Musing about what 2022 holds is not so much a pursuit of definitive answers as it is an invitation to examine a chaotic clash of pandemic, price, policy and geopolitical risks. Conveniently, but rather clumsily, five emerging markets Asia themes for 2022 emerge.
Theme 1: Discordant recovery stacked against EMs
Despite turning a corner, the global economy is still in the midst of an uneven recovery, stacked against EMs (emerging markets) disadvantaged by access to healthcare and cheap funding.
To be sure, this does not distract from the big picture of continued improvement in EM Asia, with adaptation, circumvention and gradual reopening dampening incremental Covid blows. Accordingly, most EM Asia economies in 2022 are set to regain ground lost to the pandemic, if not extend recovery towards the pre-pandemic growth trajectory.
But evolving “variant risks” and vaccination lags vis-à-vis advanced economies (AEs) dictate that EM Asia’s recovery will lag that of AEs. Asynchronous recovery aside, demand rebound is liable to restraints; as start-stop mobility, supply-chain disruptions and prolonged border restrictions subdue demand recovery.
Crucially, adverse feedback loops involving mounting fiscal strains, rising import costs amid more problematic inflation and a hawkish Fed fatten downside “tail risks”. In addition, adverse balance sheet impact from asset and exchange rate pressures threaten to amplify downside risks. All these point to stifled and stuttered growth for EM Asia, underpinning a bumpy recovery.
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Theme 2: Conflicted and asymmetric China risks
Moreover, conflicted and asymmetric China risks may accentuate turbulence. Asymmetric because China’s sway is likely to be tipped to accentuate downside risks. The fact is, downside risks from financial shocks and supply-chain ripples tend to amplify amid a tightening Fed. In contrast, tailwinds may be curtailed by domestically targeted stimuli. What’s more, China’s demand revival may inconveniently amplify pre-existing cost-push, to the detriment of a growth rebound.
And Beijing’s conflicting impulses are crystallised in the dissonance between its “handbrake” turn on policy to unambiguous stimulus and lingering headwinds from the property sector crackdown alongside regulatory tightening aimed at anti-monopolistic measures. Whether China, in totality, inspires tailwinds or churns up headwinds is as unclear as it is uneven across time and countries.
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Across time, ripples from default by Chinese developers cast a pall early this year whereas lagged stimulus boost promise positive spillover later this year. Across countries, Beijing’s “Zero Covid” restrictions dampen and defer regional tourism recovery while China’s conflicting swings between anti-speculative clampdown and strategic reserve-building impose volatility on commodity producers. All said, China will accentuate a bumpy and uneven EM Asia recovery.
Theme 3: Inflation insurgence
Persistent cost-push factors amplified by food and energy price pressures mean that inflation risks will not only manifest and persist this year but evolve to become more profound amid higher food and energy consumption in EM Asia.
This is not just an unwelcome intensification of policy dilemma. Crucially, persistent food/energy costpush, conspiring with strained fiscal position and a hawkish Fed, threaten a spiral from inflation to wider macrostability risks.
Theme 4: ’Kokomo USD’ and macro-stability risks
Moreover, a “Kokomo USD”, a derivative feature of a “Kokomo Fed” of a Federal Reserve (Fed) poised to “get there fast, and then ... take it slow” (also known as front-load tightening), may amplify macro-stability risks.
Specifically, EM Asia FX is predisposed to depreciation as a corollary to a “Kokomo USD” may tip over as tail risk of self-reinforcing sell-off in EM Asia FX and asset markets. Especially if resurgent inflation, elevated debt, and capital outflows conspire to set off adverse feedback loops.
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Admittedly, measured EM Asia FX softening confer advantages to exports recovery. But these are washed out by supply-chain limitations and cost-push vulnerabilities and overwhelmed by the threat of “tipping risks” undermining macro-stability.
Theme 5: Coerced normalisation and sharper trade-offs
Given tail risks to macro-stability are disproportionally damaging, a hawkish Fed may demand EM Asia central banks’ tightening start sooner and go further than otherwise.
Moreover, AEs weaning off drastic fiscal impulses will potentially compromise EM Asia’s fiscal deficits and debt. So, policy trade-offs between inflation-growth balance and macro stability risks are sharpened. And policy normalisation, if not compelled by fundamentals, maybe coerced by threats to stability; considering that relative inflation overshoot and/or policy lags will differentiate relative FX and asset market outcomes.
Constrained upcycle?
All considered, these macro themes suggest a half-full rendition of constrained upcycle for EM Asia this year. This is one where the recovery will extend but suffer bumps and dampeners amid prolonged “variant risks”. China, despite stimulus buoyancy, remains a wild card and downside risk. Inflation will be increasingly inconvenient, demanding policy calibration against a tightening Fed at the pain of capital outflow.
Consequently, EM Asia central banks must endure sharper trade-offs, guarding more against inflation and macro-instability rather than ensuring growth. Weaker EM Asia currencies following a “Kokomo USD”, while alluring for exports, will be washed out by imported inflation vulnerabilities and “fat tail” stability risks.
Vishnu Varathan is executive director, and head, economics and strategy, Asia & Oceania Treasury at Mizuho Bank
Cover photo: ikshit Patel/Unsplash
