Asian markets are bracing themselves for the knock-on effects of fiscal disagreements in the US, experts told Emerging Markets on Wednesday.
A default would have many negative consequences, and even if it is avoided, volatility can still be expected – although Asia appeared more resilient to such shocks than it used to be.
The worst-case scenario is a failure to agree an increase in the US debt ceiling. “If no fiscal agreement is reached, and the US drifts into default, this could have severe repercussions across emerging Asia,” Frederic Neumann, co-head of Asian economic research at HSBC, told Emerging Markets.
“With US growth likely to slump, trade would suffer. With local demand already wobbly in many countries, an export tumble would present additional challenges. Fortunately, most Asian markets retain the ability to deliver a powerful stimulus in response, but this would take time to enact and gain traction.”
The other impact of a US default would be a desire by Asian central banks to diversify their currency holdings away from US Treasuries, Neumann said.
One interesting side-effect of that, he said, could be to prompt China to liberalize its currency regime faster, “with the renminbi becoming an increasingly viable reserve alternative to the US dollar. This won’t happen overnight, but a US default may be the spark that sets the train towards reserve diversification in motion.”
But economists are hopeful that it won’t come to that. “Political brinkmanship has led the federal government to partially shut down but we expect an agreement to be reached before the debt ceiling becomes binding,” said Rob Subbaraman, economist at Nomura in
Singapore. Even so, his colleague Euben Paracuelles noted in a report that there was still a risk to Asian markets. “Even as Fed tapering expectations have been pushed back, looming US fiscal risks could act as a drag on Singapore’s growth outlook,” he said.
Frances Cheung, senior strategist for Asia ex-Japan at Credit Agricole CIB, told Emerging Markets an alternative view was possible. “There is a mentality currently in Asian markets that the debt ceiling uncertainty could possibly delay further the Fed tapering, which is positive for risk assets,” he said.
“However, I doubt if this mentality can sustainably hold up risk assets if there is no resolution to the debt ceiling as we get nearer to the deadline.” If there is no resolution two or three days before the deadline, he said, “risk assets will be hurt.” He does not expect Asian assets to benefit from any sell-off in US Treasuries since investors are likely to be risk-averse.