India, Indonesia better placed as Asia pack runs disinflation risk

Lower degree of leverage helped, says a Morgan Stanley report

A lower amount of leverage and benign demographic trends are likely to shield India and Indonesia from the worst of a deflationary risk run by other Asian economies.

High levels of debt and an adverse demographic situation could affect other countries including China and Thailand, according to a Morgan Stanley Asia report entitled ‘Debt, Demographics and Disinflation.’

“We are particularly watchful of this emerging trend as it comes at a time when the region is already beginning to face the challenges of deteriorating demographics (slowing potential growth) and high levels of debt to GDP. Disinflationary pressures, if sustained, will weigh on nominal GDP growth and push up real interest rates in the economy,” said the report authored by Chetan Ahya, Derrick Y Kam and Jenny Zheng and dated 11th April.

The trio suggested that regional policy makers will find it tough to manage debt issues if these disinflationary pressures sustain for a longer period of time. This in turn could affect growth prospects for the region, they said.

“We believe that China, Hong Kong, Korea, Singapore, Taiwan and Thailand are most exposed to this risk. In contrast, India and Indonesia are relatively better positioned given still-benign demographic trends and the absence of an aggressive pick up in leverage over the past six years. Aggressive structural reforms, including change in growth mix – particularly in China – could be a more effective way of avoiding further buildup of disinflation risks,” said the report.

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