Fitch Solutions Asia Key Themes For 2022: Uneven Recovery Ahead

Fitch Solutions / Country Risk / Asia / Fri 03 Dec, 2021

fs disclaimer

As 2021 comes to an end, we at Fitch Solutions take this opportunity to lay out our Asia key themes for 2022. We expect that many of the themes that dominated 2021 will cause spillovers in the new year even as we move closer towards economic normalisation. The uncertainty regarding monetary policy normalisation, rising inflation, the rollout of vaccines and new variants suggest that the policymaking environment will remain challenging. Moreover, rising geopolitical factors will increasingly become a feature as tensions between China and Taiwan grow.  

Below, we outline themes that, in our view, will dominate in the coming year:

  • Regional Growth To Slow, But Mostly A China Story
  • Uneven Recovery For Tourism-Dependent Economies
  • Rise In Inflation And Monetary Policy Will Catch Up
  • Political Risk Will Rise
  • Geopolitical Risk Will Remain Elevated

Theme 1: Regional Growth To Slow, But Mostly A China Story

In line with our view for the global economy, we expect growth in Asia to slow in 2022 as cyclical, structural and Covid-related factors weigh on economic activity. We forecast average regional growth to decelerate from 6.2% in 2021 to 4.8% 2022, which is broadly in line with the five-year average before the pandemic hit. In large part, the slower regional growth will be driven by a slowdown in China, where we expect real GDP growth to ease from 7.8% in 2021 to 5.4% in 2022. This will come on the back of a combination of less favourable base effects; Beijing’s zero-Covid strategy, which will continue to curb consumption growth; a regulatory crackdown across multiple sectors of the economy and ongoing stress in the property sector. Aside from the direct impact on regional growth (China accounts for around 50% of Asia’s total GDP), this slowdown will also have second-round effects, with weaker credit growth in China dampening consumer demand in the country and weighing on Asia’s export outlook.

Growth To Slow, Particularly In China

Asia - Real GDP Growth, %

Source: Fitch Solutions

Finally, policy normalisation across the region could also add headwinds to growth in certain economies as policy becomes slightly more restrictive. Indeed, we expect fiscal deficits to narrow across the region and for monetary policy to tighten as inflation rises over the course of 2022.

However, some Asian economies are set to buck the wider regional trend, with Indonesia, Malaysia, the Philippines, Thailand and Vietnam poised to see their growth outlooks brighten in 2022. Indeed, after recurring outbreaks and restrictions over the course of 2021, improving vaccination rates will allow these economies to start to normalise, supporting a rebound in growth over the next 12 months. That said, this will not be enough to counteract the wider regional trend, and we highlight that the new Omicron variant could pose downside risks to our view for these economies to see an acceleration in growth in 2022.

Slowing Chinese Credit Growth To Weigh On Exports

Asia - Chinese Credit Impulse & Export Growth, %

Source: Bloomberg, Fitch Solutions

Theme 2: Uneven Recovery For Tourism-Dependent Economies

The recovery in tourism will be slow across Asia, and this will weigh on economies with large exposure to the tourism sector. First, while vaccination rates have improved in recent months, they not only remain uneven across the region, but some countries have been relying on less effective vaccines, which means that segments of the population remain more vulnerable. In turn, this means that Asia is the region with the most restrictions in place as of end-2021. According to the UNWTO, 65% of all destinations remain completely closed in Asia and the Pacific. In comparison, Europe is the most open global region to international tourists (with 7% of borders completely closed), followed by Africa (9%), the Americas (10%) and the Middle East (15%).

Asia Remains Broadly Closed For Tourism

Destinations With Completely Closed Borders, %

Source: UNWTO, Fitch Solutions

Going forward, we believe that Asian governments will be slower than those in other regions to transition towards treating Covid-19 as endemic, and new variants such as Omicron could potentially see additional restrictions being implemented, further delaying the economic normalisation of the region. For example, the Philippines, which had previously laid out plans to welcome vaccinated tourists from December 1 2021, has reportedly suspended its plans to open up given the threat of Omicron.

Second, arrivals from key source markets are likely to be subdued because of government policy in these markets or the personal preferences of visitors in the face of continued Covid-related uncertainty. For example, we expect China to maintain a zero-Covid policy, meaning that Chinese tourists, which account for a substantial portion of tourists in the region, will not be travelling internationally in 2022. As a result, Asian economies such as Thailand and the Philippines, which rely heavily on Chinese tourists (about 28% of all tourist arrivals in Thailand and 21% in the Philippines in 2019) will see a relatively sluggish and uneven recovery. Even visitors from destinations that allow international travel may be slow to return to Asia, as we expect that continued uncertainty surrounding Covid-19 will encourage tourists to remain closer to home. For example, European tourists, which also account for a large portion of tourists in Asia, will most likely prefer to take short-haul flights and remain in Europe rather than travel across the world.

Asian Economies Lagging Behind

Tourism Contribution To GDP vs Recovery In Number Of Flights, %

Source: WTTC, Airportia, Fitch Solutions

Theme 3: Pickup In Inflation, Monetary Policy Will Catch Up

In 2021, delayed economic recoveries due to recurrent lockdowns had suppressed demand-side inflationary pressures across most of Asia and allowed central banks to maintain accommodative policy stances. Our view is that as social distancing restrictions are eased through to 2022, domestic activity should begin to normalise across Asia, putting upward pressure on inflation and prompting central banks to normalise monetary conditions. Indeed, while supply-side factors saw headline inflation readings spike in some economies in 2021, such as the Philippines (pork prices) and Thailand (vegetables), and energy and shipping costs have fed through increased price pressures, the underlying demand-side inflationary pressures have been relatively muted. Soft labour markets and households’ higher propensity to save kept consumer demand in check, while fiscal policy was less supportive than seen in developed markets. Nevertheless, we expect more economies to return to pre-pandemic output levels in 2022, and as consumer confidence improves on the back of recovering employment prospects, demand-side price pressures should begin to recover.

Inflation To Remain Elevated, Resulting In More Hikes

Asia - Average Consumer Price Inflation

Source: Fitch Solutions

In turn, we expect monetary policy tightening to become more prominent in 2022 as the normalisation of economic activity reduces the need for unprecedented monetary accommodation. In 2021, we already witnessed monetary tightening in some economies which had recovered robustly from the initial pandemic shock, such as New Zealand and South Korea. As more economies follow the recovery paths of these markets, we expect similar monetary policy normalisation. In addition, we expect monetary tightening by the US Federal Reserve, which will put pressure on economies dependent on external financing to tighten monetary policy. Already in 2021, the more vulnerable economies of Sri Lanka and Pakistan began monetary tightening, in part to boost investor sentiment, and we believe that other central banks in the region could face these pressures in 2022, prompting them to tighten. That said, we believe that interest rate hikes will be more gradual than what rates markets are currently pricing in.

Tightening Ahead For Asia, But Less So Than Market Expectations

Asia - Change In Interest Rates & Market Expectations

Source: Bloomberg, Fitch Solutions

Theme 4: Political Risk Will Rise

The policy challenges arising from the pandemic will continue to contribute to a rise in political risk across the region, as it has done since 2020, as disrupted livelihoods due to pandemic control measures increase popular disaffection. Indeed, the average Short-Term Political Risk Index score in Asia has decreased to 66.6 out of 100 by the end of November 2021, from 67.7 in December 2019 before the start of the pandemic. Against the onset of the more virulent and transmissible variants, the relatively slow pace of vaccine rollouts in these markets - largely due to an initial shortage alongside weak healthcare infrastructure - has led to a sluggish economic recovery. Moreover, likely reductions in fiscal stimulus and the relatively elevated year-on-year inflation levels in 2022, particularly for markets that are net commodity importers, will further weigh on household spending capacity. The potential for further economic disruption stemming from restrictions put in place to combat Omicron and any other emergent Covid-19 variants of concern could also lead to labour market disruptions, further fuelling discontent and could lead to protests and a source of social tensions.

Political Risk Will Continue To Rise

Asia - Average Short-Term Political Risk Index

Note: Scores out of 100; higher score = lower risk. Source: Fitch Solutions

Additionally, dissatisfaction towards governments’ handling of the pandemic across Asia as well as rising pandemic fatigue are likely to pose downside risks to policy continuity, risks which are set to be amplified by the Omicron Covid-19 strain. In 2022, three major economies in Asia, namely Australia, the Philippines and South Korea, will be holding elections, which is an opportunity for voters to voice discontent over lockdowns which have disrupted their lives and livelihoods. Unvaccinated voters may also vent discontent at tougher restrictions directed at them. In the case of legislative elections such as in Australia, even if governments are not changed, there remains a high likelihood that their majorities will be reduced, weakening their policymaking potential and feeding through to greater political gridlock.

Theme 5: Geopolitical Risk Will Remain Elevated

Finally, we expect geopolitical risks to remain elevated across Asia in the next 12 months, as 2022 will be a politically sensitive year for both the US and China. The Communist Party of China (CPC) will hold its 20th Congress sometime in Q421, during which President Xi Jinping will seek a rare third term and a new government will be installed. Xi and the CPC will want to project strength in the run-up to the congress and will likely be even more sensitive than before to any external pressure and criticism, particularly from the US. The US, meanwhile, will hold its mid-term congressional elections in 2022, and there is a high likelihood that candidates will be incentivised to employ hawkish rhetoric against China in order to shore up their political support. Longstanding issues including Taiwan and the South China Sea will feature prominently, likely even more so than before. The local elections in Taiwan as well as the Philippine presidential elections could serve as respective flashpoints for those two issues. Specifically, we believe that mainland China will continue to escalate its pressure campaign against Taiwan by increasing the frequency, scope and scale of its incursions into the latter’s air defense identification zone, while the US will continue to sail warships through the Taiwan Strait in support of the island. Indeed, tensions have continued to rise, with the exchange of more heated rhetoric over Taiwan between the US, mainland China, Taiwan and Japan in late 2021. Hong Kong will be another contentious issue, as the US and the UK are likely to continue criticising China over its tightening control over the city’s political systems, which has, in their view, diminished democratic norms and individual freedoms.

Key Issue Fitch Solutions View
Cross-Strait Relations We expect 2022 to mark a further rise in tensions between China on the one hand and the US and Taiwan on the other, with escalations of incursions by Chinese military aircraft into Taiwan’s air defense identification zone, both in scope and frequency.
South China Sea We expect US-China tensions to worsen from the South China Sea disputes, as both parties have signalled greater willingness to confront each other in the strategically sensitive waterway. Tensions could escalate significantly following the formation of the Australia-UK-US security alliance, as Beijing’s assertiveness is expected to continue rising, ahead of the party congress.
Trade And Economy We see potential for the escalation of trade tensions in 2022, amid uncertainty surrounding the implementation and durability of the phase one trade deal, with the US likely to pay close attention to China’s pledge to increase imports from the US.
Democratic Norms And Individual Freedoms In Hong Kong We view the ongoing issues surrounding democratic rights and freedoms in Hong Kong as another factor for China which could also lead to further tensions with the US. Since the 2019 passage of the National Security Law in the Special Administrative Region, Washington has imposed sanctions on Chief Executive Carrie Lam, and in July 2021, seven more deputy directors at the Hong Kong liaison office were added to the list.
Investigations Into The Origin Of Covid-19 We expect the US to continue investigations in 2022 into the possible lab origins of Covid-19, which will most likely further strain relations between Washington and Beijing.
Source: Fitch Solutions

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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