Asian economies may need to brace for rising debt and capital flight: IMF

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Anything that creates turbulence in the financial markets will find a way and a transmission channel.

Anne-Marie Gulde

International Monetary Fund

“We have seen capital flows increase, reaching levels that we have not seen for the last time [sic] at the time of the taper tantrum and certainly anything that raises interest rates further through this channel will have impacts on borrowing costs in Asia.”

“It’s a very important concern that we have.”

The 2013 taper tantrum occurred when investors reacted to the US Federal Reserve’s plans to ease quantitative easing by rapidly selling bonds, triggering a price crash.

The IMF has warned that over-indebtedness prevails in many Asian countries and that those whose currencies depreciate against a stronger US dollar could face a deeper cost of living crisis. For example, the US dollar is near a 24-year high against the yen.

Asia and Pacific Economies: Real GDP, Consumer Prices

Real GDP (annual variation in %) Consumer prices (annual change in %)
2021 2022 (f) 2023 (f) 2021 2022 (f) 2023 (f)
Advanced Asia 3.7 2.2 2.3 1.2 3.6 2.6
China 8.1 3.2 4.4 0.9 2.2 2.2
India 8.7 6.8 6.1 5.5 6.9 5.1
ASEAN-5: Indonesia, Malaysia, Vietnam, Thailand, Philippines 3.4 5.3 4.9 1.9 4.7 4.4

Source: International Monetary Fund *Asian advanced economies refer to Australia, Hong Kong and Macau, Japan, Singapore, South Korea, Taiwan and New Zealand

The IMF expects global growth to slow to 2.7% in 2023, 0.2 percentage point lower than its July forecast.

In Asia, it also cut growth projections for China to 4.4%, down 0.2 percentage points from the July forecast. The fund also cut the growth figures for the ASEAN-5 group of Indonesia, Malaysia, the Philippines, Thailand and Vietnam by the same amount to 4.9%.

Impact of the crisis in the United Kingdom

When asked if the UK bond crisis would have a contagion effect on Asian economies, Gulde said the UK bond crisis would have a limited impact on Asian markets, although “anything that creates market turbulence financiers will find a way” to disrupt other economies.

“Pension funds investing in Asia are lower than they used to be…what I would like to stress is that anything that creates turbulence in the financial markets will find a way and a transmission channel,” a- she told CNBC.

“Granted, we don’t know all the channels, but it’s definitely not good news for our countries in Asia as it is globally.”

Janet Li, head of Asia wealth management at asset management firm Mercer, agreed. She said Asia’s exposure to liability-driven investing, or LDI, was lower than the UK’s, mainly because long-term repos in Asia were less common than lump-sum withdrawal plans.

Liability-driven investments, which are widely held by pension funds, match assets and liabilities to ensure money is paid out to retirees.

The crisis in the UK resulted from rising yields and falling bond prices, which triggered collateral calls on pension funds to cover their LDI-linked derivatives.

In an effort to deposit more cash as collateral against the decline in the value of LDIs, pension funds sold UK gilts – or long-term government bonds – to raise cash.

The fire sale prompted the Bank of England to step in with a more orderly purchase of these unloaded gilts.

Central banks should continue raising interest rates, Mercer says

“So if we try to compare and see if Asian patient funds are more at risk right now, the short answer is no,” Li Li told CNBC’s Squawk Box Asia on Wednesday.

“But many defined benefit plans still have long-term liabilities they must manage due to the recent spike in interest rates.”

However, there were benefits for Asia, Gulde said.

As many Asian economies such as Japan and Hong Kong open up, increased human mobility will generate economic activity and could block a downturn. Separately, currency depreciation in the region could mean increased exports for Asian economies, Gulde added.

China’s slowing economy is also dampening underlying inflation in the region, the IMF said.

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