External woes seen dragging growth in Asia’s emerging markets

Asia’s emerging markets will likely continue their growth slowdown until the fourth quarter of this year due to trade tensions, the technology sector downcycle and a slowing Chinese economy, prompting further interest rate cuts in some countries like the Philippines.

This is according to Japanese investment house Nomura, which also cites risks in economies with high investment-saving ratios like Indonesia, India and the Philippines to face difficulties in funding their current account deficits due to capital outflows in case of a “downside scenario.”

Under Nomura’s “downside” scenario, the ongoing growth slowdown and escalating US-China trade war may start to have nonlinear economic effects through tighter financial conditions, decline in consumer confidence and increase in corporate credit stress.

This is in contrast to the “upside” scenario, where geopolitical risks could subside and, in particular, the United States and China quickly reach a trade truce, while business confidence rebounds and financial conditions ease as the potency of very low policy interest rates increases.

In Nomura’s Aug. 30 commentary “The World Economy: Nearing an Inflection Point,” Nomura said amid the ongoing slowdown in Asia (excluding Japan), there were signs of growing divergence within the region. It noted that countries like Vietnam, Taiwan and Malaysia were benefiting from the diversion of trade away from China.

Its baseline growth forecasts have already incorporated the adverse effects of trade escalation, especially for the open economies. In the case of the Philippines, economic growth is seen at 6 percent this year, before improving to 6.7 percent next year and 6.8 percent in 2021.

Overall, Asia ex-Japan is projected to grow by 5.6 percent this year and next year and by 5.5 percent in 2021.

“Further out in 2020, we still expect a gradual growth recovery to set in, as Asia benefits from ongoing policy easing and a potential capex (capital expenditure) recovery in the tech sector,” Nomura said.

“On the policy front, with the export downturn spilling into weaker domestic demand, we expect further rate cuts in India, Indonesia, the Philippines, Malaysia, South Korea and Thailand.”

Nomura sees central banks in Malaysia and the Philippines cutting rates by more than its base case scenario of a 25-basis point rate cut. The Bangko Sentral ng Pilipinas’ overnight borrowing rate is currently at 4.25 percent, which Nomura had expected to ease to 4 percent this year and stabilize at this level through 2021.

On Nomura’s downside scenario, it noted that many Asian economies were currently at a tipping point and multiple factors could trigger a sharper downward spiral.

“As the trade war morphs into a tech and currency war, rising policy uncertainty could delay the tech recovery and act as a drag on investment. Piling inventories will force firms to cut production and cut jobs. There are spillover risks from a slump in Chinese property sector and significant RMB (renminbi) depreciation. Asset price correction can tighten financial conditions,” Nomura said. —DORIS DUMLAO-ABADILLA