The Looming Threats to Developing Asia
Written By: Semini Satarasinghe
With avenging trade wars, vulnerabilities of financial markets, geopolitical tension and volatility in the global economy, there are looming threats to developing Asia. Comprising of more than 49 countries, the positive economic growth in the Asian region is dominated by regional superpowers, China and India. Not to mention, emerging Asia, that encompasses countries such as India, Indonesia, Pakistan, Philippines, Thailand and Vietnam, with a collective forecasted growth rate of 6.5% in 2018-2019 by the IMF, is expected to be the driving force for global economic growth. However with inevitable economic unpredictability globally, there are imminent threats to the Asian region. This article will focus on two key threats that affect the economy of Asia.
The strong economic growth observed in the U.S economy has dampened the appreciation of Asian Currencies. The steady federal funds rate hike from 1.50%-1.75% to 2.00%-2.25%, along with combative comments by the Federal Reserve policymakers have fortified the greenback. Along with the positive shifts in unemployment rates, the budget deficit and consumer confidence, the overall economic growth in the U.S has aided in increasing Treasury yields.
Theoretically, a stronger dollar would make goods in markets more competitive and in turn increase exports. However, the rise in debt and sluggish economic growth, particularly in emerging Asian economies, have offset the benefit of devaluated currencies against the U.S. Dollar.
Rise in Debt Repayment
The increase in U.S Treasure yields has added pressure on the Asian Currencies. Asian countries affected by this phenomenon have largely been from emerging Asia, including India and Indonesia. These countries experience widening budget deficits fueled by expensive imports such as petroleum and commodities. Rising crude oil prices together with currency devaluations have drained foreign reserves in countries such as Pakistan and India. Additionally, the higher U.S Interest rates have fueled dollar-denominated debt payments, thus increasing the debt burden and refinancing capabilities of many countries in the Asian Region.
MSCI Emerging Market Index
Source: Market Data, Financial Times
Debt is sustainable only if revenues are healthy. Along with shrinking growth in an economy, the positive gearing effect of debt is overturned. Emerging Asian economies such as Pakistan, India, Indonesia and Vietnam are struggling in dollar-denominated financial repayments. Hence, the devaluation of the emerging markets’ currencies against the USD makes repayment and refinancing obligations much harder than the ideal outcome of boosting exports and gaining market competitiveness.
Deteriorating Budget Deficits
Further, the regional currency turmoil affecting emerging Asia has increased inflation beyond expected levels and added depreciatory pressure on currencies such as the Indian Rupee (INR) and the Pakistan Rupee (PKR). On top of trade tensions intensifying and instability in the overall economy, emerging Asia has observed sluggish capital inflows, which further deteriorates the budget deficit. Increased U.S interest rates, rising crude oil prices and the increased price of dollar denominated energy imports and external funding flows have added to the sharp currency devaluations. Consumer spending power across many emerging countries with large import dependency and crippling foreign currency reserves is bound to weaken if central banks fail to tackle the inflationary pressure and stabilize sharp currency fluctuations.
The rise in U.S interest rates, a fortifying U.S dollar, an increased cost in debt repayments and sluggish economic growth pose an imminent risk to the emerging markets and corporations in Asia.
Threat of China
Despite the bearish economy of China in the late 19th and 20th century, over the recent decades the resurgence of Chinese prosperity and power has been evident. Although recent years have shown a slower rate of growth in the economy, the country has boasted years of power in its history. While there is no basis to correlate rising power with increasing threat, many Asian countries have been skeptical of the intentions of China. Factors such as communist governance, credibility and the ultimate goals of China are affecting the perception of other countries in Asia. Further, debt trap diplomacy by China has induced a cynical perception of itself among its neighbors and western allies.
With increasing global connectivity through diversified supply chains and economic corporation, China yet remains in control of a guarded and authoritarian regime. The country has even boasted of how the authoritarian system in China can be a model for the world. However much of the initiatives by China, such as the recent development in the South China Sea, have been portrayed as acts of intimidation towards its neighboring countries. James N. Mattis, U.S Secretary of Defense has stated that the U.S questions the broader goals of China and added that despite contrary claims by China, the placement of weapon systems in the disputed sea is directly tied to military use for the purpose of intimidation and coercion. Militarization of the Paracels and Spratly islands in the South China Sea has caused rising tension among its neighbors including Taiwan, Vietnam, Philippines and Malaysia.
The multimillion-dollar Belt and Road initiative (BRI), also known as the “One Belt, One Road” is a strategy by the government of China to build economic ties along the economic belt and naval routes connecting over 80 countries across three continents. With a potential to connect an estimated 4.4 billion people, the project forecasts advanced economic growth through the building of infrastructure and the improvement of financial and trade ties. However, such an extensive project spanning Asia, Europe and Africa has sparked resentment regarding the intentions of China. A policy paper by the Center for Global Development in March 2018 identified 23 countries, involved in hosting the BRI initiative, that are at risk of debt distress, 8 of which are assessed to be highly vulnerable. Such stark statistics portray problems in sustainable financing and debt in borrower countries with increasing debt-to-GDP ratios. Countries including Afghanistan, Kyrgyzstan, Tajikistan, Pakistan, Maldives, Bhutan, Sri Lanka, Myanmar, Mongolia, Cambodia and Laos are a few of the countries in Asia identified as being at risk of debt distress that is exacerbated by their involvement in the BRI, thus, further dampening development in these nations.
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