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In the pandemic’s second year, some familiar worries -- about inflation, capital flight or public debt -- are starting to surface across the developing world. Except in one corner.
In Asia, policy makers aren’t too preoccupied with these classic emerging-market problems. Their economies look increasingly like they’ve emerged.
Asian Exception
In the pre-pandemic decade, Asian economies posted much faster growth and lower inflation rates than their emerging-market peers
Source: International Monetary Fund
That’s largely down to lessons learned from the traumas of the past three decades –- from the late-1990s regional meltdown to the global crash of 2008 and the so-called “taper tantrum” of 2013 -- and the defenses put in place as a result.
“Asian countries have used past crises to learn and build resilience,” said Sonal Varma, an economist at Nomura Holdings Inc. in Singapore.
Their economies now boast hefty foreign-exchange reserves, stronger financial systems and an unassailable place as the world’s manufacturing powerhouse. Their stock markets, like those in the developed world, have posted gains during the pandemic while other emerging regions lost ground.
Top Performers
Emerging Asia's stock markets, like those in the developed world, have climbed during the pandemic
Source: MSCI, Bloomberg
Note: All returns in USD
In India, which is battling the world’s worst Covid-19 outbreak, the central bank chief has cited the buffer provided by its foreign exchange reserves, which have grown more than tenfold since 2000. “This gives us the confidence to deal with global spillovers,” Governor Shaktikanta Das said Wednesday as he introduced new support measures.
All of this has left the region’s policymakers largely unfazed by the great inflation scare roiling many of their peers.
With U.S. bond yields on the rise and the prices of food, energy and raw materials soaring, emerging nations like Brazil, Russia and Turkey have been forced into interest-rate hikes this year -– even though their economies are still recovering from Covid-19.
By contrast, central bankers in Asia sound more like the Federal Reserve’s Jerome Powell -- arguing that any price increases will likely be modest and transitory. No emerging Asia economy has raised their benchmark interest rate so far in 2021, and only Pakistan is forecast to do so by year-end, according to Bloomberg.
The region is likely to undershoot inflation targets this year like it did in 2020, TD Ameritrade analysts said in an April 19 report.
Lessons Learned
At the start of the Asian crisis in 1997, policymakers responded with fiscal consolidation and higher interest rates. The ensuing slump cost the region hundreds of billions of dollars in lost output and triggered a profound rethink of how economies should be managed.
When the global crash of 2008 arrived, Asian economies were more resilient “because they responded with countercyclical fiscal and monetary stimulus,” according to a report this year by the United Nations Economic and Social Commission for Asia and the Pacific. And there’s been no major debt crisis in the region since the 90s, “thanks in part to the rapid growth of local currency bond markets.”
Going Local
Average size of EM Asia local-currency bond markets as share of GDP
Source: Asian Development Bank
The markets for government and corporate debt in emerging Asian economies were worth more than $20 trillion last year, up from less than $1 trillion two decades earlier.
Some countries also moved to impose long-term restraints on spending -- like Indonesia, which enshrined a budget-deficit cap equal to 3% of GDP in law. When the rule was broken during the pandemic, investors broadly accepted the assurance that it would be reinstated when the emergency was past.
On debt vulnerabilities and other metrics, Asian economies generally rank the strongest in Bloomberg’s emerging-market scorecard.
Trade has given Asia an extra buffer throughout the pandemic, as its exports bounced back relatively fast. South Korea and Taiwan, the key suppliers to a tight global market for semiconductors, are in an especially strong position.
Back In Business
Year-on-year change in exports
Source: World Trade Organization
For some analysts, those economies -- where per-capita economic output is around $30,000 -- are too wealthy to be considered emerging markets anyway. That highlights a wider problem with the term, which evolved to describe a class of financial assets and doesn’t capture distinctions between economies and societies.
The group known as Emerging Asia often includes giant but poorer economies like India, as well as much richer ones like Taiwan. Others on the widely-used MSCI EM Asia index include Indonesia, South Korea, Malaysia, Pakistan, Philippines and Thailand -- as well as China, which many in the financial world place in a category of its own.
‘Sigh of Relief’
Whatever the labels, the proximity of the world’s fastest-growing large economy has been a boon for neighbors, especially in the pandemic.
Around the middle of last year, many Asian companies “were facing sudden stops in orders and liquidity,” said Taimur Baig, chief economist at DBS Bank Ltd. in Singapore. “As China’s factories began to hum, a sigh of relief percolated through Asia’s elaborate supply chain.”
Many emerging-market investors already treat Asia differently. Ian Samson, a fund manager at Fidelity International in Hong Kong, says it’s in effect a separate bloc.
“In terms of the fundamentals -- whether it’s structural growth or fiscal balances -- Asia has been outperforming Latin America” and emerging markets in Europe, Africa and the Middle East, Samson said. Asia is especially dominant in emerging-market equities, accounting for the large majority of total investment, he said -- partly because it has bigger companies, and partly because more of them are in high-growth sectors like technology.
Building Buffers
Asian countries outside China have steadily built their FX reserves
Source: Bloomberg, ANZ Research
Paul Sandhu at BNP Paribas Asset Management sees Asian out-performance continuing “for the foreseeable future” -- and he points to strengths that go beyond economics to include governance. In the early phases of the pandemic, Asia “handled it better than any other economy, whether in emerging markets or developed markets,” he said.
To be sure, Asia has its share of problems. Beyond India’s deadly second wave of Covid-19 infections, there have been resurgences in Thailand and the Philippines too, while vaccination campaigns are lagging.
Other economic challenges include escalating private debt and longer-run question marks over central-bank independence -- issues that trouble some developed economies too. And the growing tensions between the U.S. and China create headaches for countries seeking to stay on good terms with both.
Still, the region’s economies generally have more room for error than most of their counterparts, according to Baig at DBS.
“No emerging economy in Asia at present is characterized by debt sustainability concerns or a dramatic collapse in investor sentiment, which seems to be the case in a number of emerging economies elsewhere,” said Baig.
— With assistance by Livia Yap, Yudith Ho, Claire Jiao, and Tassia Sipahutar
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