Publication of 'Overseas Economic Focus' on the 24th
Current Account and Reserve Assets' Shock Absorption Capacity↑... Financial Markets Priced In Advance
[Asia Economy Reporter Jang Sehee] As the U.S. Federal Reserve (Fed) is expected to begin tapering (reducing asset purchases) as early as next month, assessments indicate that the possibility of financial instability occurring in emerging Asian countries is limited.
On the 24th, the Bank of Korea stated in its 'Overseas Economic Focus' report, "Due to improved shock absorption capacity such as current account balances in these countries, enhanced communication by the Fed, and financial markets' preemptive reflection, the likelihood of financial instability in emerging Asian countries caused solely by tapering appears limited."
The Bank of Korea emphasized, "Although concerns such as delayed economic recovery and rising inflation in the five ASEAN countries are expected to amplify financial instability in conjunction with tapering, the general assessment is that the possibility of capital outflows is limited."
It evaluated that the shock absorption capacity in terms of global investment capital inflows and outflows, current account balances, and reserve assets has significantly improved compared to the past. Furthermore, it anticipated that financial markets have largely preemptively priced in the Fed's tapering.
Regarding the economic recovery patterns of emerging countries, the Bank of Korea analyzed that ▲ recovery is slower than in advanced countries ▲ recovery speeds vary among emerging countries ▲ despite sluggish domestic demand, inflation remains high. The Bank noted, "It is necessary to pay attention to the possibility that these risk factors may negatively impact the real economy of emerging Asian countries not only in the short term but also in the long term."
There is a risk of COVID-19 resurgence, and if the Delta variant spreads mainly in Vietnam, Malaysia, and others, production disruptions may occur.
The five ASEAN countries saw a significant expansion of fiscal deficits during last year's COVID-19 crisis response, greatly reducing fiscal policy capacity. With the Fed's tapering imminent, monetary policy capacity has also diminished.
Accumulated private debt is also a concern. The five ASEAN countries have experienced a significant deterioration in fiscal soundness, and household and corporate debt have increased substantially this year following last year, raising concerns about the soundness of the private sector.
Meanwhile, as the COVID-19 shock has persisted more intensely and for a longer duration in emerging countries compared to advanced countries, concerns about prolonged low growth due to scarring effects have been raised. Even in terms of employment shocks, emerging countries have experienced greater impacts than advanced countries. The employment decline rate in emerging countries in 2024 (-2.9%, compared to pre-crisis levels) is projected to exceed the global decline rate (-1.9%).
The International Monetary Fund (IMF) expects that while advanced countries will approach pre-crisis gross domestic product (GDP) trends around 2022 due to faster recovery, emerging countries will experience a negative output gap for a considerable period.
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