The global economic landscape is changing fast. Scarring from the COVID-19 pandemic has weakened potential growth, making slower income gains the new normal for many countries. Geopolitical tensions — especially a trade and technology “war” between the US and China — are threatening not only to halt globalization, a key enabler of growth over the past few decades, but also to split the world economy into separate blocs. The days of low and stable inflation seem to be giving way to structurally higher and more volatile prices.
Meanwhile, rapid digitalization — propelled partly by advanced technologies like generative artificial intelligence — is continuing apace, and the effects of climate change are becoming more visible by the day. Taken together, these developments pose major challenges to policymakers worldwide. Those in the ASEAN Plus Three countries — the 10 ASEAN members, plus China, Japan and South Korea — are no exception.
During the pandemic, ASEAN Plus Three governments went all in to support their economies, not least by monetizing fiscal deficits — a taboo in normal times. The unprecedented fiscal stimulus they pursued — including large amounts of direct assistance to households and firms, from cash handouts to fuel subsidies — was accompanied by large interest-rate cuts. For example, in the Philippines, cumulative cuts in the policy rate reached 200 basis points in 2020. Governments also pursued policies such as debt moratoria and regulatory forbearance.
In the post-pandemic era, these measures are excessive, imprudent and unsustainable.
However, lower growth, higher inflation and more public debt — which surged from about 93 percent of GDP, on average, in 2019 to 100 percent in 2022 in ASEAN Plus Three economies — makes unwinding them difficult. Doing so while addressing the multifaceted challenges that lie ahead would require a carefully crafted mix of policies, tailored to specific economies’ needs.
ASEAN Plus Three policymakers seem to recognize this. Despite facing broadly similar challenges, these governments have emphasized different measures, depending on their economy’s circumstances and policy space. For example, countries such as Singapore and the Philippines sought to tackle inflation primarily through aggressive monetary tightening, with the former using exchange-rate targeting to reduce imported inflation.
By contrast, Indonesia, Malaysia, South Korea and Thailand pursued more gradual interest-rate hikes, and used fuel and food subsidies to keep inflation in check. Meanwhile, China (where inflation remains low, and the post-pandemic recovery has been slower than expected) and Japan (with structurally low inflation) upheld accommodative policies.
ASEAN Plus Three countries also intervened in foreign-exchange markets. As the US Federal Reserve aggressively raised interest rates, fueling expectations that rates would remain higher, the US dollar appreciated, especially against currencies of countries with larger interest-rate differentials.
Since rapid currency depreciation can compound inflationary pressure, making it harder for firms and households to adjust, several ASEAN Plus Three central banks used their international reserves to bolster their currencies.
However, policymakers were careful not to overdo it, and retained sufficient international reserves to meet their external obligations. More broadly, they seem to have managed to limit the fallout from pandemic and inflation shocks, and, overall, ASEAN Plus Three remains a bright spot in the global economy.
This success has come at the cost of reduced policy space, and to withstand future shocks, ASEAN Plus Threet countries must rebuild it. To this end, they should embark on fiscal consolidation and end regulatory forbearance, debt relief, and other extraordinary policies and programs introduced during the pandemic.
Many ASEAN Plus Three economies have already committed to rebuilding their fiscal space. Singapore has raised several taxes, including its Goods and Services Tax, and Indonesia has implemented a comprehensive tax-reform package which includes a 2 percent increase in its value-added tax. Malaysia is rolling back broad-based subsidies in favor of more targeted support, while the Philippines has adopted a medium-term fiscal framework.
There is much more to do. In the short term, two priorities stand out: strengthening balance sheets in both the public and private sectors, and building up financial buffers.
Although financial sectors in the ASEAN Plus Three countries remain stable, with ample liquidity and capital buffers, there are pockets of weakness in some economies, and in many, debt stocks have risen uncomfortably close to the threshold of sustainability. Macroprudential policies — such as capital requirements, loan-to-value ratios, and debt-service ratios — should be implemented or bolstered, and weak banks should be recapitalized. Some countries have already been pursuing debt restructuring, to ensure that viable borrowers can survive as debt-relief programs expire.
ASEAN Plus Three policymakers must also address longer-term structural challenges. Greater regional integration is essential, as it would increase countries’ resilience to the forces of fragmentation, reinforce efforts to mitigate climate change, and improve efficiency and productivity through faster digitalization.
Some countries might need infrastructure development, labor-market reforms, industrial policies, regulatory changes, and a concerted effort to boost foreign direct investment and trade.
The ASEAN Plus Three countries should waste no time preparing for the formidable challenges they face. The outlook for the global economy depends on their success.
Hoe Ee Khor is chief economist at the ASEAN+3 Macroeconomic Research Office. Runchana Pongsaparn is group head and principal economist at the office.
Copyright: Project Syndicate
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