Most Asian countries have maintained strong economic growth in recent months despite the turmoil in global markets; however, significant downside risks threaten the region’s continued performance. In Thailand, floods threaten to undermine the country’s growth and disrupt regional supply chains. In China, a spate of defaults in the informal banking market is casting a shadow over the country’s prospects
- Bangladesh: Bangladesh’s deal with India will likely lead to long-term growth of bilateral trade and improvement of domestic infrastructure
- Cambodia: As Cambodia becomes increasingly integrated into the regional and global economies, it will start drawing significant attention from investors
- China: Multinationals should watch for news of further SME defaults as they could put a drag on Chinese growth
- India: India’s Right to Information Act is beginning to create serious problems for corrupt politicians and businessmen
- Indonesia: Indonesia’s policymakers have shifted their attention from inflation to growth, confident that they have price pressures under control
- Japan: The economy’s slow path to recovery will further decelerate due to the global economic slowdown, rising Yen, and continuing energy issues
- Malaysia: Malaysia has drawn significant FDI so far this year, suggesting that the country remains an attractive destination for manufacturing
- Pakistan: Recent interest rate cuts, which were aimed at promoting growth, are likely to spur already high inflation
- Philippines: A recently announced fiscal stimulus package may create opportunities for multinationals operating in the Philippines
- South Korea: New anti-graft reform measures should help to improve South Korea’s corruption landscape over the medium term
- Taiwan: Taiwan’s business environment will continue to improve as the island’s leaders work proactively to attract investment
- Thailand: The recent floods will impact global supply chains for agricultural goods, automobiles, and consumer electronics until at least Q1 2012
- Vietnam: Pledged foreign direct investment is dropping as growing domestic risks give companies reason to pause
Most Asian countries continue to exhibit strong growth despite the recent turmoil in global markets. However, if there is a full-blown recession in the developed world, some markets will weather the storm better than others. In particular, domestically-oriented countries like India and Indonesia will be much less affected by a downturn in the West than will export-oriented countries like Thailand and Malaysia
- Bangladesh: Bangladesh’s deal with India will likely lead to long-term growth of bilateral trade and improvement of domestic infrastructure
- Cambodia: As Cambodia becomes increasingly integrated into the regional and global economies, it will start drawing significant attention from investors
- China: Signs of weakening consumer demand have appeared in the luxury goods industry, which has seen stellar growth numbers in H1 2011
- India: Continuing interest rate hikes along with inflationary pressures will dampen GDP and industrial growth for the remainder of 2011
- Indonesia: MNCs should ensure that they are effectively taking advantage of Indonesia’s numerous government incentive programs
- Japan: The economy’s slow path to recovery will further decelerate due to the global economic slowdown, rising Yen, and continuing energy issues
- Malaysia: Malaysia is pursuing an unprecedented expansion of its oil infrastructure that may create significant opportunities for multinationals
- Pakistan: Companies should expect price pressures in Pakistan to remain elevated for the foreseeable future
- Philippines: A new agreement with China will bolster bilateral trade and boost foreign direct investment in the Philippines
- South Korea: New anti-graft reform measures should help to improve South Korea’s corruption landscape over the medium term
- Taiwan: Taiwan’s business environment will continue to improve as the island’s leaders work proactively to attract investment
- Thailand: Companies should remain cautious of the political landscape until the country’s new government has established a solid base of support
- Vietnam: The government’s new minimum wage hike will undergird Vietnam’s inflationary spiral, prolonging the pain for multinationals in the country
Regulatory changes in several countries are impacting the investment environment. In China, new policies may give foreign companies greater access to a US$1 trillion market. In Indonesia and Malaysia, regulatory changes will improve the business environment across several sectors. In Thailand, the government is pursuing policies that may unleash consumer spending along with inflation
- Bangladesh: Multinationals should monitor Bangladesh’s budgetary spending as it will impact the country’s ability to support industrial development
- Cambodia: Shortages of skilled workers may create a drag on Cambodia’s rapid growth in the coming years
- China: Recent changes to Beijing’s “indigenous innovation” rules may allow greater access to China’s enormous government procurement market
- India: New Delhi is poised to give multinationals greater access to an untapped portion of India’s massive retail market
- Indonesia: A new “tax holiday” policy will stimulate investment in several industries and lower the cost of expanding into Indonesia’s rural areas
- Japan: Power shortages currently plaguing Japan will become more severe in the coming months as the country continues to shut down reactors
- Malaysia: A new initiative to remove foreign equity restrictions in certain sectors has the potential to dramatically improve Malaysia’s business environment
- Pakistan: Efforts to boost economic development in Pakistan will be marred by worsening relations with the US
- Philippines: Manila’s new export development plan may create investment opportunities for companies in the IT, electronics, and agribusiness industries
- South Korea: High levels of household debt and rising interest rates will undermine South Korea’s consumer demand growth for the next 12-18 months
- Taiwan: Taiwan will face increasing competition in Europe, its fourth largest export market, as a result of a new FTA between the EU and South Korea
- Thailand: Companies should monitor government announcements about a variety of new policies that will impact Thailand’s investment environment
- Vietnam: If Hanoi continues to dither on raising interest rates, inflation may exceed the government’s new target, setting the stage for lower growth
Malaysia surprised markets last week when it did not raise interest rates. Instead Malaysia’s central bank instituted increased reserve requirements in an effort to restrain the flow of credit and cool inflation in a hot economy.
This is the new monetary calculus in emerging markets. In a globalized world, most emerging market central banks do not have the firepower to maintain prices with monetary policy alone. Capital from slow-growth mature markets, mainly the US and Europe, is attracted to emerging market bonds because of strong growth prospects, increased stability and widening interest rate spreads. As emerging market central banks raise rates to cool their economies, more foreign capital pours in and exacerbates the currency and inflationary imbalances that the central banks are looking to control.
Malaysia’s move will not go far enough to normalize its economic imbalances, but it is an important and creative start. Companies can expect similar moves by central banks in other emerging markets. If the new calculus can turn into consistent policy, currency appreciation will slow to mirror the pace of rising standards of living rather than the more rapid and unpredictable pace of foreign capital flows. This will impact hedging strategies as corporate treasuries can more accurately anticipate currency volatility across their growing emerging markets portfolio. Inflation may also cool as bank lending becomes more stringent, increasing consumer wallet-share for discretionary goods while also relieving some pressure from rising labor costs.
Brazil employed similarly creative strategies around taxing portfolio inflows to slow currency appreciation, while also using more traditional rate hikes in a combined effort to curb inflation and currency appreciation.
The new monetary calculus is a key step for financial stability and continued economic growth in emerging markets. Markets employing these strategies are likely to outperform in an unbalanced economic environment characterized by slow growth in mature markets and rapid growth in emerging markets.
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