Indo-Pacific Forecast | H1 2023
Below is an introductory letter by BGA President and CEO Ernie Bower on the company’s latest half yearly regional forecast, circulated to clients and prospects to help inform their planning for the upcoming months.
As we look ahead at Asia in 2023, the bad news is that the outlook for global economic growth is grim. The good news is that Asia will remain a relatively bright spot. Benefiting from Asian growth will be challenging, but done effectively, it will be rewarding. The region is deeply integrated with the world’s economy and is firmly positioned as the epicenter of geopolitical competition, defined at the top level by China-United States tensions. While Asia will continue be impacted by rising inflation, volatile food and energy prices, supply chain disruptions and the specter of global recession, its resilience, strong demographics and economic momentum will provide the best prospects for near- and long-term expansion.
The region is set for modest growth in the first half of 2023. The International Monetary Fund expects the average growth rate for developing and emerging Asia to increase to 4.9 percent in 2023 powered by fast-growing economies like India, Indonesia and Vietnam. Global growth is expected to decline to 2.7 percent for the year.
Asia’s economic expansion will occur amid ongoing national transitions. Expected elections in Bangladesh, Cambodia, New Zealand, Pakistan and Thailand will reveal how well governments are managing deteriorating macroeconomic conditions and cost of living pressures on their populations. Countries will also be watching closely to see if China eases its zero-COVID approach following its quinquennial Communist Party Congress in October 2022, which could boost the economic prospects of Asia’s largest economy as well as global growth.
Regional developments will put the spotlight on Asia’s major powers in shaping the Indo-Pacific’s future beyond the bipolar prism of U.S.-China competition. Japan’s hosting of the Group of Seven will showcase Tokyo’s leadership in non-proliferation, infrastructure and energy, while India’s hosting of the Group of 20 will shed light on inequalities highlighted by countries of the global south in areas like pandemic relief and climate assistance. Indonesia’s chairmanship of the Association of Southeast Asian Nations (ASEAN) is expected to provide a boost to the grouping’s moribund Indo-Pacific outlook and move it closer to eventually admitting Timor-Leste which will increase its membership to eleven.
Businesses will face challenges with planning and budgets, as the region’s central banks will struggle to manage inflation and the fallout from continuing U.S. interest rate hikes. Primary concerns will be the cost of energy, food and generally, imports. There is good reason to be concerned about rising debt obligations and refinancing terms in countries like Laos, Mongolia and Pakistan, even if they do not approach the level of Sri Lanka’s historic debt default. Expect economies like Hong Kong, Singapore and Vietnam to consider introducing restrictive regulations in the digital domain, putting a strain on companies depending on the once reliable trend toward Asia’s growing connectivity.
Geopolitical risks also loom. Leaders in the Indo-Pacific hope the November meeting in Bali between Chinese President Xi Jinping and U.S. President Joe Biden will help tamp down the sharp rhetoric and rising tensions between the two superpowers. Yet U.S.-China relations will likely worsen following the return of divided government in Washington after the recent midterm elections, with both parties trying to “out-tough” each other on China ahead of 2024 election.
Both U.S. and Chinese politics will have deep influence over flashpoints such as Taiwan and the South China Sea. Intensifying violence in post-coup Myanmar raises the potential for cross-border spillovers and regional instability, irrespective of whether polls are held by the military in 2023. North Korea could up the ante by conducting its seventh nuclear test – its first since 2017 – which could spark a crisis in the Korean Peninsula.
Yet Asia will also offer the best opportunities for businesses amid an otherwise gloomy global outlook. Newly elected governments in countries including Japan, the Philippines and South Korea are adjusting to shifts in global supply chains and thinking about how to step up cooperation with business in areas like digital and energy. Vietnam, Thailand, Malaysia and Indonesia are benefiting from the resetting of global supply chains around China.
Other countries could share in this economic boost if they decide to pursue reforms and put pro-investment policies in place. To that point, economies as diverse as Fiji, Mongolia, Nepal and Thailand are offering tax exemptions, easing visa restrictions and cutting red tape to attract tourists and foreign investment. Experimentation is also growing across the region on digital payment systems and central bank digital currencies.
One of the most important trends to watch is accelerating cross-border collaboration and economic integration in Asia. There is no greater driver for long term growth. The world’s first Australia-Singapore Green Economy Agreement signed in October could be a pathfinder in reshaping regional standards for environmental governance, while the $6 billion China-Laos railway, when fully opened, could boost trans-Asian connectivity plans for the Mekong subregion. The U.S.-led Indo-Pacific Economic Framework could catalyze new thinking in areas like supply chains, clean energy, tax policy and the digital economy, as Washington seeks to develop this new trade framework while hosting the Asia-Pacific Economic Cooperation leaders summit in northern California next November.
Given the conditions described in our bi-annual H1 2023 forecast, the continued imbalance of investment of corporate resources, including risk management, strategy, corporate and government affairs between more traditional markets of North America, Europe and Asia remains a challenge for most companies. Asia is responsible for a growing share of global revenue and dominates growth projections, yet it continues to be defined by dynamism and higher risk. Returns on investment in this space will be significant and profound.
As always, we welcome your feedback and thank you for placing your trust in our partnership.
Ernest Z. Bower IV
President & CEO