## Asia Sails Into Headwinds From Rate Hikes, War, and China Slowdown

_IMF Blog, October 13, 2022_

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## Bibliographic details
- Authors: Krishna Srinivasan, Shanaka J Peiris
- Published: October 13, 2022

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### Overview
- Growth forecasts for Asia and the Pacific have been cut to 4 percent this year and 4.3 percent next year, compared with a 5.5 percent average over the last two decades.
- Asia’s rebound early in the year is losing momentum after a weaker-than-expected second quarter.
- Three persistent headwinds are identified: tightening financial conditions, Russia’s invasion of Ukraine, and China’s strict zero-COVID policy coupled with real estate sector turmoil.

### Key headwinds and transmission channels
- Sharp tightening of financial conditions:
  - Raising government borrowing costs.
  - Likely to become more constricting as major advanced-economy central banks continue to raise interest rates.
  - Rapidly depreciating currencies could further complicate policy challenges.
- Russia’s invasion of Ukraine:
  - Continues to trigger a sharp slowdown in Europe and reduce external demand for Asian exports.
- China slowdown:
  - Zero-COVID policy and lockdowns, plus deepening real estate turmoil, have caused an uncharacteristic and sharp slowdown that weakens momentum in connected economies.

### Growth forecasts and regional outlook
- China:
  - Near-zero growth in the second quarter.
  - Full-year growth of 3.2 percent, recovering modestly in the second half.
  - Accelerates to 4.4 percent next year, assuming pandemic restrictions are gradually loosened.
- Japan:
  - Growth unchanged at 1.7 percent this year.
  - Slows to 1.6 percent next year, weighed down by weak external demand.
- Korea:
  - 2022 growth revised up to 2.6 percent due to a strong second-quarter.
  - Revised down to 2 percent in 2023 reflecting external headwinds.
- India:
  - Expands by 6.8 percent this year.
  - Slows to 6.1 percent in 2023 due to weakening external demand and tightening monetary and financial conditions.
- Southeast Asia and select countries:
  - Vietnam: expected 7 percent growth this year and a slight moderation next year.
  - Philippines: forecast 6.5 percent expansion this year.
  - Indonesia and Malaysia: growth will top 5 percent this year.
  - Cambodia and Thailand: will expand faster in 2023 on a likely pickup in foreign tourism.
  - Myanmar: growth this year expected to stabilize at a low level amid continued unrest and suffering.
- Asian frontier and vulnerable markets:
  - Sri Lanka: experiencing a severe economic crisis; authorities have reached an agreement with IMF staff on a program to help stabilize the economy.
  - Bangladesh: war in Ukraine and high commodity prices have dampened recovery; authorities have preemptively requested an IMF-supported program and access to the Resilience and Sustainability Trust to meet large climate financing needs.
  - High-debt economies such as Maldives, Lao P.D.R., and Papua New Guinea, and those facing refinancing risks like Mongolia, are facing challenges as global conditions change.
- Pacific Island Countries:
  - Growth expected to rebound strongly next year to 4.2 percent from 0.8 percent this year as tourism-based economies benefit from eased travel restrictions.

### Inflation and exchange rates
- Inflation:
  - Now exceeds central bank targets in most Asian economies.
  - Driven by global food and energy prices, currencies falling against the US dollar, and shrinking output gaps.
  - Core inflation has also risen; persistence driven by inflation expectations and wages must be closely monitored.
- Exchange rate movements:
  - US dollar strengthened against most major currencies as the Federal Reserve raises interest rates and signals further hikes.
  - Most Asian emerging market currencies have lost between 5 percent and 10 percent of their value against the dollar this year.
  - The yen has depreciated by more than 20 percent.
  - Recent depreciations have started passing through to core inflation across the region, potentially keeping inflation high for longer.
- Commodity price shocks:
  - Spikes in global food and energy prices early this year threatened to abruptly raise the cost of living, with particularly strong implications for lower-income households.

### Policy recommendations and priorities
- Monetary policy:
  - Central banks need to persevere with policy tightening until inflation durably falls back to target.
  - Exchange rates should be allowed to adjust to reflect fundamentals, including the terms of trade and foreign monetary policy decisions.
  - If global shocks raise borrowing rates unrelated to domestic policy and/or threaten financial stability or inflation expectations, foreign-exchange interventions may be useful for countries with adequate reserves, alongside macroprudential policies.
  - Countries should urgently consider improving liquidity buffers, including by requesting access to precautionary instruments from the Fund for those eligible.
- Fiscal policy:
  - Continue gradual fiscal consolidation to moderate demand alongside monetary policy, focused on the medium-term goal of stabilizing public debt.
  - Measures to shield vulnerable populations from rising costs should be well-targeted and temporary.
  - In countries with high debt levels, support needs to be budget-neutral to maintain the path of fiscal consolidation.
  - Credible medium-term fiscal frameworks remain imperative.
- Structural and longer-term policies:
  - Address scarring from the pandemic: elevated corporate leverage that may weigh on private investment, and education losses from school closures that could erode human capital without remedial measures.
  - Urgent need for ambitious structural changes to boost productive potential and address the climate crisis.
  - Strong international cooperation is needed to prevent greater geoeconomic fragmentation and ensure that trade aids growth.

*IMF Blog: Asia Sails Into Headwinds From Rate Hikes, War, and China Slowdown*

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## References

- [Vietnam](https://www.imf.org/en/News/Articles/2022/08/26/CF-Vietnam-bucks-Asias-Downbeat-Growth)
- [agreement with IMF staff](https://www.imf.org/en/News/Articles/2022/09/01/pr22295-imf-reaches-staff-level-agreement-on-an-extended-fund-facility-arrangement-with-sri-lanka)
- [Resilience and Sustainability Trust](https://www.imf.org/en/Topics/Resilience-and-Sustainability-Trust)
- [geoeconomic fragmentation](https://www.imf.org/en/Blogs/Articles/2022/05/22/blog-why-we-must-resist-geoeconomic-fragmentation)

_Source: https://www.imf.org/en/blogs/articles/2022/10/13/asia-sails-into-headwinds-from-rate-hikes-war-and-china-slowdown_