Published June 24, 2016
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Plenty of dust in the air. But a couple of things are becoming clear. First: markets didn't take the Brexit vote too well. Second, with growth already wobbly, policymakers across the region may need to do more to steady the ship. Still, not everyone has the same room for maneuver. Economies where the bias for further easing may have increased include Australia, New Zealand, Korea, Japan, China and Thailand. A little more constrained on the monetary front are India, Indonesia and Malaysia, with currency weakness either risking to stoke price pressures or tighten financial conditions (or both). Fiscally, the latter three, as well as Thailand and Taiwan, are also more constrained than others.
Asia spent plenty of ammo battling the global downturn in recent years. Any bullets left? Yes, some. But with the arsenal running low, officials will have to weigh their actions carefully. Plus, monetary easing is increasingly losing its punch. Central bankers may certainly do whatever they can, but the heavy lifting should fall on the shoulders of fiscal authorities. Moreover, the case for reforms is becoming ever more pressing.
Start with monetary policy. There are two countries in Asia where, in response to Brexit, central bank actions appear both likely and relevant for the rest of the world: China and Japan. The former may have to add some extra juice to local demand, whether through temporary liquidity injections (as occurred this week) or more permanently with RRR cuts. However, don't expect a shaky renminbi to add to global financial jitters: stability will likely be the main priority for the time being.
Next, Japan. This is the big one. A sharp appreciation of the Yen poses challenges for emerging markets: over the last couple of years, Japanese investors have bought bonds across the world, including in emerging Asia, at record amounts. Japanese banks, too, have sharply raised their lending exposure. Luckily, the BoJ is not likely to sit idly by: expect officials to try to lean against an overly rapid climb of the yen. Direct FX intervention is certainly one possibility, but additional monetary easing will need to be part of the mix. HSBC's Japan economist, Izumi Devalier, also notes the growing risk of an aggressive easing move along "all three dimensions": more QE, more risk asset purchases, more rate cuts.
What about elsewhere? Rates could still go lower in most economies should the Brexit fall-out be more severe than expected. In fact, we have rate cuts already pencilled in for Australia, New Zealand, Taiwan, and China for the coming months. In Indonesia, too, the central banks could still ease (note that IDR held up much better today than many others in the region), but prolonged financial volatility would make this tough.
Thailand is another candidate where interest rates could still fall, although we don't' forecast this for now. In Singapore the threshold is relatively high given that the MAS already flattened the slope in April and a negative slope or re-centering would presumably only be prompted by an outright global recession.
On the other hand, we still forecast a cut in India. This looks more difficult to deliver if the INR comes under sustained pressure. Here, financial risks aren't so much the worry as the impact a weaker currency has on inflation, which already started to trend up of late. In Malaysia and the Philippines, too, we see no real scope for monetary easing at the moment, with the former more constrained by potential financial volatility and the latter's financial system still being flush with excess liquidity.
But, question is: will monetary easing make any real difference to growth? At the margin, perhaps. But, broadly, central banks have lost their punch. That means extra fiscal spending will be needed to tide the region over any potential slump in world demand. Japan seems ready to deliver more, and so does China. Elsewhere, Korea, Singapore, Hong Kong, Australia, New Zealand, and the Philippines could do a lot more as well, but probably won't, at least not very quickly. Taiwan (due to self-imposed fiscal rules), Indonesia (ditto), Thailand, Malaysia, and India are more constrained.
So, there's still some buffer for Asia to hold up growth. But there isn't enough ammo to go into a prolonged battle. What the region really needs, therefore, is a more sustainable growth model. And that will not come until structural reforms are tackled.
Frederic Neumann is Co-Head of Asian Economic Research for HSBC Global Research
Re-disseminated by The Asian Banker