TOKYO Having witnessed the landslide victory of Myanmar's National League for Democracy, China's slowdown and the agreement on the Trans-Pacific Partnership, 2015 has been another tumultuous year for Asia. But what does 2016 hold for the continent? Rajiv Biswas, Asia-Pacific chief economist at IHS, a U.S. provider of market and economic analysis, looked into his crystal ball.
POCKETS OF RISK For Biswas, familiar concerns over China's economic health will still require close attention in 2016. "I think the imbalances in China still pose a risk to the outlook. Although in our base case we expect China to be growing 6.3% next year, I think there is still a significant risk that China could have a weaker outlook if the imbalances accumulate."
So what are these imbalances? Biswas cited overcapacity in industries such as steel, coal and shipbuilding as a factor that will place a significant burden on the economy. Another trouble spot is the nonperforming-loan ratio at Chinese banks, and the level of corporate debt denominated in U.S. dollars. "We put the risk of a hard landing in China over the next three years at about 25%," Biswas said.
When IHS ran a scenario in which China lands hard and remains in a rut, the effect on Asian growth was dramatic. "We assumed China goes down to 5% growth for a decade. This is a more limited probability of that 25%, only a 10% chance out of that 25%. [But] the transmission shock waves are quite severe around the region," warned Biswas. "The shock waves are quite substantial for Singapore. Taiwan and South Korea will be hit hard. For the whole of the Asia-Pacific region, we could say that up to 2020, it loses 3.5% of accumulated GDP [including China]."
MARITIME SECURITY Geopolitical tensions are also a source of concern. "In the South China Sea, there are quite a lot of naval assets from various countries, so the risk is greater that something could happen. Although I think neither China nor the U.S. would want such an incident to happen, the people in charge of those smaller vessels could make mistake," leading to a situation that "goes out of control."
"Also, I think since the end of last year, there has been an escalation of concerns about terrorism," Biswas said. "Malaysia, Indonesia -- even the Philippines -- have had some of their citizens joining ISIS. The fear is that they could either come back and then do similar actions in their own country, or with the knowledge they have gained could develop cells in their country."
Despite the risks, Biswas remains optimistic on the continent's prospects. He predicts that growth will continue despite further moderation in the Chinese economy. "If we look at the Asia-Pacific region as a whole, our expectation is that growth in 2016 will be 4.6%, which is actually the same as in 2015," Biswas said. "In 2016, they will have to put more effort into getting growth moving," he added, stressing that the countries in the region need to "focus more on domestic demand in terms of boosting growth momentum for the year ahead."
IHS expects the Asia-Pacific region to show the fastest growth of any in the next 30 years, with its share of global gross domestic product rising from 32% in 2015 to 46% in 2045.
"Vietnam, Cambodia, Myanmar, Laos -- the frontier economies -- can easily grow at 6-7% per year. We aren't in a phase yet where we should talk about the whole of emerging Asia moderating," Biswas said.
He said that the upshot of China's slowdown is that a lot of low-cost manufacturing would head to Southeast Asia and India.
He said a big beneficiary of this shift will be manufacturers in the Greater Mekong subregion. "Myanmar never used to have low-cost manufacturing, so imagine in 10 years' time -- that could really move significantly. There are obviously risks, but it's not too gloomy. I still see quite a bright future for Asia."