Wednesday 22 August 2018

Perfect Storm and Open Economies


Although economic conditions in East Asia remains favourable, headwinds are developing, especially for second half of 2018. The landscape on capital flows, investment and consumption have all turned cautious. Some are due to external factors while others are more internal in nature. The U.S. has been instrumental in stirring-up tariffs, sanctions and currency wars. And for many nations, it is not easy to negotiate with a USD20 trillion economy.

The World Bank in its June 2018 report (Global Economic Prospects: The Turning of Tide?) suggested a modest slowdown in the region (excluding China). Growth may taper to 5.3% in 2019 (predicated on moderating demand, tightening monetary measures and a general easing of commodity prices). For China, growth is around 6.3% in 2019, lower than 6.5% anticipated for 2018. And all this before the recent Trumpian measures.

Increased protectionism creates a climate of uncertainty for trade and investment. And more open the economy, the harder the hit. So capital flows are stressed, markets experience volatility and asset prices and currencies depreciate. If a combination of downside risks materialise, slowdown is sharper than forecast – meaning a shaving of 1-1.5% of current GDP forecasts.

Malaysia is an open economy with total trade to GDP at 136% (World Bank Report, 2017). Other nations in ASEAN reflect the following:


Trade (% of GDP)
Cambodia
125
Indonesia
40
Laos
76
Myanmar
46
Philippines
71
Singapore
322
Thailand
75
Vietnam
200
                                Source: World Bank / Trading economies

So for open economies external shocks amplify impact on GDP as much as domestic vulnerabilities. And what is an open economy? One in which a country trades with other nations and where the ratio (trade to GDP) is 1.0 or above – a measure (it can also be expressed in %) of its openness! In the above table, Singapore is the most open economy followed by Vietnam, Malaysia and Cambodia. Both China and India are low on this scale at 38% and 41% respectively. What does this mean? Well, China and India will have lesser impact from external shocks as compared to Singapore and Malaysia.

Reference
Global Economic Prospects: The Turning of the Tide?, World Bank, June 2018.




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