Ready for Brexit contagion? HK likely to enter recession, China’s yuan to soften, and Singapore’s growth to cool, analysts say

Asian economies may slow down sharply and currencies may be pushed broadly lower as the Brexit contagion hits Asia, with Hong Kong likely to fall into a recession and the Chinese yuan to decline further, according to analysts.

Britain’s dramatic decision to break from the European Union has roiled financial markets and sent shockwaves across the globe. Asian economies could soon feel deeper pains through several channels, including the financial sector, trade, investor confidence, and investor psychology, according to analysts from Nomura on Tuesday.

“It’s not a temporary contagion. There are going to be several waves [on Asia],” said Rob Subbaraman, chief economist for Asia ex-Japan for Nomura, in a conference call.

Subbaraman said his team had slashed GDP growth forecasts for all major economies in the region and put Asia’s aggregate growth at 5.6 per cent in 2016, down from a previous projection of 5.9 per cent.

In the region, Hong Kong may be hit the most, with its 2016 GDP likely to shrink by 0.2 per cent, compared with a previous estimate of 0.8 per cent growth. In 2015, Hong Kong’s economy grew by 2.4 per cent. Singapore’s projected growth rate for 2016 was also cut sharply to 1.1 per cent, versus an estimate of 1.8 per cent previously.

“Hong Kong and Singapore are both financial hubs and very exposed to UK banks,” said Subbaraman. “They also have managed exchange rates, which give central banks less leeway in rate policy. There is also a risk that the HIBOR (Hong Kong Interbank Offered Rate) rates could start rising.”

In particular, the reasons that they forecast an “outright recession” for the Hong Kong economy are mainly related to a stronger Hong Kong dollar, which is rising with the US dollar amid global risk aversion.