Asia’s ‘Goldilocks’ economies mitigate the risks


Jeremy Weltman
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Several of the region’s emerging markets (EMs) were upgraded by analysts in 2017, and with economic growth predictions now being raised, 2018 could provide more of the same.


Malaysia improved the most of all the EMs in Asia last year, gaining a point in Euromoney’s country risk survey and rising two places in the global risk rankings to 36th out of 186 countries.

The scandal concerning the state development fund 1MDB clouded the outlook, undermining the survey score for corruption and highlighting political risk.

However, Malaysia’s capital access and debt ratings indicators improved after the decision to introduce a goods and services tax in 2015 to ensure the debt target of 55% of GDP is routinely met.

Risk experts upgraded all five of Malaysia’s economic factors, from bank stability through to government finances.

GDP rose by an estimated 5.6% in real terms in 2017, speeding up from the 4.2% outturn for 2016, and with economists upgrading their 2018 predictions based on strong domestic demand and momentum from last year’s strong global trade, prospects remain favourable.

The Malaysian Institute of Economic Research is predicting 5.4% growth for 2018.

It says demand for palm oil is likely to fall due to India raising tariffs on edible oils and the EU intending to ban biofuel from oils, but the effects are countered by China lowering its average import tariff on consumer goods.

The stronger currency is keeping import prices in check and supporting consumer confidence along with robust employment.

Inflation should dip below 3% this year, the current-account surplus will slightly exceed 2% of GDP and the unemployment rate will fall closer to 3%.

As with other countries in the region, it is experiencing ‘Goldilocks’ conditions – not too hot and not too cold – with low inflation, but strong growth benefiting from dynamism in China, India, the US and western Europe.

Risks to contemplate

Investing in the region is not without its complications, of course.

Low interest rates have fuelled a boom in the real-estate market resulting in empty buildings without tenants in Malaysia, and in South Korea highly leveraged households are vulnerable to mortgage rates rising, as central banks gradually tighten monetary policy.

The problem is widespread, stretching from Malaysia and Thailand to China and Hong Kong. High and rising personal credit ratios to GDP or disposable income are warning indicators of future problems, as rising debt-servicing leaves less disposable income for consumption, eroding economic growth prospects.

With local financial markets reacting negatively to monetary tightening by the world’s major central banks, there is pressure to follow suit to prevent capital outflows.

The global trade cycle would slow down as a result, dampening the feverish demand for commodities, semi-conductors and other manufactured goods produced in Asia.

Wide appeal

However, with China still growing, and the North Korean situation unlikely to produce a war, most of the big EMs are expected to maintain strong growth in the short term, exceeding expectations as the momentum spills over into 2018.

Indonesia, the Philippines and Thailand, just like Malaysia, are all investment grades within the third of ECR’s five risk categories, and all three countries have had their survey scores upgraded during the past 12 months:


Indonesia, one of the largest markets, is preparing to issue the region’s first sovereign green bond, an Islamic issue known as sukuk, to finance sustainable infrastructure.

The country has some notable political risks tied to the fortunes of president Joko Widodo and the ethno-religious tensions influencing the regional and local elections due in June before next year’s presidential and parliamentary voting.

These risks are factored into Indonesia’s lower risk score of 51.28 compared with other large EMs in Asia, putting it 64th in the rankings near the bottom of tier three, sandwiched between South Africa, one place higher, and Croatia, just below.

All five of Indonesia’s economic risk indicators were upgraded in 2017, with GDP growth forecast to exceed 5% again this year.

In the Philippines, there are still huge question marks hanging over the leadership style of Rodrigo Duterte, whose bloody crackdown on drug dealers and terrorists is proving highly contentious, but the president has solid backing for his economic reforms in the legislature, enabling corporate tax cuts to progress.

The country is expected to replace China as the fastest-growing economy in the region this year, according to the IMF, with GDP rising at a whopping real-terms pace of 6.7%. Adding further support to its improving risk score, the current-account is close to balance, with a small deficit of just 0.3% of GDP predicted for 2018.

The declining external debt ratio is likely to hit 20% of GDP this year, with debt-servicing falling to 9% of exports, and ample foreign currency reserves totalling $80 billion that are worth four times the country’s short-term maturing debt obligations.

While recognizing that most Asian EMs are medium-risks with various idiosyncratic issues, notably South Korea with its huge tail risk caused by the delicate situation with North Korea, most analysts remain positive on the region’s prospects.

Philipp Mayer, a survey contributor and country risk analyst at Erste Bank, notes the fact several countries in the region have undergone credit rating upgrades in 2016-2017.

“I do not expect any downgrades in the short run, given there will not be any external shocks such as a Chinese financial crisis,” he says.

Mayer also states that political risk is under-estimated. This is not peculiar to the Asian region; it is a global phenomenon mostly driven by the monetary policy stimulus from record low borrowing rates and quantitative easing (QE) to support economies since the global financial crisis.

“As we are now one year behind peak global QE, we will slowly and for sure later this year or early next year see more risk differentiation in the markets,” he says.

However, Mayer also adds there will be a greater focus elsewhere and not on Asia’s EMs, which are all investment grades.

Therefore, if central banks manage their credit bubbles appropriately, only raising interest rates gradually, and proportionately, in response to macroeconomic conditions, and the region avoids shocks, the risks of investing are unlikely to prove a deterrent.