white papers

Assessing Asia’s macroeconomic sustainability

Assessing Asia’s macroeconomic sustainability
Dhiraj Bajaj - CIO, Asia Fixed Income and Equities

Dhiraj Bajaj

CIO, Asia Fixed Income and Equities
Nivedita Sunil - Portfolio Manager

Nivedita Sunil

Portfolio Manager

Measuring up Asian fundamentals

How do macroeconomic fundamentals in Asia measure up relative to other emerging markets in the current context of tighter US monetary policy? Asia ex-Japan stands out compared to other emerging markets (EM) in terms of economic resilience, boasting higher growth prospects and more contained inflation, for instance. Other metrics such as public sector finances and external vulnerabilities also feature notable improvements in the region

In this white paper, we use long-term data from the past decade to analyse trends for different EM investment-grade sovereigns in three key areas: economic resilience, public sector finances and external vulnerability. The impact of tighter US monetary policy will differ across various EM countries due to their varying degrees of resilience in these three key areas. We believe this makes Asia stand out relative to the rest of emerging-market fixed income, as shown in Table 1.


Table 1: Summary regional macroeconomic assessment


Summary 5-10
year view

Growth outlook

Public finances outlook

External financing vulnerabilities

DM Asia

(Australia, Japan, Singapore)

Balance of risk: Positive

Strong policy credibility and stable institutions support long-term investability

Low potential growth but broadly diversified and resilient economies

Broadly, sustainable fiscal and debt metrics. Japan’s large debt burden is sustained by large local + central bank ownership

G10 and highly traded currency status acts as a shock absorber and cushions external financing issues

North Asia

(China, Hong Kong, South Korea, Taiwan)

Balance of risk: Neutral

Structural growth headwinds are balanced by very high levels of external resilience

Structural growth headwinds likely (especially in China) amid poor policy visibility and global growth slowdown

Moderate debt burdens and strong fiscal accountability at the central government levels, which provides room to act

Strong external resilience with very high FX reserves from years of current account surplus accumulation

South and southeast Asia

(India, Indonesia, Malaysia, Thailand, Philippines)

Balance of risk: Positive

Strongly improved policy credibility across both fiscal and monetary lens, which provides stability to benefit from high potential growth in the region

Region with the highest potential growth and strong domestic consumption stories that provide some resilience to global growth headwinds

Moderate debt burden with strongly improved fiscal credibility over the years. India is the only outlier with large debt burden but funded almost entirely through local ownership

Much improved FX reserves compared to the prior 2013 taper tantrum episode, which allows for a controlled FX weakening with limited spill over effects

Middle East

(Saudi Arabia, Qatar)

Balance of risk: Positive

Structural increase in oil prices and a focus on fiscal prudence makes the region very robust to global shocks

Moderate growth prospects, still very reliant on oil and natural gas prices.

Strong fiscal surpluses from high oil prices, which allows ample room for manoeuvre to pursue diversification efforts

Strong current account surplus and positive NIIP anchors strength


(Poland, Hungary)

Balance of risk: Negative

Increased geopolitical tension and structural pressure on growth in Europe erode the long-term attractiveness

Structural pressure on growth from stagflation in Europe. Energy availability to remain a key issue, which is likely to hamper growth prospects

Fiscal discipline largely intact so far, although the region is likely to come under pressure as increased populism and polarization increase risks

Mediocre external buffers with negative net investment positions, with no significant improvements in FX reserves over the past decade


(Mexico, Colombia, Peru, Chile)

Balance of risk: Negative

LatAm is fraught with political pressures towards left-leaning/populist measures, leaving the region vulnerable to sharp structural deterioration

Structural pressure on growth from poor investment policies (especially Mexico). Structural inflation also a headwind (e.g. in Colombia)

Fiscal balances likely to be under pressure from rising social demands (Chile), high expenditure rigidity (Colombia) and support to SOEs (Mexico)

Medium external vulnerability with reasonable but unimproved FX reserves
over time

Erstwhile IG EM

(Brazil, South Africa, Turkey, Oman)

Balance of risk: Neutral

Varying degrees of sustainability in growth/fiscal and external metrics led to the downgrade into high yield between 2015-2020

Anaemic growth prospects are and were a key driver of downgrades for Brazil and South Africa

Weak fiscal structure for Brazil, Oman and South Africa (combined with low projected growth) led to worries around debt sustainability

External vulnerability was exacerbated (alongside poor institutions) for Turkey and Oman that precipitated the downgrade

Source: LOIM. For illustrative purposes only.


Structuring allocations

How should investors structure their exposure to Asian fixed income? We advise tilting allocations towards a quality focus on investment grade (IG), creating long-term exposure to countries that are on sounder macroeconomic footing, thereby reducing exposure to en-masse ratings downgrades.

We recommend a core USD allocation to Asia and the Middle East through a bespoke benchmark of the JACI Diversified IG and EMBI Global Middle East IG, structured to maximise diversification and macroeconomic stability. For a satellite, off-benchmark allocation, we favour the GBI-EM IG Asia focused on EM sovereigns in local currency to lock in alpha opportunities from the rate cycle peaking in these countries.

For investors who believe the end of the down cycle in fixed income is near, we believe Asian IG debt is a robust way to obtain exposure to strong, stable returns from a multi-year perspective.


Read our full white paper on structuring Asian fixed income allocations using the link above.

important information.

This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a marketing material and has been approved by Lombard Odier Asset Management (Europe) Limited  which is authorized and regulated by the FCA. ©2022 Lombard Odier IM. All rights reserved