpluses across Emerging Asia that is putting upward pressure on currencies. The shift to bigger external surpluses could also land the region in hot water with the US Treasury as it prepares to publish its semi-annual report into which countries have been manipulating their currencies.

  • The COVID-19 crisis has led to a ballooning of current account surpluses across Emerging Asia that is putting upward pressure on currencies. The shift to bigger external surpluses could also land the region in hot water with the US Treasury as it prepares to publish its semi-annual report into which countries have been manipulating their currencies.
  • Most Asian countries ran large current account surpluses before the pandemic. But they have widened considerably as a result of the crisis. Exports from across the region have held up extremely well. Part of the resilience is due to strong demand for electronics and IT equipment from people shifting to working from home. A global increase in investment in new data centres has helped too. And there has been a surge in demand for healthcare products such as face masks and pharmaceuticals.
  • More recently, spending on consumer goods has recovered quickly in major export markets – in many cases, retail sales are now above pre-crisis levels even though broader measures of household spending are much more subdued. In addition, tensions between the US and China appear to be driving a continued shift in some sectors to source from outside China. Vietnam and Taiwan are the main beneficiaries.
  • At the same time, imports have been weak. Very weak domestic demand has been a factor in some countries, most notably India and the Philippines. However, the main reason behind the slump in imports has been the collapse in oil prices. Most countries in Emerging Asia (Malaysia is the key exception) are net importers of oil.
  • Overall, we estimate that regional exports fell by just 3% y/y in August, while imports were down by 9%. Most countries have seen big increases in their trade surpluses (or in the case of the Philippines and India, sharp falls in their deficits). In aggregate terms the merchandise trade surplus of the region, excluding China and India, has risen sharply. (See Chart 1.)
  • In most cases, the shift in goods trade balances has translated into a change in current account positions. India and the Philippines have seen the biggest shifts. Both were running deficits before the crisis, but both recorded large surpluses in the second quarter. The only major economy in the region that now runs a current account deficit is Indonesia, but even there the deficit fell to just 1% of GDP in Q2. The only place that has recorded a marked fall in its current account surplus is Thailand, where a slump in international tourism (a services export in the current account) outweighed the improvement in the goods trade balance. That said, the country still recorded a surplus of nearly 5% of GDP last quarter. (See Chart 2.)
  • The expansion of surpluses is a key factor behind recent upward pressure on Asian currencies. While many EM currencies have fallen sharply against the US dollar this year, Asian currencies have mostly appreciated. (See Chart 3.) The gains would have been bigger had countries, notably Thailand, the Philippines and India, not been intervening heavily in foreign exchange markets to weaken their currencies. (See Chart 4.) We expect further appreciation over the coming months, and we recently revised up a number of our Asian currency forecasts.
  • The shift to even bigger surpluses risks drawing a response from the US. The US Treasury is formally scheduled to publish its semi-annual report on whether major trading partners have been manipulating their currencies for unfair advantage on 15th October (although the schedule often slips). One of the usual criteria is whether a country has a current account surplus equivalent to 2% of GDP. As things currently stand, seven countries in Asia are above that threshold.
  • While larger current account surpluses may represent a headache for policymakers in many countries, for places which before the crisis were recording perennial current account deficits the sudden improvement in their external positions is a welcome development. Sri Lanka, Pakistan, India and Indonesia have all seen their current accounts deficits either narrow significantly or turn into surpluses. This has provided support to their currencies and has given central banks in these countries space to loosen monetary policy to support demand.

Chart 1: Emerging Asia (ex. China & India) Merchandise Trade Balance (% of GDP)

Chart 2: Current Account Balance (% of GDP, seasonally-adjusted)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics

Chart 3: Currencies vs US Dollar (% change since 1st March)Chart 4: Value of Foreign Exchange Reserves (% change since January, US$)
Source: BloombergSources: Refinitiv, Capital Economics

Gareth Leather, Senior Asia Economist, gareth.leather@capitaleconomics.com