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Monetary loosening 'may be enough for Asia-Pac economies for now'

Economists note that so far, only markets closer to the US-China spat, like S. Korea, have taken fiscal moves. Things could change if trade talks sour

Maybank's Dr Chua says the risk of a recession would be high if a full-blown trade war breaks out. He suggests that Singapore introduce a trade war stimulus package that could include financial aid, especially for SMEs.


MOST Asia-Pacific economies may not resort to fiscal stimulus unless a full-blown trade war between the United States and China comes to pass, say economists.

Last week, China indicated that it has "tremendous" room for monetary and fiscal adjustment if trade tensions worsen. But although manufacturing figures have weakened across the region, fiscal moves have been taken mainly by markets closer to the trade war, such as South Korea.

For others, monetary loosening may suffice for now. Policy-makers began taking a more accommodative policy stance even before the recent trade war escalation, noted Asean+3 Macroeconomic Research Office chief economist Khor Hoe Ee, who does not expect fiscal moves to be on the cards for now.

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"Most regional economies continue to be in the mid-phase of the business cycle, and close to long-term trend in the credit cycle. There is thus generally no need for major stimulus measures at this juncture, as the current policy mix is broadly appropriate."

Malaysia and the Philippines have already cut their policy rates; China and the Philippines have also cut reserve requirements for banks.

Last Tuesday, the Reserve Bank of Australia cut its official cash rate for the first time in almost three years. Economists at UOB Global Economics and Markets Research expect Bank Indonesia to possibly join the rate-cutting cycle in the second half of this year.

DBS economists expect the US to make rate cuts of 25 basis points each in September and December, "to be explained as insurance against global market risks and chronically below-target inflation".

In a May report, Deutsche Bank economists considered the likely policy responses of emerging Asia economies in the case of an all-out trade war, if the US slaps a 25 per cent tariff rate on remaining China imports - a decision likely to be made by the end of this month. They expect monetary stimulus to be applied in most economies, with the Asean countries "likely to rely more on monetary policy than on fiscal policy to support growth".

"In contrast, given their relatively low policy rates, developed Asian economies are likely to rely more heavily on fiscal stimulus given their stronger fiscal health," they added.

But things could change if trade tensions continue to take a toll - and certainly if talks sour.

Said Maybank Kim Eng senior economist Chua Hak Bin: "We expect more governments and central banks across Asia to introduce stimulus measures and ease monetary policy as the US-China trade war takes its toll on growth and exports.

"Asean governments with the fiscal space should accelerate their infrastructure build-up and boost public investment." With falling global interest rates, governments can tap lower financing costs for capital expenditure, he added.

To support exporters specifically, governments could look at moves such as income tax rebates, lower trade financing costs and more generous tax deductions for machinery and equipment investments, he said.

Regional exporters that have been particularly hard hit include Taiwan and South Korea. In both markets, the purchasing managers' index - a leading indicator - for new export orders has been in contractionary territory for at least nine months.

DBS Group Research economist Ma Tieying said both economies have room to expand fiscal policy, given that government debt levels are not high at 30 to 40 per cent of gross domestic product, and sovereign rating profiles are sound.

South Korea unveiled a 6.7 trillion won (S$7.86 trillion) supplementary budget in April to shore up the economy. At its May monetary policy board meeting, Bank of Korea governor Lee Ju-yeol "emphasised the importance of policy coordination on the fiscal front", Citi economists Marie Kim and Yoon Jeeho noted.

While Singapore's manufacturing figures have slumped, the domestic economy remains robust, said Dr Khor. Still, against a worrying external backdrop - the trade war, an-already maturing tech cycle and Brexit uncertainties - he does see scope for fiscal policy to mitigate the impact on local exporters or other firms affected by the trade conflict.

"Some temporary and targeted fiscal measures, such as corporate income tax rebates or greater capital expenditures, would be supportive," he said.

The UOB economists named Singapore among the Asian economies that "are in a fiscally strong position to implement countercyclical policies if needed".

Maybank's Dr Chua believes that Singapore will likely respond in the event of a full-blown trade war, as the risk of a recession would be high.

He suggested that Singapore introduce a targeted trade war stimulus package. This could include financial support for export industries, especially small and medium-sized enterprises; ready lines for trade financing; incentives to attract multinationals as parts of supply chains shift towards Asean; and relaxed mortgage loan-to-value rules.

Noting that mortgage growth has nearly ground to a halt since last July's tightening measures, he said: "There is probably room to ease some of the housing financing rules without significant risk to the property market or financial stability."