- The region does not suffer from large savings-investment deficits
- Public debt ratios remained largely under check during the pandemic
- External debt ratios are modest
- Real exchange rate misalignment is minimal
- FX buffers to deal with potential liquidity crunch are ample
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Commentary: Market turmoil and Asia’s shock absorption capacity
As fears of global financial stability rise, how are Asian economies set up? Pretty well, in short. We track Asian economies’ macro vulnerability indicators on an annual basis, and compare them across a large number of EM economies outside the region. A few key aspects are well established:
- The region does not suffer from large savings-investment deficits, with only India and the Philippines expected to run a current account deficit amounting to more than 3% of GDP this year.
- The region did not see public sector debt ratios balloon during the pandemic years, India being one notable exception.
- Except for Malaysia, no country in Asia has external debt/GDP ratio exceeding 40%, while most EM economies in EMEA or LatAm have more than that.
- As for real exchange rate deviation from long-term trend, not a single Asian EM currency is in the more-than-5% misalignment category.
What about buffers to deal with the risk of external liquidity drying up? Our preferred metric to assess such risk is central bank foreign currency reserves to gross external funding ratio. Gross external funding needs are estimated by adding the year’s projected current account deficit with all external debt due this year (usually termed as “short-term external debt on residual maturity basis”). As per this metric, Asian economies have done a good job with debt management, reserve build-up, and stabilising their current accounts, with the ratio improving across the board in recent years. Since such ratios are not just relevant as a trend over time, but also in terms of regional cross section, it is worth noting that as per our projection for 2023, India, Indonesia, and Malaysia have the lowest cover in the region. The implication is that in times of global market stress and flight to safety, among Asian currencies, we will monitor INR, IDR, and MYR most closely.
We think that some lack of cyclical synchronicity holds Asia in good stead. Typically, growth and financial stability shocks in the West hurt external demand and liquidity, affecting regional exporters and borrowers, dragging down growth. But China’s re-opening and continued upside to regional travel and tourism are sources of offsetting support this year.
We will keep a close eye on the risk of contagion from the brewing turmoil in Europe and the US, but we nonetheless take solace from the fact that investors have much more to worry about economies outside of Asia than in Asia.
Taimur Baig
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Ma Tieying 馬鐵英, CFA
Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
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