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Asia 2023

Economic positivity, and political ambiguity

06 March 2023

Economic and political analysts seem to have forgotten about Covid-19 all together. Marking its first anniversary, pundits are fully preoccupied with the global impact of the Russo-Ukrainian war since it began in 2022.  

The Year Ahead: Challenges and Opportunities

The Economist’s The World Ahead 2023 report describes the world today as being “much more unstable, convulsed by the vicissitudes of great-power rivalry, the aftershocks of the pandemic, economic upheaval, extreme weather, and rapid social and technological change.” What, then, is in store for Asia in the year ahead? 

Amid global economic throes, Asia is a relative welcome relief. After two years of pandemic-induced economic difficulties, which the Fitch rating company describes as “arguably the most economically disruptive period since World War II,” developing Asia managed a healthy recovery in 2022. And while it is expected to do better in 2023, it is tipped to be a touch lower than first predicted, according to the Asian Development Bank. Asia expanded by 4.2% in 2022 and will likely grow to 4.6% in 2023. Both figures are marginally lower than the previously estimated expansion of 4.3% and 4.9%, respectively.

Three main reasons could explain this forecast: first, relentless COVID-19 cases and persistent lockdowns in China; second, the impact of the ongoing war in Ukraine, especially on oil prices and supply chain; and third, slowing global growth fueled by inflation. 

Asia’s largest economy, China, was forecast to expand by 3% in 2022, compared with the earlier projection of 3.3%. The IMF, however, has lifted China’s growth forecast for 2023 sharply to 5.2%. India’s GDP is expected to be 7.2% in 2023 compared to 7% in 2022. After growing 5.5% in 2022, backed by increasing consumption and tourism, the Southeast Asian bloc will likely cool down to 4.7% in 2023.

Even with these revised forecasts, developing Asia is still on course to do better than other regions globally, both in terms of growth and inflation. However, the Economist Intelligence Unit (EIU) warns that higher interest rates will ensure a challenging economic environment in Asia in 2023. As a result of high levels of household debt in countries like Australia and South Korea, growth is likely to slow considerably. 

The EIU also forecasts China’s slow exit from zero-COVID policies will potentially lead it to adopt a less confrontational approach to international affairs. Therefore, any reduction in geopolitical risk is likely to reduce the turbulence witnessed in the markets during 2022. But the EU, having entered a recession, and the US economy forecast to slow sharply, are expected to impact Asia’s growth. 

Analysts also have warned of volatility and uncertainty in the oil and gas markets in 2023. Buyer-supplier relations and trade policies remain in the spotlight. This may encourage a continued standoff between OPEC+ and the US over production quotas, impacting energy prices, which is bound to impact Asia’s economic, political, and diplomatic dynamics. 

But the overall projected growth numbers in Asia should serve as encouraging news for oil producers in the Gulf and Middle East.

In the environmental domain, establishing a ‘loss and damages’ climate reparations fund at COP27 sets the stage for the concerns of developing countries getting more attention at the 2023 COP28 hosted by the UAE.

Political State of Affairs

While the Asian economic scenario is relatively optimistic, the political scene is less so. A host of countries are due for polls in 2023. The EIU warns of risks of political uncertainty in Southeast Asia as the ripple effects of the closely fought 2022 elections in Malaysia become apparent. In Thailand, ex-prime minister Thaksin Shinawatra’s party appears set to make a major comeback. His daughter, Paetongtarn, is among the leading contenders to be the next premier, but a potential dissonance with the military could lead to social unrest and political stalemate. After 36 years in power in Cambodia, Hun Sen could give way to his Western-educated son Hun Manet, marking a generational shift that forebodes major changes for the country.

Indonesia, which heads for elections in 2024, must decide its presidential candidates by October 2023. Java governor Ganjar Pranowo is seen as the favourite, followed by Defense Minister Prabowo Subianto and former Jakarta governor Anies Baswedan. Analysts have expressed cautious optimism amid increasing signs of nationalism and sectarianism in Southeast Asia’s largest economy.

After years of political stability in Japan with Shinzo Abe either as prime minister or as the key figure behind the country’s policies, his death ushers in a new era of policies across the political and economic spectrum. Prime Minister Fumio Kishida has a huge battle shoring up his and his party’s popularity numbers amid several controversies and inflation. A $200 billion economic package could ease some pressure, but Japan’s major shift in defence expenditure – doubling from 1% to 2% of its GDP – may result in financial pressure in other areas, including a hike in corporate taxes. Japan is also set to host the next G7 summit, and depending on how Premier Kishida’s popularity pans out, the country may even witness a snap poll.

Amid continued testing of missiles by North Korea, a challenging economic environment, and the fallout of the stampede that killed about 150 people, South Korean President Yoon Suk-yeol could face political challenges in 2023, which would impact the country’s economy. 

Pakistan heads for polls after major drama in 2022, which included Prime Minister Imran Khan losing a parliamentary no-confidence motion and facing an assassination bid, as well as a political takeover by Shahbaz Sharif, brother of former premier Nawaz Sharif. Stiff political competition among several political parties could pose numerous tests to a divided country and an already-depressed economy.   

Bangladesh, one of the fastest-growing economies in the world, is also scheduled for voting and could examine the prospects of Sheikh Hasina Wazed’s government which has been in power since 2009. 

India is expected to benefit from companies and countries reducing their reliance on China. A series of economic deals and investments are expected to achieve fruition for India in 2023, which may favor the ruling party led by Prime Minister Narendra Modi in the 2024 parliamentary elections. With India hosting the G20 Summit, issues vital to the Global South are bound to attract more attention. 

Asia’s Global Geopolitics

On the foreign policy front, the resumption of foreign travel by Chinese President Xi Jinping in 2022 is likely to heighten diplomacy during 2023. China is likely to be cautious in its support for Russia despite its differences with the US. The unexpected warm meeting between President Xi and US President Joe Biden could prevent further deterioration of bilateral relations despite their differences over Taiwan. Yet, the tension between the two will remain high over issues pertaining to technology, semiconductors, refined metals, and minerals, as well as materials required for the sustainable energy transition and climate change in general.

Global consulting firm Control Risks views the US-China relationship as the most significant geopolitical risk in 2023. While most assessments dismiss conflict, Southeast Asian countries worry that any US-China standoff will affect them enormously.

It will be interesting to watch how the US-Japan-Korea-Taiwan Chip4 grouping against China and revolving around export controls and supply chains, particularly semiconductors, plays out. Furthermore, the success of such and other groupings like the I2U2 (India, Israel, the US, and the UAE) could determine the nature of new geo-economic and geopolitical ‘minilateral’ partnerships that are positioning themselves between bilateral and multilateral diplomatic efforts.

The India-China border row and India-Pakistan ideological tension will continue to keep the concerned countries and the international community distracted, but these are unlikely to blow out of proportion.

Finally, the head of the political risk firm Eurasia Group, Ian Bremmer, argues that “tomorrow’s geopolitics will be based not on a single global order, but on multiple coexisting orders, with different actors providing leadership to manage different kinds of challenges.” 

The World Ahead

Assessing ‘Where We Are Headed in 2023’, Bremmer said the global security order would be led by the US, global economic order will depend on China’s performance and the global digital order would be driven by giant tech companies, while the global climate order is “multipolar and multi-stakeholder” already.

In summary, many Asian countries, especially those qualifying as middle powers, will be among those actors providing solutions to diverse global problems. The emerging new world (dis)order will likely witness more cooperative frameworks, with economic and tech-knowledge transfer issues being the leading dynamics over political-security alignments, contributing to Asia’s continued progress.