Liao Shuping, Xiong Qiyue and Wang Ningyuan also contributed to this article.
I. Reshaping of trade pattern exerts pressure on foreign trade
Most economies in Asia follow an export-oriented development model, where economic development is highly dependent on foreign trade, and exports are a key factor in driving domestic economic growth and business investment. At present, globalization is experiencing a countercurrent, with the United States, European countries and other countries intensifying protectionism by imposing tariffs, goods and technology export restrictions and other measures, and trade partnerships undergoing important adjustments and the supply chain pattern facing restructuring, which poses new challenges to the development of Asia's foreign trade.
The share of intermediate goods trade between the United States and Europe and Asia declined. In 2023, the volume of global trade in intermediate goods declined by 6%. The share of intermediate goods trade between the United States and European countries with Asia was 40% and 22.2%, down 3.9 and 2.7 percentage points from 2022. Similar divergences have occurred in services trade. The United States reduced imports of information and communications services from Asia. Asia’s share in the US information and communications services imports declined from 45.1% to 32.6% in 2018-2023, while North America’s share increased from 15.7% to 23.0% (Figure 1). The decline in the share of intermediate goods trade means that global supply chains are being restructured. The US and European countries are more inclined to look for suppliers in their own countries or nearby regions to reduce their reliance on long-distance supply chains. This trend will pose challenges to Asia’s foreign trade and economic growth.
Source: WTO.
Figure 1 Asia and North America’s shares in the US information and communications services imports
II. Rising debts entail greater pressure on external debt servicing in some countries
In response to the impact
of the epidemic, Asian economies have generally implemented large-scale
expansionary fiscal policies, and government debt levels have accelerated.
Under the influence of the Fed's interest rate hike, which caused spreads to
widen, the Russian-Ukrainian conflict and the situation in the Middle East
pushed up risk aversion and other factors, many Asian currencies depreciated
sharply against the US dollar. Between March 2022 and July 2024, the currencies
of six Asian economies depreciated by more than 10% against the USD, with the
largest depreciation being the Turkish lira (-58.13%) and the JPY (-24.38%). A
stronger USD cycle has exacerbated debt pressures in some Asian countries.
According to IMF data, government debt in developing Asian economies stood at
78.1% of GDP in 2023, up 19.2 percentage points from 2019 before the pandemic.
The widening debt-to-GDP ratio is expected to continue, reaching 81.5% in 2024
and 92.1% in 2028
(Figure 2).
Source: IMF.
Figure 2 Total government debt as a percentage of GDP in selected economies
Country-specifically, the Philippines and India face more prominent debt problems.
The size of the Philippines’ external debt is growing rapidly. In 2022 and 2023, the Philippine government’s external debt balance grew by 7.9% and 18.7% YoY, respectively. By the end of 2023, the external debt balance reached a record high of USD 71 billion. At the same time, the Philippines has experienced large trade and current account deficits for 12 consecutive quarters. Official foreign exchange reserves have been rapidly depleted. At the end of March 2024, the Philippines’ foreign exchange reserves stood at USD 1.07 billion, down about 40% from the end of March 2022. The short-term external debt of the Philippine government is small, with a balance of USD 186 million at the end of 2023. However, if the balance of payments and foreign exchange reserves continue to fail to improve, the Philippine government will face greater external debt repayment pressure as USD 71 billion of long-term external debt matures.
Pressure on India’s debt servicing has risen markedly as benchmark interest rates remain high and the INR depreciates. India’s inflation rate rose again to 5.1% in June 2024, above the central bank’s 4% inflation target. In an effort to curb inflation, the RBI left its benchmark repo rate unchanged at 6.5% for the ninth time in a row in August. High policy interest rates and rising domestic borrowing costs have led to increased debt pressures. At the same time, India’s rapid economic growth in recent years has been driven in large part by the massive accumulation of USD debt. Against the backdrop of high USD interest rates, the INR has also continued to depreciate against the USD. India’s borrowing costs in the international market have increased significantly, and the pressure to service its external debt has increased significantly. In August 2024, the USD-INR exchange rate was close to crossing 84, a nearly five-year high. India’s external debt increased to 78.3% of GDP by 2023, the highest level since 2018. India, which has the highest external debt ratio of any emerging market, has been ranked by international agencies as one of the emerging markets most in need of fiscal consolidation, according to the IMF report.
III. Demographic change weakens growth momentum in Asia
Developing Asian economies are experiencing rapid aging. The Asian Development Bank estimates that the number of elderly people aged 60 and over in developing Asian economies will more than double from 570 million to 1.20 billion between 2022 and 2050, with the proportion of the elderly increasing from 13.5% to 25.2% (Figure 3). At present, more than 20% of the elderly population aged 60 and above in a number of developing economies, such as China, South Korea, Singapore, Thailand, Armenia and Georgia. Singapore, Thailand and South Korea are aging the fastest, doubling the proportion of the population aged 60 and over from the 10% level in 17, 18 and 19 years, respectively.
Increasing aging poses a challenge to public finances and public services in Asia. The Asian region as a whole has a low participation rate in individual contributory pensions and relies mainly on government-led public pension schemes. Japan (85%), Uzbekistan (86%), Kazakhstan (80%), South Korea (54%) and Singapore (48%) are among the countries in the Asian region with high rates of participation in individual contributory pensions, while most of the other Asian economies have individual pension participation rates of less than 45%. [1]Poverty rates are high among the elderly in Asia. According to the Asian Development Bank, the relative poverty rates of the elderly in South Korea, China, Vietnam, India and Japan are 46.9%, 28.1%, 23.7%, 23.0% and 21.1% respectively, higher than the country's overall poverty rate of 32.1, 7.1, 9.2, 3.3 and 9.3 percentage points. [2]The poor wealth status of the elderly has further increased the dependence on government public pensions and old-age services. The proportion of the elderly population has increased, the government’s public pension expenditure has increased, and the pressure on medical and health expenditure has increased. At the same time, the aging population has reduced the labor force and affected the tax base. The decrease in government tax revenue and the increase in expenditure demand for improving the living conditions of the elderly increased the financial pressure on the government. Japan’s aging-related spending as a percentage of GDP has been among the highest in the world and is expected to exceed 22% by 2040.
Source: Asian Development Bank.
Figure 3 Population structure and share of older population in developing Asian economies
[1] Proportion of the working population that contributes to a personal pension.
[2] The relative poverty rate refers to the proportion of the population in that age group whose disposable income is less than half the disposable income of the economy.
【This article is AFCA Working Paper No. 2024-27/190】
Expert Biography
Chen Weidong, Director Fellow of Asian Financial Cooperation Association Think Tankers Committee, General Manager of the Research Institute, Bank of China. Dr. Chen joined the Bank in 1999, and was closely involved in the IPO of Bank of China Hong Kong Limited and the restructuring and IPO of the Bank. From 2005 to 2011, Dr. Chen was the Deputy General Manager of the Strategic Development, Bank of China. From 2011 to 2014, he served as the Vice President of Bank of China Liaoning Branch. From 2014 to 2019, Dr. Chen served as the Executive Deputy Director and the Director of the Institute of International Finance, Bank of China. Dr. Chen is also the Secretary General of the China International Finance Society since February 2015, and the chief editor of the journals of Studies of International Finance and International Finance since July 2014.He graduated from the International Economy Department, Renmin University of China with a Ph.D. in economics in 1997.
Liao Shuping, Xiong Qiyue and Wang Ningyuan also contributed to this article.
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