In the first part of this interview, Oxford Economics’ head of Asia Economics Louis Kuijs, spoke about trends in global trade and the impacts of geopolitics and economic factors on Asian supply chains, and the factors in their resilience.
In this second part, Mr Kuijs talks about the fiscal impacts of the pandemic on Asian economies, its implications more broadly on economic growth in the region, and which economies are relatively better placed than others and why.
Unravel: We want to shift the focus a little bit now from trade to growth more broadly. In your view, what are the key factors that will drive Asian economic growth in the coming quarters?
Mr Kuijs: On the plus side, most Asian economies are being helped by a pretty vigorous global recovery, which is good for trade and business sentiment. So that’s a big driver.
Now, on the domestic side, we see an easing of restrictions and opening up in some countries. Unfortunately, however, in a number of Asian economies, this trend has halted or even pushed into reverse with renewed outbreaks. And given vaccination rates are low in many countries, that is clearly weighing on the economic recovery. Low vaccination rates are a serious problem.
When we look at our GDP growth forecasts for Asia as a whole, the 2021 numbers still look very good, because we fell in such a deep hole last year, so that is not a surprise. But we’ve already scaled down our forecasts for many countries, and unfortunately, we will have to do that again this month for countries like Australia, Indonesia, Malaysia and Thailand.
Relatively speaking, Asian economies will not grow rapidly this year. In normal years, Asia tends to grow significantly faster than the US and Europe, but this time around the US is going to grow faster than Asia ex-China. This hasn’t happened in a long time. Even Europe is doing quite well, compared to Asia ex-China. This has a lot to do with the COVID story, which is still a significant issue in Asian economies where vaccination levels are low. Sadly, this isn’t just the case with emerging markets, but also developed markets such as Australia, Japan and South Korea.
Unravel: Broadly speaking, have emerging Asian economies managed to withstand the fiscal implications of the pandemic? What, in your view, will be the long-term fiscal impacts of COVID-19 on developing Asian economies, and on economic development more broadly?
Mr Kuijs: I don’t want to get too much into the specifics for any particular country, but I would say that when we look at recent trends and forecasts, while Asia is still having a hard time dealing with COVID, that will eventually be over. We remain quite bullish about the region’s medium- to long-term growth prospects. This is a part of the world where savings are high, which is necessary to sustain expansion of your capacity to produce. These countries are also in a relatively solid external vulnerability position in terms of their current accounts, being not so much in deficit and not being on that threshold where if Wall Street doesn’t like what you’re doing, it can punish you.
So, we have healthy investment-to-GDP ratios and the capacity to expand production. As a result, we still have decent potential GDP growth rates. These growth rates are coming down gradually over time as the economies mature and demographic transitions take place. But if you compare our forecasts for Asian emerging markets with those in say Latin America, there’s no comparison really – we are far more bullish on Asia. This is because Latin America doesn’t save enough to have a decent amount of manufacturing taking place without relying on foreign investment.
If you look at economic history, you see how hard it is to develop sustainably and to have decent trend growth over a long period of time without having a solid manufacturing sector. In this respect, Asia continues to be relatively well-placed.
I’ve talked a lot about growth, but at the end of the day, the fiscal arithmetic has to add up. If you look at countries such as India or China, which tend to have quite large fiscal deficits year after year. Why are their debt-to-GDP ratios still not very high? It is because they have decent trend growth and that’s helpful in keeping the fiscal numbers manageable. Through the COVID crisis, two things have prevented a steep increase in the debt-to-GDP ratios that we’ve seen in the western world. The first is that while growth was terrible last year and even negative in some countries, we are already seeing it come back, and if you look at a three-year period, growth is better in Asia. But also, Asian governments tend to be more conservative on the fiscal front than in the West. So, we haven’t seen very large increases in deficits in most Asian countries. As a result, I am not intimidated by Asia’s fiscal arithmetic.
Unravel: And the last question, Louis, what are the bright spots for growth in Asia?
Mr Kuijs: Well, if we just look at the growth numbers in 2021, they’re spectacular, as we’ve talked about. But where are they really high? If you look at our growth forecast for 2021, we have India growing at 9.1%, which is the highest. Of course, India’s GDP fell by 7% last year, so it needs to make up for that. But nonetheless, it is strong growth. We also have very sizeable growth in Vietnam and the Philippines.
Of course, countries like Australia and Japan will never see such rates of growth because they are very mature economies.
But there are still some other poor countries that aren’t doing well – Thailand and Indonesia in particular. For these economies, we expect that the current COVID headaches are weighing very significantly on growth this year. As such, these two economies have a very disappointing growth profile this year. We only expect these two economies to crawl out of the COVID nightmare next year. So that’s a little bit of the story among emerging markets in Asia.
Louis leads the Asia-Pacific macro team and its research. He contributes to S&P Global Ratings’ macro-credit narrative and represents the firm in events, conferences, and the media, delivering its insights and thought leadership to the marketplace. Before joining S&P Global Ratings in 2022, Louis held senior positions in both the public and private sectors, including at the International Monetary Fund (IMF) in Washington DC, the World Bank in Beijing, and at the Royal Bank of Scotland and Oxford Economics in Hong Kong. While with the World Bank, he led the China Quarterly Update, headed the Bank’s mid-term review of China’s 11th Five Year Plan, and led research on China’s saving and investment, rebalancing, and long-term growth and structural change.