As concerns about recession are off the table, we start to see again the conditions for emerging markets reflate with monetary policy. Slow growth, manageable inflation and central banks not raising rates put Asian emerging markets in a sweet spot. Asia’s total economy is projected to increase by 5.6% in 2019, and inflation is expected “to remain unconcerning in the medium term,” according to Standard Chartered Plc.
Fundamentals of South East Asian countries are solid, current account deficits are small, foreign reserves are more substantial than before and currencies are unpegged. These countries are benefiting from the current interest of the investment world towards emerging markets, with the MSCI EM Index up 9.1% during the present year. Among the new emerging economies worth considering in Asia, we can name the following four:
India has been considered for a long time as the Asian economy with the second-highest potential, only behind China. The World Bank forecasted a GDP growth of 7.3% in 2018-2019 and 7.5% for the next two years. In the words of Ayhan Kose, Director of the Development Prospects Group at the World Bank, “India’s economy is robust, resilient and has the potential to deliver sustained growth."
iShares India 50 ETF, 3-year performance
This rapid economic growth stems from a variety of different factors. Diminishing oil prices, fewer worries of inflation, enormous population, favourable demographics and high potential due to low initial GDP have made India the fastest-growing large economy worldwide and very welcoming to foreign investment and trade. According to PwC, India will surpass the UK at the end of 2019 as the world’s fifth-largest economy.
Despite such impressive growth, the global trade situation and the widening current account deficit have brought some challenges to the country, including USD 220 billion of short-term debt, a fiscal deficit of 3.3% of GDP in 2018-19 and declining (although sufficient) foreign exchange reserves.
As a response to those challenges, the Indian government announced in September some measures to boost capital flows and reduce “nonessential” imports. Firstly, eliminating withholding taxes on Masala bonds; secondly, proposing new norms for foreign portfolio investors (FPIs) to attract long-term and stable investments into debt markets; thirdly, enabling manufacturing units to access external commercial borrowings; and lastly, raising import tariffs on 19 items. Furthermore, the Reserve Bank of India recently cut the repo rate by 25 basis points to strengthen private investment activity and buttress private consumption.
The current rupee depreciation has contributed to the reduction of trade deficit, as exports grew 2.44% in February and imports contracted 5.41% in dollar terms. In the medium term, a gradual depreciation of the rupee due to a normalisation of inflation rates is expected.
The third-largest Asian country by population has enjoyed a consistent 5 per cent average GDP growth for more than a decade. Its political stability, adjustments to fiscal policy to ensure sustainable growth and focus on reducing poverty have created an attractive environment for foreign investment and business.
Indonesia has enjoyed steady investment flows in recent years, with FDI averaging USD 7 billion since 2016. While its economy continues to depend to a large extent on domestic investment and household spending, the Indonesian government announced in late 2018 various policy changes aimed to provide further opportunities for foreign investors, mostly on the regulatory side of the creative industry.
The economic challenges ahead are mostly related to its current account deficit of USD 9.1 billion in Q4 2018 that has multiplied over the last two years due to the trade uncertainty, Fed movements and rising imports of raw materials and capital goods. This situation has put additional pressures on the rupiah exchange rate, although the Governor of Bank Indonesia predicts a better FX market in 2019 marked by an increase in liquidity, low inflation and a narrowing fiscal deficit.
Despite the macroeconomic difficulties, Indonesian industry leaders such as PT Bank Central Asia or Ciputra have continued to adapt their business models to the changing conditions by leveraging innovation and technology, supporting the government's efforts to turn Indonesia into one of the major digital economies by 2025.
SEA Internet economy market growth
Bloomberg rated Malaysia as the top emerging market in November, due to its current account surplus and stable economic growth. Moody’s A3 credit rating reflects a large and diverse economy that is growing at a relatively steady pace and boasts high levels of competitiveness. Furthermore, the rupture with six decades of government by the National Front party brought policies regarding transparency and corporate governance. As a consequence, FDI into Malaysia surged to USD 3.15 billion in the last quarter of 2018, and GDP growth surpassed expectations to 4.7% YoY.
With the recent cuts in public expenditure aimed at reducing public debt, private sector expenditure will continue to be the key driver of growth. Monetary policy will remain accommodative, as inflation is projected to increase 2.5-3.5 per cent from last year’s 1.5-2.5 per cent and private consumption is expected to grow 6.8 per cent.
The 2018 Global Competitive Report placed Malaysia in the 25th position out of 140 countries. The country’s progress towards a sustainable, innovative ecosystem based on emerging technologies, higher-than-average labour productivity due to a high density of knowledge-based industries and the adoption of cutting-edge technology for manufacturing have all contributed to this. Furthermore, the young and skilled labour has allowed the country to become a global leader in outsourcing opportunities, seeing a growing overseas demand for Malaysian information and communications technology.
2018 Global Competitiveness Report - Malaysia
(Source: World Economic Forum)
The Philippines has slowly emerged as one of the fastest-growing economies in the world, featuring foreign business incentives, political stability and an abundance of natural resources, among others. Its GDP managed to grow 6.2% in 2018, significantly above the 5.1% of the SEA region. Such growth has been accompanied by a decline in poverty rates, with per capita GDP reaching an all-time high of USD 3,018.58.
One of the country’s main strength is its macroeconomic resilience to surrounding financial crises as a result of the government's efforts to boost infrastructure spending. The DOF unveiled in early 2018 an ambitious plan to invest USD 180 billion into 75 flagship projects, not only to encourage investments but also to improve health, education and social protection across the whole country. Furthermore, The Philippines continues to incentivise foreign investment through a favourable tax system, which has contributed to the excellent trade relationships with the US, this being the world’s second-largest importer of Filipino goods.
Easing inflation after its decade high in October has lent a hand to the rally of the Philippine peso. The Philippine currency strengthened 0.8 per cent in February to 51.70 per USD, the best performance among Asian currencies, with technicals supporting the case for further gains. Sentiment towards the currency keeps improving as foreign investment into Philippine stocks and bonds recorded a net inflow of $763 million in January, a 300 per cent increase YoY.
Dollar-peso slow stochastic continue to signal bear trend
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