Passers-by wearing protective face masks following an outbreak of coronavirus (COVID-19) are reflected on a screen showing stock prices outside a brokerage house in Tokyo, Japan, March 17, 2020.
Issei Kato | Reuters
Asian countries will face three major headwinds in the coming year, according to senior economist Carlos Casanova, Asia at the Swiss private bank UBP.
“We have rising omicron cases. We have priced in lower growth in China to around 5%. And now the Fed meeting minutes suggest that the pace of downsizing will be faster than expected,”[ads1]; he told CNBC “Squawk Box Asia”. “on Friday, adding that these factors” pose a threat to the region as a whole. “
The US Federal Reserve scared investors last week after the minutes from the December meeting signaled that members were ready to tighten monetary policy more aggressively than previously expected.
The Federal Reserve indicated that it may be ready to start raising interest rates, reverting to its bond-buying program and engaging in high-level discussions about reducing its holdings of government bonds and mortgage-backed securities.
While Asia’s emerging markets are well positioned, they will be more affected by these factors – especially if the Fed moves aggressively on the policy front, Casanova pointed out.
“There will be a real interest rate compression between emerging markets in Asia and the United States,” he said. This could lead to further outflows of bonds in the region, especially from economies that are more vulnerable, he added.
In 2013, the Fed triggered a so-called “loser tantrum” when it began phasing out the asset purchase program. Investors panicked and this triggered a sale of bonds, which led to a rise in government interest rates.
As a result, emerging markets in Asia suffered severe capital outflows and currency depreciations, forcing central banks in the region to raise interest rates to protect their capital accounts.
It all depends on how the Fed proceeds to normalize its policy in the coming months, Casanova said.
“What we are fighting to avoid is a situation where they are more proactive in reducing their balance sheets while implementing three rate hikes in 2022,” he noted, saying it could potentially lead to further outflows from the region and deflationary pressures.