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7 Risks to Asia’s Economic Resilience in 2022

Across Asia, vaccination rates are rising, e-commerce is soaring, trade has rebounded and supply chain problems are starting to ease, delivering hope for the new year. Moody’s Analytics predicts that, by the end of 2022, all major Asian economies will have achieved a full recovery as measured by real GDP that exceeds its level of the fourth quarter of 2019

Yet optimism is tempered by several risks to sustained economic recovery and regional stability. Here are seven to watch for in the months ahead. 

COVID-19 Halts the Global Recovery

The slow roll out of vaccines in several countries, waning vaccine effectiveness and the emergence of the Omicron variant (and potentially others), constitute the biggest threat to the region’s sustained recovery in 2022. The situation could worsen if new variants prove resistant to existing vaccines and spread quickly across borders, straining health care systems. 

Because of its reliance on manufacturing, Asia is particularly exposed if there is continuing disruption to global supply chains. Expect more localized lockdowns and targeted travel bans that could spook investors, unsettle stock markets, inflict more pain on the battered travel and tourism industry and generally raise concerns about a deferred exit from the pandemic.

The IMF warns that higher commodity prices and shipping costs, coupled with continued disruption of global value chains, are amplifying concerns about inflation persistence and export resilience.

China Misjudges Its Response to Domestic Challenges

The Evergrande crisis and volatility at other Chinese real estate companies have stoked concerns about how the government is managing the unsettled property sector, which accounts for the bulk of household wealth. Regulatory crackdowns on different sectors (internet services, education tutoring) have caused investors to wonder what industry will be targeted next and what measures Beijing intends to apply in its drive to reduce wealth disparities and achieve “common prosperity.” 

China’s zero-tolerance approach to COVID-19 translates into a ban on most foreign travel and regular shutdowns at ports for mass testing. The knock-on effects on supply chains are contributing to persistent product shortages and delays globally and, in turn, contributing to inflation globally. 

Local economies within China have been disrupted by lockdowns and curbs on inter-provincial travel. Consumer confidence remains below pre-pandemic levels, construction has slowed and power cuts have forced businesses to reduce their operations. 

The IMF reports that the rapid withdrawal of policy support and the lagging recovery of consumption are also slowing economic recovery. In short, China is juggling multiple domestic challenges, and if it does not perfectly calibrate its responses, growth could be further constrained, negatively impacting other Asian economies. 

Asia Is Particularly Exposed to Cybercrime

Asia is particularly exposed to cybercrime because of its large populations, relatively low awareness of cyber threats, absence of disclosure regulation and outdated and unlicensed technology. 

While the region accounts for 60% of the countries that are very highly exposed to cyberattacks, it is also the top originator of cyberattacks, including state-backed actions supported by China, Iran and North Korea. 

Phishing, pharming, extortion, non-payment/non-delivery, personal data breaches, identity threats and spying will continue to challenge the defenses of individuals and organizations in the public and private sectors. Bots will be responsible for the vast majority of incidents. Continuous cyberattacks threaten to impose great costs and generate disruption. 

Inflation Is On the Rise in Asia

Inflation has been on the rise across Asia, driven by shifting global demand, rising food and fuel prices, and supply chain disruptions. The Asian Development Bank forecasts higher inflation in developing Asia in 2022. 

The IMF warns that higher commodity prices and shipping costs, coupled with continued disruption of global value chains, are amplifying concerns about inflation persistence and export resilience. Lasting delays in mining operations, shipment backlogs, semiconductor shortages, surging freight costs and snap quarantine restrictions in key manufacturing and shipping areas are magnifying inflation risk. They may also cause structural changes to production and delivery and storage capacity across sectors.

Higher rates in the U.S. could increase debt burdens, stimulate capital outflows and cause a tightening of financial conditions in Asian developing economies. It could also cause downward adjustments in stock markets globally. If Omicron and other variants boost infections globally and continue to spur new government restrictions this risk will decline as economies slow.

Divisions Deepen Between the United States and China

Strategic competition between the U.S. and China has increased and threatens to drive global fragmentation. The U.S. and its allies continue to promote defense, security and infrastructure development initiatives in the “Indo-Pacific” region with the aim of countering China’s ambitions. Building on the groundwork laid by his predecessor, President Joe Biden is urging allies to apply restrictions on China in the areas of finance, investment, technology and trade. 

This effort is putting pressure on third countries to choose sides. Decoupling is underway in areas of advanced technologies. President Xi Jinping’s consolidation of power — and pride in accomplishments like containing COVID-19 and hosting the Winter Olympics — will bolster China’s confidence in the face of the prevailing anti-China sentiment in the American capital and growing concerns about Beijing’s actions among its neighbors and many democratic states globally. The geopolitical rivalry could depress investment and productivity growth. 

Social Tensions from COVID and Climate

COVID-19 has generated immense human suffering in developing Asia, particularly among groups that were already challenged with poverty, vulnerability and marginalization. During the pandemic, many governments tightened control over their populations and used the crisis as cover for restricting civil liberties and suppressing dissent.

Having boosted public spending to ameliorate the immediate impacts of the crisis, state budgets will come under pressure, which may lead curtailing social programs. Environmental threats and climate change are adding to instability. 

Asia remains the world region most at risk to the negative impacts of climate change. In some countries, populations already chafing against unrepresentative government, political repression, corruption and inequality may be agitated enough — by lost opportunities during the pandemic and further delays in recovery — to turn to protest. Countries where unrest may turn violent include Bangladesh, Myanmar, Pakistan and Thailand.

Potential Security Flash Points

The U.S. withdrawal from Afghanistan renews the threat of a safe haven for terrorist groups. Violent extremist media branches of al-Qaida and its affiliates, as well as the Islamic State of Iraq and as-Sham (ISIS), have celebrated the Taliban’s perceived victory over the U.S and encouraged the use of violence by their followers and supporters. 

China and Central Asian states are casting a wary eye over developments. COVID-19 and natural disasters have hit North Korea particularly hard and could spur more provocations like missile tests as it seeks attention and aid. 

China has ramped up the pressure on Taiwan from several angles, including military flights into Taiwan’s air defense identification zone. Meanwhile, the U.S. has scaled up its support to the self-governing island. Although an attempt by Beijing to take Taiwan by force in 2022 is highly unlikely, a miscalculation by involved parties could cause an incident that would have major global ramifications for international relations and the global economy. 

Conclusion

Renewed pandemic waves, possibly driven by the emergence of more infectious and vaccine-resistant variants, the waning effectiveness of vaccines already administered and slower-than-expected vaccine rollouts could derail Asia’s recovery. 

However, if China and the U.S. ratchet down their bilateral tensions and find ways to work together on major global challenges, investor sentiment will improve, along with business and consumer confidence.

Bart Édes

Distinguished Fellow at Asia Pacific Foundation of Canada @Bartapest

Bart Édes is a Distinguished Fellow at the Asia Pacific Foundation of Canada. He was a senior staff member at the Asian Development Bank, 2009-2020, based mainly in Southeast Asia. 

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