At the turn of the year, Asia's economies appear remarkably resilient. But looks can be deceiving. Beneath the surface, challenges to growth and prosperity are mounting. The year 2017 is when Asia needs to show resolve and tackle long-needed reforms. Alas, the political calendar renders this unusually tricky, raising the risk of further policy paralysis and economic stagnation for years to come.
Volatile financial markets notwithstanding, Asian economies have recovered in recent months from the growth scare and financial turbulence earlier in 2016. In China, activity bounced, helped by soaring infrastructure investment and robust housing construction. Japan's economy, too, fared a lot better toward year-end thanks to surprising gains in exports and industrial production.
Among the smaller economies in the region, volatile exchange rates have, so far, done little to dent local demand, while exports, too, have perked up. Even India seems to have weathered "demonetization" better than feared, at least judging by the latest manufacturing survey.
It is thus easy to expect further gains, or at least stable performance, for 2017. However, look closely, and the headwinds for growth in the region appear to stiffen. The bounce in exports, for one, may not last long. Stronger U.S. demand could help, but this may well be offset by growing protectionism in the West.
This comes on top of more structural issues plaguing Asian trade, including the shift in global demand toward services and the ongoing weakness in world capital expenditure that has been a powerful driver for the region's exports in the past.
And then there is debt. For several years, growth in emerging Asia, above all in China, was powered by a rapid climb in leverage. But this process is starting to lose its punch, in part because more and more credit is needed to even sustain mediocre rates of growth -- hardly something that can be sustained indefinitely.
At the same time, rising U.S. interest rates and a stronger dollar make debt increasingly costly to finance. Meanwhile, regulators, worried over potential risks to financial stability, are gently tapping the breaks wherever possible.
Without robust exports and amid growing debt saturation, it appears unlikely that growth across the region could accelerate. Fiscal policy, of course, can paper over the cracks for a while. In China, the government has already hinted that it will rely more on public spending to shore up demand.
In Japan, too, a generous fiscal stimulus should lift growth over the first half of 2017, but that effect will fizzle later on. Elsewhere, either the appetite for such policies appears limited or public coffers do not provide much leeway to deliver a determined boost.
Needed structural reforms
A more lasting solution for Asia, then, is to apply structural reforms. With growth hemmed in by slowing credit and sluggish exports, only gains in productivity can deliver sustained prosperity. The list is long, and varied. Pruning the privileges of state-owned enterprises tops the agenda, not just in China but also in India, Thailand, Malaysia and Indonesia.
Better infrastructure, both physical and educational, is also urgently needed in many members of the Association of Southeast Asian Nations and South Asia, while in Japan and South Korea, more flexible labor markets would help improve competitiveness.
This agenda is hardly exhaustive, but it is a start. Determined policies on this front would go a long way to spur private investment in the short-term, thus shoring up growth, before the boost from productivity gains filters through over time.
None of this is a secret. Proposals have been plenty and commitment to such reforms has been pledged for several years now. As time wears on, however, the need to follow up with real action becomes ever more pressing. Asia cannot afford another year of merely incremental steps. Trouble is, as elsewhere, political realities often intrude, delaying the required adjustments. And Asia's 2017 political calendar is making things especially tricky.
Start with China. The country is facing a momentous political transition. At the 19th Communist Party Congress, likely to be held in October, a new standing committee of the politburo will be unveiled that will lead China over the next five years. This will likely mark the concentration of power in the hands of President Xi Jinping.
In principle, this should be positive for the acceleration of reforms. However, in the run-up to the leadership reshuffle, the risk is that few bold decisions will be taken. At least in the recent past, years of leadership transitions have seen a more cautious approach to reforms.
Japan, by contrast, will not need to hold elections in 2017 and the government commands sizeable majorities in the upper and lower houses of parliament, strengthening its hand to drive ahead with new policies. But, here too, caution may reign.
Prime Minister Shinzo Abe may seek to change his party's constitution at a meeting in March, enabling him to serve a third, three-year term as its president and thus prime minister. This, in turn, may reduce the government's appetite to press ahead with controversial legislation, and could even trigger a call for early elections.
India has, admittedly, taken some bold steps in recent years. For example, the government pushed through parliament a new sales tax, to be implemented this year, and strengthened the country's bankruptcy procedures. However, a series of local elections in 2017, notably in the country's most populous state Uttar Pradesh, may slow reform momentum at least over the first half of the year.
Meanwhile, in South Korea, presidential elections loom at the end of the year, with the current suspension of President Park Geun-hye already raising the risk that determined fiscal easing, or indeed the implementation of structural reforms, could be delayed.
In ASEAN, the picture is more varied. Thailand and Malaysia may also call elections this year, which might push back further difficult policy decisions. By contrast, once the March gubernatorial elections for Jakarta are out of the way, the government could speed up national reforms, building on its already impressive track record over the past year.
The Philippines, too, could take more decisive steps in 2017, not only nationally, but also as the current chair of ASEAN, while Vietnam is likely to continue with its reform program of the past year.
A tricky calendar. Political realities, in short, mean that reform momentum may not turn out to be overly aggressive in 2017 despite deteriorating economic fundamentals. For the past several years, easy financial conditions helped the region to muddle along. However, the path to continued prosperity is rapidly narrowing in Asia. Only a determined reform push can ensure the growth endures.
None of this is to say that Asian growth will stall entirely this year, or that sudden financial stress will erupt. The region maintains sizeable buffers against external headwinds. Even if growth is unlikely to accelerate, it still remains higher than in most other regions of the world.
The concern, rather, is that another year of steady, if uninspiring, growth, will reduce the sense of urgency to implement the reforms that are needed to sustain the region's march toward greater prosperity. The tracks will need to be laid now, and the hope remains that courage triumphs in the face of political uncertainty.
Frederic Neumann is co-head of Asian economic research at HSBC.