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Are the glorious days over for the Tiger economies?

/ 06:34 PM September 02, 2019

KUALA LUMPUR — With falling exports and economic growth dipping, the once fast-growing Asian Tigers of South Korea, Taiwan, Hong Kong and Singapore are now limping.

Even the rapidly developing Asian Tiger Cub economies of Indonesia, Malaysia, Thailand, Philippines and Vietnam are affected by weaker global growth.

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Complicating matters are, among other factors, the intensifying US-China trade war, and massive pro-democracy protests in Hong Kong.

Bucking the regional trend, Vietnam gains from strong tourism, exports and industrial output.

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Taiwan may also gain unexpectedly as its companies relocate home from China, said Pong Teng Siew, the head of research of Inter-Pacific Securities.

Nevertheless, all suffer from easing global momentum. A spiraling trade row, based on decades-old resentments, between Japan and South Korea is rattling the smartphone market.

Some of South Korea’s top exports are affected by Japan’s decision to remove it from a preferential trade list of materials required in its high tech industry.

Hong Kong’s economy which shrank 0.4% in the second quarter, is bogged down by the three-month long mass protests.

Singapore’s economy which shrank 3.3% quarter-on-quarter, is also on the radar for a possible technical recession.

Two consecutive quarters of economic contraction, by definition, amounts to a technical recession. Weaker currencies may help exports by making them less expensive in foreign currencies but companies with higher import content will have to pay more for their imported raw materials.

The yuan which has crossed a psychological barrier of 7.0 to the dollar, is expected to weaken by year end to between 7.20 (ANZ Bank and ING Bank) and 7.40 (RBC Capital Markets and JP Morgan), and risks hitting 7.66 (Bank of America Merrill Lynch).

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There is a limit to which regional currencies can weaken, as “weakness in the yuan will put the brakes on other currencies in the region, including the rupee, Singapore dollar, won, ringgit and rupiah, from sliding against the dollar, ’’ said AmBank Research in its currency outlook. In its worst case scenario, AmBank Research sees the ringgit falling by 8% to 10% against the dollar, should the yuan fall 10% against the greenback.

The base case sees the ringgit range bound between 4.15 to 4.20 to the dollar, with the local currency possibly reaching 4.05 to 4.10 on a US-China trade deal.

The won will weaken the most due to its strong dependence on China and the US to which its supply chains are closely interlinked.

The baht will be the most resilient based on Thailand’s large current account surplus, low inflation and steady growth.

But in the weeks ahead, “regional currencies will have to adjust to weaker levels, on continued trade war rhetoric and its impact on trade flows, ’’ said Hong Leong Bank chief operating officer, global markets, Hor Kwok Wai.

The speed and magnitude of the recent yuan depreciation points to the need for its stability especially in view of the high exposure of Asian exports to China.

Many Asian currencies now rely on China’s policymakers to manage yuan stability. “The rapid weakening of the yuan poses a new risk for some Asian currencies due to the further denting of business and financial market sentiment, ’’ said Lee Heng Guie, the executive director of Socio Economic Research Center.

These Asian countries face material risks in a downturn in trade and investment as well as supply chain disruptions.

Currency weakness to boost exports can only achieve so much; in the long run, exports will be negatively impacted as long as the worsening trade war is not resolved.

In the meantime, these tiger and cub countries can struggle to use monetary and fiscal stimulus programmes to prop up their economies. “It all started with the trade disputes. Asian economies must find their way to sustain growth; closer trade among each other and diversification from exports will help cushion the impact, ’’ said Danny Wong, the CEO of Areca Capital. There is still optimism for Asia to outperform developed countries in the years to come.

Investors have to be patient and ride out this period of volatility, said Hor.

After allowing the forces of globalisation to roll on and gather steam, the US suddenly started a trade war that aims to, almost overnight, address many complaints against China.

Defying calls from US companies to withdraw from tariffs, US President Donald Trump labelled them as “weak and badly run” companies. The largest US business lobby has urged Trump and President Xi Jinping to return to talks in “good faith.” There must be some way out of this tunnel and we should not wait too long as things worsen.

Columnist Yap Leng Kuen notes the urgent need to de-escalate.

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TAGS: Asia, Business, economy, Tiger Economies
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