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Asia’s silver lining

Chief Economist, South East Asia & India, ANZ

2023-02-07 05:30

The outlook is murky. But the good news is any potential slowdown in Asia outside China in the short-to-medium term is likely to be a garden-variety one, led predominantly by weaker exports.

Macroeconomic and financial imbalances that, in the past, have seen external shocks impact domestic demand in the region, resulting in a deep and protracted slowdown in growth, are currently mild or even absent.

Asset prices do not currently look stretched, vulnerable external liabilities have been stable, and the credit cycle is well behaved. Amid clouds of concern, there is a silver lining.


The nature and strength of the credit cycle is the over-arching determinant of the depth of the growth slowdown. The region’s credit cycle has made a comeback after a hiatus of nearly two years but is far from exuberant.

Credit growth has been trailing nominal GDP growth, suggesting the post-pandemic recovery has predominantly been driven by improving income rather than leverage.

The credit impulse, measured as the ratio of annual change in credit to that in nominal GDP, is also quite muted for most economies.

India, the Philippines, South Korea and Taiwan are admittedly outliers at first glance. Nonetheless, India’s strengthening credit impulse comes against the backdrop of a significant reduction in corporate leverage in the preceding years.

The debt-equity ratio of firms represented in the MSCI India index declined by around 30 per cent between 2019 and 2021. For others, it has either been stable or even moderately lower in the same period.


Household indebtedness has admittedly risen in some economies, especially in South Korea, Taiwan, and Thailand. At the same time, there is no evidence rising household leverage has become a major driver of property prices.

Property prices have risen much more than household indebtedness due to a larger allocation of savings into the sector. The fact house price-to-income ratios have either been stable or declined in most economies further attests to this view.

These developments do not preclude a correction in property prices. However, the prospect of households facing a greater burden of debt servicing amid falling property prices will likely be avoided in most economies.

Overall, such a possibility holds only for South Korea and Taiwan, in ANZ Research’s assessment, and even then, only mildly so.

In ANZ Research’s view, Asian equities look fairly valued on both absolute and relative bases. Twelve-month forward price-to-earnings ratios (PER) are currently below their long-term averages for most markets, quite in contrast to the run-up to the global financial crisis or the subsequent recovery in late-2009.

At the individual market level, forward PERs are above their long-term averages only for Indian and Thai equities, but for idiosyncratic reasons – the superior and stable performance of overall corporate earnings in India, and the anticipated dividend from improving tourist flows into Thailand.

Asian equities are also trading at a discount to their US counterparts, despite a narrowing of profit margins. Such divergences are not uncommon but have historically been triggered by events such as the start of quantitative tightening in the US in 2015.

The current situation may be similar; nonetheless, we should bear in mind the US monetary tightening cycle is now in its late stage and - more importantly - the gap in profit margins is likely to sink further.

To improve

Current account positions in India, the Philippines, South Korea and Thailand weakened considerably in 2022 for a host of reasons, predominantly a surge in commodity prices that widened the traditionally narrow gap between import volumes and values.

That gap has now started to narrow, and trade deficits are moderating in tandem. In fact, trade deficits peaked in July/August 2022 and have been trending lower since, albeit in an uneven manner.

Data from late 2022 show much-lower deficits in each of the above-mentioned four economies. The maximum progress has been made by Thailand, whose November trade deficit was nearly 68 per cent lower than its peak in August.

The least progress is seen in India where the fall from the peak in July was 18 per cent. That trend is expected to continue even amid weaker exports.

The bottom line is current-account pressures are now past their point of maximum stress and should become more manageable this year.

Sanjay Mathur is Chief Economist, South East Asia and India at ANZ

This piece is an edited version of the ANZ Research report, “Asia Macro Weekly: a ‘garden variety’ slowdown”, published January 27, 2023.

Asia’s silver lining
Sanjay Mathur
Chief Economist, South East Asia & India, ANZ


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