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Economies in Asia are well placed to withstand a further worsening of the global economy, according to a report released by Fitch Ratings this week. In general, healthy trade and fiscal balances, policy flexibility and their resilience in 2009 suggests that most countries in the region are well-protected against contagion from further shocks from Western Europe and the US.
The report — “Emerging Asian sovereign pressure points” — noted that Thailand combines high exposure to a global slowdown with limited scope for monetary policy stimulus, but in contrast, Indonesia has a track record of resilience to global economic shocks and has the most scope for a policy response. Meanwhile, China and India are less exposed to a global growth shock, but also have little tolerance for policy stimulus should things go badly wrong.
A sudden worsening in global market liquidity is likely to hurt Indonesia, Korea and Malaysia most, but would have a limited impact on China, Taiwan and the Philippines. But, “emerging Asian exposure to a sudden stop in external financing ... appears limited, with only Sri Lanka and India running deficits on their basic balances (current account balance plus net foreign direct investment inflows)”.
The report looked at several metrics to assess the potential exposure of emerging Asian economies and their sovereign credit-worthiness to a further deterioration in the global economy and heightened stress in the financial system. However, the rating agency stressed that these contingencies do not reflect its base case scenario.
Fitch pointed out that the threat to the real economy from a potential sharp worsening in the global economy can be determined through trade openness and the scale of the deviation seen in 2009 GDP growth compared with the preceding five-year average growth rate. The three countries that experienced the largest shock to growth — Malaysia, Mongolia and Thailand — are among the most open to trade in the region, while those least open to trade suffered smaller shocks to GDP growth in 2008 to 2009.
A government’s ability to stimulate its country’s economy and protect potential downside risks to growth was also considered. The current and projected level of real interest rates as well as the difference between a sovereign’s general government debt-to-GDP ratio are two key measures of monetary and fiscal stimulus capacity.
Indonesia’s low public debt-to-GDP ratio suggests that it has room to implement fiscal stimulus; current and forecast positive real interest rates allow scope for monetary accommodation. Taiwan also has positive real interest rates, but negative real interest rates in Thailand and Korea suggest that responsive monetary stimulus may be limited in both cases.
Meanwhile, India and Sri Lanka may have the most limited capacity for policy stimulus because both have high public debt-to-GDP ratios and negative real interest rates.
China’s capacity for further stimulus may also be constrained due to concerns about the asset quality of the banking system following the credit-led stimulus effort of 2009-2010, although, “purely fiscal metrics are less of a constraint given the strength of the overall sovereign balance sheet”.
However, “trade openness” does not fully explain the extent of the growth shocks felt in the region in 2009, according to Fitch. Demand for commodities is also important, and a downturn in the global economy would likely hit commodity prices, harming the region’s exporters.
Indonesia (oil and gas, coal and palm oil), Mongolia (coal, copper, and gold), Vietnam (rice and oil) and Malaysia (oil and palm oil) are the most commodity dependent in emerging Asia.
On the other hand, Korea, India, China and Taiwan would be the most likely beneficiaries from a fall in commodity prices as they are significant net commodity importers.
Finally — and most optimistically — Fitch noted that the current account balances for the region as a whole indicates that it is well placed to handle a repeat of the liquidity shock that hit the financial system three years ago. The most vulnerable are Sri Lanka and India; the rest of emerging Asia is sitting comfortably.
