Update Country Report Maldives 13 Oct 2022

• EIU has further downgraded its GDP growth estimate for Asia in 2022. Conditions will remain challenging in 2023, with growth forecast to rebound only moderately in China and to slow in nearly all other major Asian economies.
• Strong goods exports have supported Asian growth since the pandemic began, but the grim outlook for global demand in 2023 means this is set to change. Economies more reliant on services exports will fare slightly better, with regional travel and tourism reviving.
• Asian financial markets should be less volatile in 2023, helped by a more predictable outlook for global monetary policy and a softening in recent US dollar strength. This will give some limited space to central banks to support growth.

Since EIU's second-quarter update in mid-2022, our expectations for Asia's growth have deteriorated further. We now expect regional GDP to grow by 3.5% in 2022 (down from 3.9% previously), chiefly owing to further downgrades to our estimate for China's expansion. Major changes in our forecasts have otherwise been few, although Malaysia and Vietnam stand out for having had their near-term growth prospects raised substantially. As a net energy exporter, the former has benefited from a period of high commodity prices, while the latter continues to pull in manufacturing-related foreign investment.

This year has been a weak one for growth, by Asia's standards, and conditions will remain challenging in 2023. We are forecasting regional growth of 3.5% next year, unchanged from the 2022 growth rate. The stability is deceptive, however, as it primarily reflects a moderate acceleration in Chinese growth (to 4.7%, from 3.3% in 2022) after a year of severe covid-19 disruption. We assume pandemic management will become slightly more pragmatic in China next year. Elsewhere, expansion in nearly every other major Asian economy is forecast to decelerate, including in notably sharp terms in Australia, India and Japan. The monetary policy tightening initiated this year to curb inflation and to defend local currencies will drag on growth in most markets, as it weighs on consumer spending and business investment.

Global slowdown to drag on export-reliant Asia

Weaker global demand will be another source of downward pressure on Asia's growth in 2023. Surging exports, especially for consumer electronics, played a crucial role in helping Asia to recover from the early stages of the pandemic, offsetting ongoing weakness in domestic demand. This was driven by demand for stay-at-home goods in Europe and North America and the massive fiscal support provided there for households and businesses. EIU estimates that aggregate goods exports from Asia have soared to almost US$10trn in 2022, around 40% higher than their 2019 level.

As a result of high inflation in the US and Europe's energy crisis, softer demand for Asian exports has already become discernible this year and we expect it to become even more marked. In 2023 we forecast US economic growth to slow to 0.5%, from 1.5% this year, and for GDP in the EU to contract by 0.1% (compared with an expansion of 2.7% in 2022). This represents a marked deterioration in demand conditions in the two largest markets for Asia's goods exports: the US is the destination for around 15% of the region's shipments, while the EU absorbs around 10%.

As a result, external trade will be a drag on growth for many Asian economies next year. Net exports will not contribute to China's growth in 2023, having been estimated to have provided the main support this year. The contribution of net exports to growth is forecast to be negative in Bangladesh, Hong Kong, India, Pakistan, the Philippines, South Korea and Vietnam, while it declines significantly in Malaysia and Taiwan. In nearly all cases, the weaker contribution will stem from a slump in exports, rather than a strong revival in imports that might bode positively for growth. The goods export bills of Japan, South Korea and Taiwan, whose economies were buoyed by global demand for electronics and semiconductors in 2020-22, are forecast to decline next year.

The trade slump would be more significant were it not for the moderate strengthening expected in Chinese demand. This will provide some support for shipments in Asia, but we caution that the recovery is primarily tied to private consumption, which is not especially import-reliant (we expect growth in investment, which is a better indicator for Chinese commodities demand, to moderate in 2023). A further helpful factor will be continued pent-up regional demand for travel and tourism, and the lift this provides to services exports will provide some offset to weak goods exports. For example, Thailand's tourism-reliant economy is forecast to grow more strongly next year. The degree of recovery on that front, however, will be limited by the persistence of China's zero-covid policies, which will continue to restrict outbound travel from the country next year.

Markets to prove less volatile in 2023, subject to geopolitics

While real economy conditions will be challenging, financial markets in Asia ought to be less volatile in 2023 than this year. We expect the Federal Reserve (Fed, the US central bank) to have concluded its rapid interest-rate increases by the end of 2022, when the federal funds rate is forecast to reach 3.75-4%, and to keep its policy settings unchanged next year. A more stable outlook for US monetary policy will remove a major source of uncertainty for Asian bond, currency and equity markets.

The main implication for Asia's central banks will be that they will have more flexibility in their monetary policy. This year, many have tightened settings, not just to tackle domestic inflation, but also to support local currencies subject to strong depreciation forces. This external pressure will subside in 2023, as the recent strength behind the US dollar dissipates owing to the Fed's shifting stance and the US economic slowdown. As local currencies stabilise or even appreciate against their US equivalent, policymakers in Asia will again be able to focus on balancing inflation and growth.

Although we expect policy to have a tightening bias in most Asian economies as high inflation lingers, at least in the first half of 2023, rate rises will occur at a much slower pace than in 2022. In a limited number of cases, attention will turn more squarely to supporting growth. We forecast that Australia and India will implement rate cuts in the fourth quarter of 2023 as inflation concerns subside and the authorities seek to lift below-potential economic growth. Dovish turns by central banks will be welcomed by local financial markets, but will exert fresh pressure on currencies if they occur before the reductions in US interest rates we forecast for 2024.

Financial markets will remain vulnerable to geopolitical volatility, which is likely to remain as much of a risk as it was in 2022. The biggest concern is the risk of expansion in the military conflict between Russia and Ukraine, which could have huge repercussions for global growth and markets. There are also risks in Asia. North Korea's recent ballistic missile deployments and the ongoing absence of diplomatic engagement points to a testy period ahead; we expect the country to conduct a nuclear weapons test in 2023, for the first time since 2017. In addition, tensions in the Taiwan Strait will remain acute as campaigning gears up ahead of Taiwan's elections in January 2024. China could seize on even a hint of pro-independence language to expand on the unprecedented military exercises it conducted around the island in August.