While Asia Pacific is likely to post relatively strong growth next year, most risks tilt to the downside
For a brief video overview of these events, please click here.
In addition to the pertinent risks outlined in our Global Events to Watch for 2023 (e.g., China Invades Taiwan, Global Housing Crash Drives a Severe Recession, and China’s Property Market Collapses), companies should take note of several smaller risks that could impact their operations in the region. While these events span the realms of economics, politics, and security, they generally tilt to the downside, suggesting more potential for disruption than opportunity. Here are the most important potential events to monitor in Asia Pacific (beyond those mentioned in our global report here):
- Pakistan debt default: Pakistan’s economy is in dire straits, facing high import bills, growing foreign debt, a ballooning trade deficit, and a rapidly depreciating currency. In our low-likelihood, high-impact event, these factors ultimately exhaust the country’s foreign exchange reserves. Friendly nations, such as China and Saudi Arabia, and international organizations, such as the IMF, no longer agree to extend additional financial assistance to the country. As a result, Pakistan defaults on its debts, triggering massive outflows of foreign capital, a severe weakening of the Pakistan rupee, and disruption to companies’ domestic business operations.
- Change in Japanese monetary policy: Despite the yen’s drastic fall in 2022, the Bank of Japan (BOJ) has resolutely maintained its easy money policy to protect economic growth. However, that has the potential to change in 2023. The US Federal Reserve is expected to raise interest rates above 5% next year, which will lead to further depreciation of the yen. Moreover, the BOJ’s long-standing governor and champion of its easy money policy, Haruhiko Kuroda, will step down in April. The appointment of a more hawkish central banker, in an environment of massive yen depreciation, would create the conditions for an overhaul of the current monetary policy. Such a move would have a positive impact on the yen, easing the cost of imports and strengthening profits when they are converted to home currencies; however, it would also weaken Japan’s already-subdued investment levels.
- Political gridlock in Malaysia: Malaysia’s last general election left the country with a relatively unstable government. While Anwar Ibrahim’s coalition managed to cobble together an alliance to establish a new government, that alliance is tenuous, and he now faces a confidence vote on December 19. In our base case, we expect him to survive the confidence vote and remain as Malaysia’s PM for an extended period. However, it is also possible that Anwar is unable to maintain his ruling coalition and loses power soon after taking control. Were this to happen, Malaysia’s king would step in to either determine a new leader or hold elections again. Either outcome would likely lead to an extended political stalemate marked by constant power reshuffling that would hurt Malaysia’s investment attractiveness and create policy uncertainty for businesses.
- China lifts sanctions on Aussie exports: With tensions between China and Australia thawing under the Albanese administration in Canberra, relations between the two countries are currently the strongest they have been in the past three years. While tensions remain far higher than they were through much of the 2010s, recent actions by both countries to resume dialogue and improve their bilateral relationship present cause for optimism and increase the likelihood of Beijing lifting restrictions on Australian exports. However, Beijing is only expected to remove trade barriers in several stages and will attempt to spin the events of the past three years as a win for China among its domestic population before resuming the import of banned Australian products.
- India no longer accesses cheap Russian oil: India remains among the few countries that continue to import discounted crude oil from Russia due to historically friendly relations between the two countries. If there is a shift in the geopolitical calculation of continued energy imports from Russia, India will likely be unwilling or unable to continue benefiting from these low-cost imports. This shift would likely be triggered by a major war escalation by Russia in Ukraine, including, but not limited to, the use of nuclear weapons. Were India to move away from Russian crude, the price of its oil imports would escalate, triggering a massive spike in inflation in the country and leading to consumer demand destruction as well as a severe hit to manufacturing.
- Escalation along Greater China’s borders: Tensions have flared multiple times in recent years between China and its neighbors in the East China Sea, South China Sea, and Himalayas. While 2022 was not marked by escalations as in many recent years, the underlying drivers of conflicts have by no means dissipated. As China re-emerges from COVID-driven lockdowns, it is likely to continue pushing territorial claims, which may lead to escalation with one or more neighbors (e.g., Japan, the Philippines, Vietnam, or India). Should any of these issues escalate into a serious clash, companies may see disruptions to trade flows and shipping routes.
- NK missile strike forces Japanese transformation: With North Korea launching a record number of missiles in 2022, and with several flying over Japanese and South Korean airspace, the risk of an errant missile striking either of these countries has increased dramatically. While a strike on South Korea would prompt a response from Seoul and could lead to skirmishes along the Korean border, a missile on Japanese territory would be of greater consequence. Japan’s policymakers are turning increasingly hawkish, and a strike on the country would accelerate the nation’s plans to develop counterstrike capabilities, alter the constitution, and double overall defense spending. Importantly for multinationals, this would bring forward plans to increase tax revenue to fund the additional spending, either through greater corporate taxes or income taxes.
- Thai election leads to massive unrest: In our base-case view for Thailand’s 2023 general elections, opposition party Pheu Thai wins and takes control of the government in a smooth transition of power. However, it is possible that in an alternate, low-likelihood event, the incumbent party, Palang Pracharth, and its allies attempt to cling to power through political and judicial maneuvers. This would create a turbulent political environment that, along with high inflation levels and food shortages, would lead to social unrest in Thailand. Bangkok would see protracted mass protests, prompting a citywide shutdown and negatively impacting firms’ operations.
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