Why Asian economies must brace for the rising 'twin headwinds'
China's slowdown and USD's spike pose very serious threat.
According to Morgan Stanley, the risks of a potential slowdown in China and the trend of a rising US dollar and rates could pose downside risks to the region’s growth outlook. We believe that every country in the region will be exposed to at least one of these two trends, if not both.
"Within the region, we believe that the countries which will be most exposed to both trends are Hong Kong, Australia, Indonesia and Singapore. We believe that Korea, India and Thailand will be moderately exposed while, on a relative basis, Taiwan and Malaysia will be less exposed to these two trends," says Morgan Stanley.
Which countries will be more exposed to a rising USD and real rates?
We believe that the rise in the dollar, coupled with the narrowing of the region’s excess savings, will mean a rise in real rates at a time when GDP growth has been moderating.
Current account deficit countries (India and Indonesia) will be most exposed to the challenge of the rise in the dollar and real rates, in our view. We would also include Thailand in this group as its current account balance is close to neutral and leverage has picked up significantly.
In terms of sequencing, we believe that the current account deficit countries will be the first to face the challenge of having to manage their exchange rates and domestic liquidity conditions, while the subsequent rise in real rates will likely affect the highly leveraged economies.
Korea, Taiwan and Malaysia are likely moderately exposed, while China is one of the lesser exposed economies when it comes to these external pressures.
Risks of a Growth Slowdown in China. We have long argued that China has suffered from a poor growth mix and loss of capital productivity due to excess investment.
The deterioration in capital productivity is being reflected in concerns about asset quality in the banking system, declining capacity utilisation and a deterioration in corporate profitability.
The most concerning symptom of this weaker capacity utilisation is in PPI moving into deflation and the attendant implication of that on real interest rates as well as the credit multiplier.
The recent effort from policy-makers to tighten credit growth via a tighter regulatory environment for interbank assets and wealth-management products has raised the risk of a slowdown in China.