Inflation is going to be a bigger hurdle for emerging Asian economies, however, they will still grow this year, said a report from rating agency Moody's.
"Emerging Asian economies are now face-to-face with the sharpest rise in consumer prices in more than a decade. Though inflation has taken longer to manifest in emerging Asia than in other emerging regions, its ugly knock-on effects will take a larger toll as the year progresses, weighing on growth for the remainder of this year and into the year to come," said the report.
However, despite headwinds, emerging Asian economies are expected to do well.
"Even with the hit to China’s economy from its zero-Covid policy and headwinds to growth in the US and Europe, we still expect emerging Asian economies to grow this year and to do so with more haste than the rest of the emerging world. But the road forward will make for a rockier ride as central banks rush to recalibrate policy in the face of inflation’s belated surge," said Moody's.
Moody's said inflation in Asia is rising mostly because the region’s economies performed so well in the first half of the year.
"Inflation in Asia is rising—and rising now—precisely because, with the exception of China, the region’s economies performed so well in the first half of the year. The Delta variant’s blunt-force blow in India and Southeast Asia set the region’s recovery back relative to the rest of the emerging world. When the Russian invasion of Ukraine broke out earlier this year, local labour markets had yet to claw their way back," Moody's pointed out.
"Now that the reopening process in India and Southeast Asia is nearly complete, the supply shock from the invasion of Ukraine and lingering supply-chain bottlenecks have crashed into demand. The result is higher inflation—the highest, in some cases, in more than two decades," the rating agency added.
Moody's highlighted that rate hikes by most Asian central banks will take longer to have an effect which can raise the risk of falling further behind the curve.
"Much like Latin America, emerging Asia is severely underbanked. With millions in the informal economy lacking access to financial services, central bank rate hikes will take longer to bite, raising the risk that they could fall further behind the curve. The broad hit to Asian currency and stock markets in part reflects this outcome," said Moody's.
"Where rising rates will bite first is on government debt. Debt loads across emerging Asia are not as high as in other troubled regions, but they are not low either. And political turmoil has left leaders unwilling or unable to rein in spending, putting hard-won records of fiscal sustainability at risk," the rating agency added.
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