Over the past 12 months, Asia has been buffeted by overlapping international crises, including the COVID-19 pandemic and the Russia-Ukraine conflict. 

But there is a good case for cautious optimism about Asia’s prospects for 2023. China has taken measures to stabilize the real estate market and reversed course on a zero-COVID strategy that imposed great economic costs. In Japan, substantial household savings will support consumption. India’s economic boom looks set to continue — propelled by massive investments in physical and digital infrastructure and manufacturing capacity, and tourists are returning to Southeast Asia. Bangladesh, the Philippines, India and Vietnam are among the countries expected to record the region’s highest growth rates next year.

Yet there are potential obstacles to regional recovery, including soft global demand that could hold back economies with a high dependence on exports, like the Republic of Korea and Taiwan. Following are five major risks to Asia’s growth prospects and stability in 2023.

Monetary Tightening 

The Fed’s campaign to control inflation through a series of interest rate rises has impacted Asian currencies and markets. The rise in food and energy prices has caused inflation to exceed central bank targets in most Asian economies. Tight labor markets are contributing to higher wages and more inflationary pressures in some parts of the region. 

Continued monetary policy tightening in the U.S. and other OECD member countries could lead to large exchange rate depreciations, financial instability and balance-of-payment difficulties in economies with vulnerable fundamentals. There remains some threat of capital flight. Consumer and business confidence are likely to be impacted by high inflation and interest rates.

If Asian governments seek to shield households and businesses from higher prices through subsidies, price controls and easier lending, the result could be the trapping of resources in unproductive firms and a diversion of spending away from investments in physical and social infrastructure. Increased government expenditures could exacerbate inflation. 

Mitigating this risk are indications that U.S. inflation may be peaking and that future interest rate hikes by the Fed will be smaller. These developments could create some space for Asian central banks to slow the increase in their own interest rates.

More Energy Shocks

The energy sector could experience further volatility in the coming year. Fuel prices in Asia remain high despite the decline in global oil prices from their peaks in early 2022. Power generators, gas importers and public utilities in Asia are preparing for fuel supply disruptions over the coming months. 

A slow or bumpy recovery in China’s economy would negatively impact growth prospects in other Asian countries.

In 2022, drought in China’s Yangtze river system negatively impacted hydropower production during the year. Both China and India depend on hydropower for more than 10% of their electricity. Heatwaves and drought in the coming year could lead to power shortages and blackouts.

To mitigate against a drop in energy supplies, several Asian countries are stockpiling fuel, diversifying their sourcing of oil and strengthening demand management. Some are also ramping up oil-fired generation capacity.

Russia and Ukraine

Russia’s invasion of Ukraine in February 2022 shook global markets and caused chaos in commodity markets and supply chains. In Asia, prices of nickel, corn, wheat, oil and other commodities soared. Several economies experienced a deterioration of their terms of trade. Western sanctions on Russia have added to supply chain disruptions and price volatility. Most Asian countries are net oil importers, making their economies vulnerable to fluctuations in oil prices.

An escalation of the war would unsettle global commodity markets, with implications for Asia. Rising oil prices could drive up consumer and business costs in other sectors, like transport, housing and electricity. Another surge in food and fuel prices would impact low-income groups the hardest, perhaps leading to social unrest. 

Debt Burdens

Higher interest rates outside Asia have led to capital outflows and currency depreciations in some Asian countries. These developments have increased the burden of servicing debt and shrunk fiscal space, hurting countries that entered the pandemic with a high debt burden.  

China has contributed to developing country debt problems through opaque lending practices and an unwillingness to collaborate with other creditors to restructure the debts of countries taking loans. Rising costs of international borrowing are making it difficult for Asian states to secure funds to invest in climate mitigation and adaptation measures. Countries like Pakistan and Sri Lanka that borrowed heavily when interest rates were low are now struggling to fund projects to respond to weather-related disasters and enhance resilience.

The United Nations Development Programme has identified dozens of low- and middle-income countries with severe debt problems and urged the international community to undertake a comprehensive restructuring of debt, including write-offs. Impacted Asian states include Afghanistan, the Kyrgyz Republic, Laos, the Maldives, Pakistan and Tajikistan. 

Cyberattacks

Cybercriminal groups and state-sponsored cyberattacks will present a substantial risk to doing business in Asia in 2023. Automation of cyber threats will grow substantially, testing the resilience of networks and systems. Susceptibility to ransomware will be a particular concern as its profitability continues to attract new market entrants and the level of sophistication continues to grow. Global ransomware attacks increased by 28% in the third quarter of 2022 compared to the same period in 2021. 

Relative to companies in the United States and Europe, Asian enterprises tend to underestimate vulnerabilities in the areas of cybersecurity and data protection. Company management gives inadequate attention to the need for training and investment in cybersecurity. Infrastructure remains a popular target for cybercriminals.

State-backed perpetrators of cyberattacks will keep up their nefarious activities from bases in China, Iran, North Korea and Russia.

A growing area of concern is the use of deep fakes, which enable cybercriminals to gain someone’s trust by closely imitating a person they know. Social media scams are also expected to surge.

Other Risks to Watch

Natural disasters, like severe flooding and typhoons, are regular occurrences in Asia, and are likely to bring at least localized disruptions in the coming year. Beijing will continue to keep pressure on Taiwan, but military and intelligence analysts see the short-term risk of military action as very low. A consistent concern here, as with North Korea, is that an incident, perhaps stemming from some miscalculation, could balloon into a major crisis. The border dispute between China and India in the Himalayas will continue to simmer, while unrest in Myanmar could degenerate into all-out civil war with implications for neighbors (like a surge in refugees).

Beijing is confronting several serious challenges. A shrinking workforce, decline in productivity and weakening private consumption could limit China’s rebound potential as COVID restrictions are removed. The sudden course change in Beijing’s approach to dealing with the virus will lead to hundreds of thousands of fatalities. A slow or bumpy recovery in China’s economy would negatively impact growth prospects in other Asian countries. Further, Western measures targeting Chinese access to advanced technology could further disrupt supply chains. 

Elsewhere, Iran is enriching uranium at the highest levels in its history, a trend that could trigger external intervention if diplomacy cannot achieve an international agreement over the country’s nuclear program. Finally, while the worst of COVID-19 appears to be behind us (except in China), the possibility that new variants slow Asia’s economic recovery cannot be fully discounted.