Now that quantitative easing (QE) is coming to an end in the US, some say the emerging markets growth story is over. We disagree. In fact, the reasons why QE is ending are good news for emerging markets, especially emerging Asia, the region of the world most open to trade.
This is likely to be the first year of truly better growth for the world economy since the global financial crisis. We expect global GDP to expand by 3.5 per cent, with growth of 6.6 per cent in emerging Asia, 1.3 per cent in Europe, 7.4 per cent in China and 2.4 per cent in the US.
For the first time in years, all major economies are set to grow at a reasonable rate. The world economy is at long last gaining a more solid footing, with multiple drivers of growth.
“A new, more realistic and balanced, view of Asia is emerging among global investors”
This is good news for growth in emerging Asian economies, which have increasingly used leverage to support their domestic demand in the post-crisis years. While leverage has become stretched in pockets of some economies, there is little reason to expect this – or external events in 2014 – to lead to a crisis.
The region is not in a bubble, and there is no ‘miracle economy’ anywhere. A new, more realistic and balanced, view of Asia is emerging among global investors – one in which local markets do not out outperform year after year, regardless of the risks, and one where prices can adjust downwards when excessive optimism has crept in.
Many commentators are worried about the impact of higher global interest rates and tighter financial conditions on emerging markets, which have hitherto benefited from large inflows and easy financing conditions (since 2009, emerging Asia has seen gross inflows of about USD630 billion).
The sell-off we saw in emerging markets last year – when investors were anticipating QE tapering – were just the beginning, these commentators argue.
At Standard Chartered, we agree that monetary policy changes in the US are critical. By our estimates they are twice as important for global liquidity as the next most important central bank, the European Central Bank, which is twice as important as the next central bank, the Bank of Japan, which in turn is twice as impactful as the People’s Bank of China.
“Stresses in emerging Asia should be less pronounced than was the case in 2013”
At this point, however, unless inflation comes roaring back in the US, driven by a surge in credit growth – unlikely in our view – there is not a lot more left to be priced in for US rate hike expectations. For this reason, we believe the stresses in emerging Asia should be less pronounced than was the case in 2013. A key factor will be the timing of the rise in the short end of the US yield curve – something more likely to be an issue in 2015 than 2014.
While it’s true that money is no longer flooding into emerging Asia indiscriminately, this doesn’t mean that the structural story is over. In fact, clearer market signals will now be given to policymakers around the region that good policy – driven by growth-enhancing reforms – will be rewarded, and that complacency won’t. In other words, the fact that we’re coming out of the phase of indiscriminate inflows is a good, cyclical adjustment, not a cause of panic.
Current account balances should also start to stabilise in 2014, and this is another landmark point. The major reasons why we don’t foresee major problems for emerging Asia this year is that no country is likely to see a dramatic increase in inflation, and few economies are afflicted with current account deficits. In aggregate we expect a rise in emerging Asia’s current account balance over 2014.
The three economies in emerging Asia with current account deficits – India, Indonesia and Thailand – all happen to be holding elections this year. In Thailand the outlook is unclear and the longer the policy paralysis goes on the less likely it is that growth targets can be achieved. In India, coalition politics is the reality, and here we will be watching closely to see to how the reform agenda is prioritised after election. Indonesia, meanwhile, has already demonstrated its ability to go through the political cycle without it disrupting the sound economies policies that have been in place since the post-crisis reforms of the early 2000s.