COLUMN-Which Asian countries have a chance to offset Trump’s tariffs?: Raychaudhuri

By Manishi Raychaudhuri

April 16 - Asia’s export-dependent economies have been directly in the crosshairs of President Donald Trump’s stop-and-start trade war, highlighting the urgent need for the region to accelerate the difficult process of economic rebalancing in favour of domestic consumption. Some countries are much better positioned than others.

Southeast Asian nations are the most export dependent in the region and thus were set to be hit by some of the U.S. administration’s steepest reciprocal tariffs: 46% for Vietnam, 36% for Thailand and 32% for Indonesia. While other large Asian economies are less dependent on exports, they are still vulnerable, particularly China given that it’s facing U.S. tariffs well above 100%.

President Trump’s 90-day postponement of reciprocal tariffs and exemptions of many electronics has provided many in the region with temporary relief, but the endgame is far from clear.

One thing is crystal clear, however. To neutralize the impact of any decline in exports, Asian countries will need to stimulate domestic consumption and investments significantly. The question is which countries can actually do this.

Support for domestic consumption and investments usually takes two forms: fiscal, where the government directly finances programs, and monetary, which involves central banks cutting interest rates or injecting liquidity to induce consumers to spend or companies to invest.

These measures can boost aggregate demand and create jobs, but they can also increase inflation, “crowd out” private investment and weaken the currency. Moreover, a country’s ability to engage in fiscal or monetary stimulus depends on how much ‘headroom’ it has to start.

MONETARY SPACE

A central bank’s ability to cut interest rates is usually dependent on the level and direction of inflation as well as the “real” interest rate in the economy, i.e., the policy rate net of inflation. Higher real rates means there is more room to cut.

Consumer Price inflation in Asia, excluding Japan, is approaching its lowest ever, driven primarily by deflation in China. However, the degree of monetary policy space available to Asian central banks varies considerably, depending on the prevailing real interest rates.

A long-standing rule of thumb is that central banks seek to set their policy rates 1 to 3 percentage points higher than the inflation rate, as a “real” policy rate of 1-3% is typically thought to keep inflation and employment steady and near target levels.

Going by this benchmark, Indonesia, the Philippines and China appear to have the most room to cut, with real rates of 4.75%, 3.95% and 3.35%, respectively, as of April 11.

On the other hand, Korea, Thailand and Malaysia appear to have little space for monetary largesse, as their real rates are all below the 1-3% range.

FISCAL ‘HEADROOM’

A government is best positioned to increase fiscal spending when it does not have much debt to begin with and when it’s able to borrow cheaply.

On the first criterion, most Asian countries are well situated. Their public debts range from 40% to 85% of GDP, lower than the threshold of 90% beyond which growth is believed to slow down significantly, as Carmen Reinhart and Kenneth Rogoff argued in 2010.

However, the other important factor is a country’s borrowing costs. For example, both India’s and China’s public debt to GDP ratios are close to the 90% threshold. But China benefits from having a much lower cost of government borrowing. China’s 10-year bond yield is only 1.8%, compared with 6.5% in India.

When considering both the level of public debt and borrowing costs, it seems that Korea, Thailand, Malaysia, China and Indonesia have room to expand fiscal spending, while India and the Philippines do not.

Of course, one of the major risks of large fiscal and monetary expansion is currency depreciation. But in a tariff war, a weaker currency may actually be welcome because it can make exports more competitive. Besides, Asian currencies have been relatively robust against the U.S. dollar this year, making depreciation less of a concern.

OFF THE STARTING BLOCK

Several Asian countries have already begun engaging in fiscal and monetary stimulus. China has announced plans to expand its central government fiscal deficit from 3% to 4%. And Indonesia is seeking to increase its public debt to GDP ratio from 39% to 50%. Meanwhile, Korea, China, Indonesia, Thailand and India have cut policy rates by 35 to 75 basis points over the past six months.

Of course, there is no guarantee that these stimulus measures will be effective, and it will clearly take far more than the announced plans for countries to rebalance their long-time dependence on exports, particularly given all of the political and business interests involved. But if the Trump trade war accelerates, Asia may have no other option.

(The views expressed here are those of Manishi Raychaudhuri, the founder and CEO of Emmer Capital Partners Ltd. and the former Head of Asia-Pacific Equity Research at BNP Paribas Securities).