Asian economies including the Philippines are facing a delicate balancing act between supporting recovery and managing rising levels of debt and inflation, even as aggressive tightening by the United States Federal Reserve might send ripples of volatility in the region.
Asian Development Bank (ADB) chief economist Albert Park said region-wide gross domestic product was expected to expand by 5.2 percent this year and 5.3 percent in 2023 amid continued recovery in domestic demand and strong exports.
At the same time, inflation across Asia is expected to rise to 3.7 percent in 2022 and weaken to 3.1 percent next year.
Park gave the keynote talk in a webinar held last week, organized by the Asia News Network, Philippine Daily Inquirer, The Daily Star in Bangladesh, and The Star in Malaysia.
The economist said Asia was exposed to risks from the escalation of the Russia-Ukraine war, financial stability triggered by aggressive tightening by the US Fed, emergence of more lethal COVID-19 variants, and disruptions related to current outbreaks in China.
Still, Park said Omicron’s impact on the region has been limited, as outbreaks had been shorter-lived and milder than previous waves.
“[Asian] economies remained relatively open, so that economic activity softened but continued to expand in early 2022,” he added.
In the Philippines, the purchasing manager’s index—a measure of prevailing trends in the manufacturing and services sectors—remained above 50 in the first quarter of 2022 although the numbers eased compared to year-ago levels.
Also, Park said aggressive tightening by the US Fed could trigger financial market volatility in Asia, capital outflows, and currency depreciation.
“This [increasing US federal fund rates] may imply weaker global economic recovery and slower growth in developing Asia,” Park said. “[Thus,] policy choices will be more complex in the region.”
On the one hand, inflation could rev up as foreign exchange rates depreciate along with capital outflows.
On the other hand, raising interest rates to stem capital outflows is an option, but this may choke domestic demand and slow down economic recovery.
“Government leaders face a difficult balancing act,” Park said. “Each economy must weigh these tradeoffs in light of specific circumstances.”
Last week, ING Bank senior Philippines economist Nicholas Mapa noted that the Bangko Sentral ng Pilipinas continued to be dovish—keeping its overnight borrowing rate at a record low of 2 percent—while the Philippine peso swung from one of the region’s top performers to a laggard in as short as one week.
“Should present trends continue and the Fed pushes through with an aggressive tightening cycle, we could very well have the BSP and the Fed at parity by yearend,” Mapa said. INQ