Country risk: Asia more resilient than volatility suggests

China appears to be responding effectively to the cracks in its economy

The palpable sense of foreboding causing wobbly currencies and downgraded asset valuations in recent weeks is not without foundation.

With global economic growth prospects hinging on US-China trade relations, uncertain geopolitics and the outlook for interest rates, economic models are pointing downwards.

China is forecast to grow by 6.2% next year – its slowest pace since 1990, according to the IMF – and with rising oil prices and tightening financial conditions linked to higher US interest rates weighing on the outlook for emerging markets (EMs), there is naturally an increased focus on Asia’s sovereign borrowers.

Commenting on its forecasts, the IMF states: “Risks to the Asian and global forecast are now tilted to the downside, reflecting increased financial market volatility, rising trade tensions and slowing momentum in China.”

Yet many experts also believe the recent market turmoil may be just another ‘taper tantrum’, similar to the one that followed the surge in US treasury yields five years ago – there are similar causes, and eventually fundamentals will shine through.

The US economy is still performing admirably, and China’s policymakers, acutely aware of the risks, are not shy in responding – outlining plans for additional public spending, central bank funding and tax cuts, alongside local government-level liquidity measures.

Meanwhile, firms seeking to avoid tariffs are relocating their production away from China, building on the trend precipitated by China’s rising wage pressures and authorities’ enforcement of technology transfers to Chinese companies.

Malaysia, Thailand and Vietnam are identified as notable beneficiaries in that regard, although a case can also be made for others such as Indonesia, Myanmar and Taiwan.

They are among 10 countries in Asia with an improved risk score in Q3, according to Euromoney’s crowd-sourcing survey, as EMs such as Argentina, Turkey and South Africa worsened, according to the experts’ risk factor scoring, with Asia resisting the downgrades for Latin America, Middle East and North Africa, and Sub-Saharan Africa:

Malaysia, ranking 42nd in the global risk rankings just behind Italy, has had its fair share of fiscal problems worsened by the state investment fund scandal tarnishing Najib Razak’s reign.

The new government is expected to trim public spending in this week’s budget to reduce the deficit.

Economic growth is also expected to remain high next year, unemployment low and the current account in surplus.

Thailand, 52nd in the rankings and on a par with Bulgaria, is still governed by the junta, but the country is finally due to stage overdue elections next year, returning to a more democratic system, albeit one with a strong role reserved for the military.

Despite growth slowing next year, Thailand also has a strong current account, with low inflation and unemployment, and along with Malaysia it is a medium-risk, tier-three country in Euromoney’s survey.

Vietnam, meanwhile, is 83rd in tier four, on the heels of Tunisia, having climbed four places since 2013. Its bank stability and government finance scores have been uprated by risk experts in 2018, and importantly it has a current-account surplus.

There is no reason to expect these, or indeed most other Asian countries, to be hit as hard as Argentina or Turkey, despite recent attention on Indonesia and other countries with macro-fiscal imbalances.

Research by ABN Amro survey contributors and economists Arjen van Dijkhuizen and Nora Neuteboom makes the case for “differentiation”, reminding investors that EMs are a “heterogeneous asset class”.

The authors single out six factors: external debts, including the share of total dollar-denominated debt; current-account deficits and external financing requirements; commodity import dependence; specific geopolitical risks; pro-active policy measures; and banking-sector resilience.

On these metrics, the financing requirement is a concern for Indonesia and Malaysia, and household debt for Malaysia, South Korea and Thailand.

However, only Argentina and Turkey are flashing major risk, with Asia’s EMs regarded as quantitatively safer.

That view is shared by Euromoney’s metrics, showing considerable differentiation between the countries according to the various political, economic and structural risk measures: