Macroscope | Why Asia’s emerging markets are best placed to cope with stagflation fears

To be sure, developing Asia has been hit hard by Covid-19 Delta outbreaks. Yet none of the central banks have been forced to hike rates to tame inflation

Moreover, central banks in the region have more inflation-fighting credibility than they did a decade ago

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A man stands in a store in Shanghai, China, on July 9. Asia’s emerging markets have proved relatively resilient in the face of the intensifying inflationary pressures and sharp slowdowns that have posed policy dilemmas for central banks in other parts of the world. Photo: EPA-EFE

Published: 1:30am, 8 Oct 2021Updated: 2:08am, 8 Oct 2021

In financial markets, the risk of stagflation is on every investor’s lips these days. The toxic mix of a marked slowdown in growth and mounting inflationary pressures has unnerved markets, contributing to a 5.4 per cent decline in global equities since September 6.

A confluence of supply-side shocks stemming from the reopening of the world economy – a severe energy crunch, bottlenecks crimping global trade flows and acute labour shortages – are causing inflationary pressures to persist much longer than central banks had hoped, and are slowing the pace of the post-pandemic expansion.

While stagflation fears have gripped markets in advanced economies, the challenge of responding simultaneously to the “stag” and the “flation” is more daunting for policymakers in emerging markets.

Not only do the performance and outlook of developing countries hinge heavily on financial and economic conditions in the developed world, volatile food and energy prices have a higher weighting in inflation baskets.

The added pressures of the US Federal Reserve’s faster-than-expected timeline for interest rate increases and the threat of spillovers from China’s property sector-induced slowdown are putting emerging markets under more strain.

Some economies, such as Brazil, have already been forced to tighten monetary policy sharply in an effort to curb inflation and shore up local currencies. Others, such as South Africa, have held off mainly due to concerns about slowing growth.

.css-1m2rp1p{color:#34b8b5;}Macroscope | Why Asia’s emerging markets are best placed to cope with stagflation fears

Macroscope | Why Asia’s emerging markets are best placed to cope with stagflation fears