Hong Kong: Days after the surprise UK vote for Brexit started roiling global markets, prospects for greater monetary and fiscal stimulus are becoming clear in Asia, even as the region’s relative growth dynamism offers it resilience.
While Nomura Holdings saw financial contagion and a blow to confidence as the main danger for Asia, Credit Suisse Group identified trade flows as the top risk. They ended with the same conclusion: more monetary easing is in store should risks to growth materialise. Taiwan may be the first cab off that rank, with most economists surveyed by Bloomberg predicting an interest-rate cut at Thursday’s scheduled central bank meeting.
While the region’s stocks sold off Friday, the picture was more mixed on Monday, with some Asian stock benchmarks, including in the Philippines and Japan, advancing. A surge in the yen has made further Bank of Japan action more likely, while the emerging Asian currencies took a hit from the Brexit uncertainty.
From India to China to the Philippines, the region’s economies still have the benefits from urbanisation and swelling middle-class demand for consumer goods and services. Most nations are also led by governments championing infrastructure investment, something China is keen on funding through its new Asia Infrastructure Investment Bank.
Outside of Japan, central banks have positive interest rates policy makers can lower to prop up growth, while fiscal stimulus is already on the cards or under way in China, Japan and the Philippines. Analysts differ on which lever would be relied upon across the region.
"In the scenario where Brexit triggers a more generalized weakening of global growth, we think Asian economies by and large will use monetary policy easing as a first line of defense to support growth," Credit Suisse analysts including Santitarn Sathirathai wrote in a note.
Their counterparts at Morgan Stanley said that aside from liquidity injections and potential cuts to banks’ required reserve ratios, "if growth headwinds persist, we expect policy makers to respond first with fiscal easing, particularly if the capital flows situation remains volatile; central banks may be constrained in cutting interest rates immediately as that could add to depreciation pressures."
An area of agreement: trade links with the UK are relatively small, generally below 2 percent of total trade for each country, according to Standard Chartered. A bigger threat would be posed by sustained market volatility or a severe slowdown in the euro area given direct trade ranges from about 10 per cent to 15 per cent of total trade for each economy.
"The direct growth impact of Brexit, while negative, should not be significant for Asia," Standard Chartered economists led by Marios Maratheftis wrote in a note. "Asia’s fundamentals should prove resilient, particularly when compared to the initial sell-off in financial markets."
Here’s how a Brexit spillover could play out for the main Asian economies:
The world’s biggest trading nation and No. 2 economy, China sent 16 per cent of its total exports to the EU in 2015, including 2.6 per cent to the UK Any notable slowdown in Europe would add to a growth headwind for China at a time when policy makers are already battling to assure their minimum 6.5 per cent expansion target for gross domestic product.
A one percentage-point drop in EU GDP growth could lower gains in Chinese exports to the region by 7 percentage points and shave 0.2 percentage points off China’s GDP growth, according to Bloomberg Intelligence. A renewed slowdown could also trigger fresh capital outflows. The People’s Bank of China stands ready to juice the system with cheap liquidity if needed and the government has room to spend. Authorities have also responded by fixing the currency lower.
Safe haven inflows into the yen since the Brexit results have sent it to the strongest against the dollar since 2013 — hurting prospects for Japanese earnings and undermining the case for domestic investment and faster wage gains. The Bank of Japan is forecast by most analysts to step up monetary stimulus at its next scheduled meeting, in late July, if not before. The administration of Prime Minister Shinzo Abe has previously pledged to assemble a fiscal package later this year. With Japanese-made products and components accounting for a significant share of the 15 per cent of Asian exports that go to Europe, officials haven’t ruled out intervening to sell the yen.
Brexit comes at a delicate time for India. Central bank Governor Raghuram Rajan surprised markets earlier in June by announcing plans to leave the post in September, posing significant uncertainty for policy making in the near term. Brexit adds another complication and could prolong market volatility. Over the medium term, analysts say India should weather the Brexit storm, having reduced its current-account deficit and bolstered foreign investment. The Reserve Bank of India (RBI) has made clear it stands ready to support orderly markets.
The government of Asia’s fourth-largest economy on Tuesday announced a 20 trillion won ($17 billion) fiscal package designed to bolster growth as policy makers undertake a restructuring of the nation’s big manufacturers. In its statement on plans for the second half of the year, the Park administration said the measure will include a supplementary budget of about 10 trillion won to be used mainly for job-creation and support for regional districts in the country.
Credit Suisse are among those projecting at least one more rate cut by the Bank of Korea this year.
A mixed outlook. Hong Kong and Singapore, as smaller, open economies, are among the more vulnerable, according to both Nomura and Credit Suisse analysts. Nomura and Morgan Stanley identify the Philippines — where stocks climbed on Monday and an incoming president has pledged to boost spending — as among the most resilient.
Capital Economics forecast Brexit would cause at most a GDP drop of 0.2 per cent across Asia, an assessment shared by Credit Suisse. Morgan Stanley says that in a "high-stress scenario" growth in Asia excluding Japan would be hit by 0.3 percentage point this year, matching Nomura’s tentative estimate. In the high-stress case, GDP expansion could be shaved by half a percentage point, Morgan Stanley analysts led by Chetan Ahya wrote. — Bloomberg News