From Indonesia and Philippines to South Korea, stagflation-free Asia ‘leads in the race to keep inflation low’
- Economists are betting that most of emerging Asia will avoid the ‘stagflation-like conditions’ that have afflicted many Western economies of late
- That’s thanks in part to the region’s foreign-exchange stockpiles, fiscal prudence and calm crisis management – as well as a healthy dose of luck
Even as the US dollar rallied, emerging Asia’s currencies are mostly faring better than traditional havens like the yen and the euro. The region’s bonds are standing out as a rare bright spot in a year that sent global debt into its first bear market for a generation.
Asia is benefiting from both good management and good luck. Inflation is weaker than for much of the globe, and local policymakers not only built up record foreign-exchange reserves but also have been moderate in their deployment. Fiscal prudence and calm crisis management have been the norm, and while those reserves have shrunk at the fastest pace on record, they are still higher than they were at the end of the last decade.
“Emerging Asia leads in the race to keep inflation low,” said Swiss Re Chief Economist Jerome Haegeli. “Countries that can avoid stagflation-like conditions – and we currently think most of Asia will – could gain competitiveness.”
Year-to-date performance may have given some vindication to bullish emerging Asia investors. A Bloomberg index of emerging Asia bonds registered total losses of around 9 per cent this year, comparatively better than a gauge of US Treasuries which saw losses of 11 per cent, or a global emerging-markets barometer which dropped over 16 per cent.
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The foreign-exchange stockpiles Asian economies built up have helped cushion the impact of this year’s market turmoil, which has spurred the largest equity outflows for at least a decade. There has been some alarm as the reserves were drawn down, but they are still above where they stood at the end of 2019. Emerging Asia’s combined holdings are at US$2.6 trillion, after peaking above US$2.8 trillion in October.
“Over the last year external buffers that were built up have been heavily depleted – public and private debt has increased substantially, fiscal spending has increased, higher commodity imports are eating into current account surpluses, and real interest rates are negative, implying less of a buffer against capital outflows,” said Alexander Wolf, head of Asia investment strategy at JPMorgan Private Bank in Singapore.
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“Asia still has the buffers to weather the storm.” said Jin Yang Lee, an investment manager for sovereign debt at abrdn Plc in Singapore. He sees opportunities in Malaysian, Indian and Chinese debt, along with pockets of the South Korean market.
“In general Asia has been much more prudent in their policy settings vis-à-vis structural changes in their economies.”