Why is EM Asia much more resilient? Strong buffers and decisive actions to stabilize prices

Investors are concerned that shocks to the Turkish Lira may spillover to emerging Asian economies . But we argue that they are in a strong position to absorb external shock s , as they have withstood the pressure of more discriminating capital much better than countries such as Turkey . There are two key r easons why EM Asia will be fine, thanks to: a) savings to absorb shock, such as ample foreign exchange reserves relative to short-term external debt , and prudent fiscal and monetary policy to prevent overheating; and b) decisive steps to ensure macroeconomic stability . For example, most EM Asian countries have current account surpluses and even the deficit ones such as the Philippines, Indonesia and India have less than 2% of GDP. However, Turkey has -6.3% of GDP CA deficit and does not seem to be on track to tighten the economy. And even with sounder fundamentals, Asian central banks are also decisive to move if required to ensure price stability. For example, on 9 August, the Bangko Sentral ng Philippinas (BSP) hiked rates by 50bps to 4% and signaled the willingness to raise rates further if necessary after inflation rose to 5.7% YoY . The PBoC , too, stepped into limit excessive depreciation of the RMB by raising the reserve requirements for FX forward positions to 20%. In contrast, despite having inflation at 16%, an overheating economy, high foreign exchange debt, and strong depreciation expectations, the central bank of Turkey held rates and the government has not signaled that price stability is a priority through its actions and words. And so, although emerging Asia is not immune , central banks in the region are certainly making it clear that they prioritize price stability by doing what’s necessary to instill investors’ confidence. W e believe that emerging Asia is in a strong position to ride out the storm thanks to already ample buffers and steady captains at the helm of the ship.