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Robust "fundamentals" put emerging Asia ahead of global peers

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Asia's emerging markets are in a better position to attract investment compared to global peers because they have stronger "fundamentals."

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By Jackson Lewis 14.09.2018

Asia’s emerging markets are in a better position to attract investment compared to global peers because they have stronger “fundamentals,” including robust growth prospects and ample reserve buffers, according to one of the leading officials at Singapore’s central bank.

Developing economies are currently being pressured by market turmoil and uncertainty driven in part by the China-US trade conflict and other disputes. While ASEAN countries will see the effects of global tensions, Monetary Authority of Singapore (MAS) Managing Director Ravi Menon believes that they will be better prepared to benefit when the “adjustment has run its course.”

Turkey and Argentina are among the developing economies that the global market has routed, and conditions will remain challenging for the foreseeable future as trade concerns continue to shape the medium-term economic outlook. However, Menon said that emerging Asian countries have made the right moves in response to the recent troubles, and investors will recognize this further down the line.

“Asian emerging markets are in a better place than emerging markets elsewhere," Menon said at the Milken Institute Conference on Thursday. "It goes back to fundamentals. Growth is good; inflation is low; buffers are strong."

Emerging Asia has not fully escaped the recent fallout, however, as Indonesia has seen its current account and budget deficits widen, making it particularly vulnerable and reliant on investment from foreign third parties. Like the Turkish lira, Indonesia’s currency has also declined, falling 8% against the US dollar since the start of 2018. It is now at the lowest level since two decades ago, when the Asian financial crisis wreaked havoc on markets.

Indonesia’s central bank has intervened to boost the flagging rupiah with four recent interest rate rises, while the government has moved to reduce the flow of imports to improve the trade deficit. These developments and the possibility of worsening tensions and rising interest rates suggest that emerging Asia may be set for a challenging period, but Menon believes that the region’s growth story will continue.

He added that the recent commitment by ASEAN countries to forge closer ties and support more trade will help during the next 12 months. The integration of markets combined with a thriving middle class and urbanization will ensure that growth prospects remain on track.

Market watchers are now weighing up the impact of a fresh round of US tariffs on Chinese imports, which could come into force at any time after a comment period in Washington expired late last week. Menon expects the new levies to lower GDP growth for the world’s two biggest economies by 0.5% before trickling down elsewhere.

"That will sweep down the supply chains across Asia and shave off growth in many of these small open economies in Asia," he said. "Things could get a lot worse from this point on, but that remains a tail risk for now."

While China has said on several occasions that it will move in step with the US and retaliate on any fresh tariffs, Menon believes that this may not be the best response and has instead urged those involved to step up trade elsewhere. He added: “If retaliation goes on in a series of tit-for-tat moves, the impact will be bigger. So, what I'm suggesting is you can actually stop it by not retaliating."

Malaysia’s Finance Minister, Lim Guang Eng, also weighed in on the trade conflict on Thursday, saying that Malaysia should “take advantage” of the dispute by being in the right position to pick up the slack and support manufacturing demands. He said: "Our problem at the moment with our manufacturing industries is a problem of capacity – whether we can ramp up capacity in the shortest possible time. There's a lot of inquiries, not only from China but also from the United States."

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