A mammoth tax package coming in the US would add pressure on Asian central banks to tighten while aiding the region’s exports, Goldman Sachs Group Inc said.
The tax bill is expected to be approved and should support Goldman’s outlook for Asia in the coming year for sustained solid growth, inflation coming off from low levels and interest-rate increases by most regional central banks, said a research note released yesterday by Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs in Hong Kong.
“Events outside the region — particularly in the United States — are contributing to the reflationary narrative,” Tilton wrote. “The fiscal boost to US growth will aid Asian exports on the margin, but has hawkish implications for the [US] Fed [Federal Reserve Bank]” and, in turn, interest rates in Asia.
The tax bill has largely been priced in by financial markets, he said.
In addition to the monetary policy effect, it could prompt two additional, although smaller, shifts in economic activity and profits.
If the US marginal corporate tax rate declines from 35 percent to 21 percent — a move to one of the lowest in major economies from being among the most burdensome — some shifts in economic activity out of Asia are possible, Tilton wrote.
However, he said that most firms doing business in the region would not be convinced to move out on tax policy alone.
Second, while repatriation of overseas profits can be seen as a risk for Asia amid more attractive tax rates in the US, most of those already are priced in US dollars and the bulk also would be flowing out of Europe or other developed markets.
Outside of US tax legislation, there already were a bevy of factors supporting Goldman’s calls for steady growth, reflation and monetary normalization in Asia for next year.
Growth across the region has turned higher and India is poised to add more fuel next year as medium-term setbacks from demonetization and the goods-and-services tax fade.
The forecasts are in line with what most economists have penciled in for Southeast Asia’s biggest economies, Bloomberg data showed.
Most of the region’s top six economies are set to sustain this year’s momentum, led by the Philippines and Vietnam. Four of the six should see benign increases in consumer price inflation, the data showed.
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