Future financial landscape of Asia in 2025: Key areas CFOs need to focus on
In the year 2025, often associated with the Wood Snake in the Chinese zodiac, Asia finds itself at a crossroads as the new Trump administration prepares to introduce tariffs. This news, according to a Deutsche Bank Research report titled "Asia Corporate Newsletter Q1 2025," has prompted the region to devise strategies to navigate the impact of these tariffs.
The report, authored by a team including Sameer Goel, Perry Kojodjojo, Vaninder Singh, Bryant Xu, Joey Chung, Jalaj Singh, Lachlan Dynan, Michael Hsueh, Liam Fitzpatrick, and Hazel Lai, outlines an 'algorithm' for Asian economies. The first key decision node, they suggest, is China's currency policy choices.
China, with its closely interlinked economies, is arguably most at risk of a more 'strategic' rather than just 'transactional' application of tariffs. The Deutsche Bank Asia Strategy Team predicts that a smaller-than-expected fiscal package in China could necessitate deeper rate cuts in the region, potentially leading to a bull-steepening of the rates curve. On the other hand, a larger-than-expected fiscal stimulus package could ease depreciation pressure on Asian currencies.
The increase in China's fiscal deficit is anticipated to boost nominal GDP growth by 2.7 percentage points. Deutsche Bank Research economists project an increase in China's fiscal deficit from 3% to 4% of GDP in 2025.
Asia is more exposed to a protectionist US trade policy than other regions. Vietnam, for instance, has seen its imports from China double from 2017 to 2023, adding US$50 billion, and its exports to the United States increased by US$60 billion. Given Vietnam's trade surplus with the US is the third largest, it is more vulnerable to the threat of possible tariffs from the incoming US administration.
Data from McKinsey suggests that Vietnam, Malaysia, the Philippines, and Thailand have become "connectors" between the US and China and are therefore more exposed to global trade and potential US tariffs.
Several countries in Asia have big bilateral trade surpluses with the US. However, many Asian countries have low real rate buffers to deal with a stronger dollar and higher core rates. Central banks in Indonesia, Korea, and China tend to focus more on FX over output gaps.
The Chinese government is likely to respond cautiously to the US tariffs introduced by the Trump administration. They are expected to balance their currency policy carefully to maintain economic stability amid these geopolitical and trade tensions. China is expected to develop new strategies to adapt to fundamental changes in the global trade order, as highlighted by Asian policymakers who see the urgent need to react to external changes like tariffs.
Snakes, the symbol of the Year of the Wood Snake, are associated with wisdom, calmness, transformation, and creativity. Perhaps, these qualities will guide Asia as it navigates the challenges posed by the US tariffs and a stronger dollar. Most of Asia has sufficient degrees of freedom for fiscal expansion, with Philippines, Korea, India, and Malaysia being the furthest away.
In conclusion, the Year of the Wood Snake promises to be a year of strategic manoeuvres and calculated responses as Asia grapples with the impact of US tariffs and a stronger dollar. The Deutsche Bank report serves as a roadmap for Asian economies, offering insights into the complex dance of currency policy, fiscal stimulus, and trade relations that will shape the region's economic future in the coming year.
