Tuesday, 11 February 2025

Growth in emerging and developing Asia to moderate in 2025

5 min read

By Czeriza Vigilia

Economic expansion in the region likely eased in 2024, due to the downturn in China’s property sector and India’s slowdown.

In its World Economic Outlook in January 2025, the International Monetary Fund (IMF) said gross domestic product (GDP) growth in the emerging and developing Asia region is expected to have weakened to 5.2% in 2024 from 5.7% in 2023, subsiding further to 5.1% in 2025. This was revised upward by 0.1 percentage point from the October 2024 update.

The regional outlook reflected the sustained slowdown in the region’s two largest economies: China and India. Other than China and India, the region comprises Southeast Asian countries such as Indonesia, Thailand, Vietnam, Malaysia and Philippines, where GDP growth is expected to have accelerated in 2024 compared to 2023, and would be sustained in 2025. These countries have benefitted from surging demand for semiconductors and electronics, driven by significant investment in artificial intelligence.

Inflation in the region is expected to have been on par with advanced economies at 2.1% in 2024, easing from 2.4 % in 2023 because of early monetary tightening and price controls in many countries.

While most central banks in the region are expected to gradually follow the US Fed in cutting rates, the pace of monetary easing would vary according to domestic developments, said the IMF.

Growth prospects for major economies in the region

In India, GDP growth is expected to have moderated to 6.5% in 2024 from 8.2% in 2023, and stabilise at 6.5% in 2025. This, as “pent-up demand accumulated during the pandemic has been exhausted.”

In its 2025 outlook for emerging markets, credit rating firm Moody’s Ratings said that, even with slower growth, India can still sustain high growth rates, supported by household consumption and strong private sector financial health.

“India and countries in Southeast Asia will also continue to benefit from the global reconfiguration of supply chains, including countries’ and companies’ efforts to diversify trade and investment away from China,” said Moody’s in the report.

In China, despite the persisting weakness in the real estate sector and low consumer confidence, growth slowdown was more gradual at 5% in 2024, down from 5.2% in 2023, primarily due to better-than-expected net exports. In 2025, growth will continue to moderate to 4.6%. The outlook for 2024 was revised upward by 0.1 percentage point from the October 2024 update.

To arrest the economic slowdown and restore investor and consumer confidence, China’s central bank announced in September 2024 an economic stimulus package, including monetary, property and capital market reforms.

To ease the flow of credit into the financial system, Pan Gaosheng, governor of People’s Bank of China (PBOC), announced that the central bank would reduce the reserve requirement ratio (RRR)—the amount of cash banks must hold as reserves—by 50 basis points, freeing RMB 1 trillion ($137 billion) for fresh lending. This may be further cut by 20 to 50 basis points.

PBOC will also cut the seven-day reverse repo rate—the short-term policy rate used to manage liquidity in the banking system—by 20 basis points.

Rates on existing mortgages would also be slashed by 0.5 percentage points on average to give relief to property owners while encouraging household spending. This is expected to benefit around 50 million households, which will shell out RMB 150 billion ($20 billion) less in interest payments per year.

To encourage home purchases, the minimum downpayment for second houses would be lowered to 15% across the country, from the current 25%. To speed up sales of housing stock, PBOC will allow commercial banks to fully utilise the RMB 300 billion ($40.9 billion) relending facility to finance loans offered to state-run firms buying unsold apartments or parcels of land.

The PBOC also introduced new tools to revive the capital markets. The first is a swap programme, initially sized at RMB 500 billion ($68 billion), which allows securities firms, fund companies and insurers to exchange riskier financial assets for more liquid sovereign debt papers, which can be used as collateral for borrowing to invest in the stock market. Another is the RMB 300 billion ($40.9 billion) in central bank loans to commercial banks to fund purchases and buybacks of listed companies’ shares.

IMF said the recent policy measures may provide upside risk to near-term growth but is not enough to sustain growth in the medium term.

“China still needs accommodative macroeconomic policies, along with structural and premarket reforms to bolster near term activity, mitigate risks and ensure a smooth transition toward high-quality and more balanced growth over the medium term,” IMF stated in the October 2024 Financial Stability Report.

Efforts have been made to mitigate the decline in the property sector through other industries, such as green technology, but this remains a challenge. Strategic emerging industries contribute just over 13% to China’s GDP, making it difficult to offset the losses in the real estate sector, which has a 30% share in the economy.

China is also considering to inject up to RMB 1 trillion ($136.3 billion) of capital into its biggest state banks to increase their capacity to support the struggling economy, funding for which would come from new sovereign bonds.

Outlook for banks

Excluding China, economic growth will stabilise across the region in 2025, providing a stable environment for banks, Moody’s said. Declines in interest rates will also boost credit demand in most systems and improve borrowers’ capacity to pay, therefore supporting asset quality.

Governments in the region are expected to continue supporting most rated banks, as these are often the largest in their systems and are systemically important.

“We also expect most governments in the region to have ample fiscal capacity to support banks if needed, and central banks can also provide liquidity support,” Moody’s said.

It added, “In China, while the government’s fiscal capacity to support banks will deteriorate, as reflected in our negative outlook for the sovereign, planned equity capital infusions into six large state-owned banks suggest that the government remains supportive of the banking system.”

S&P Global Ratings said that while property sales in China could stabilise by the second half of 2025, the level of unpaid loans by developers would continue to rise. In the first nine months of 2024, nationwide property sales were down by 22% year-on-year.

“We project non-performing loan (NPL) ratios for property development to rise to 6.4% in 2025 before recovering to 5.2% in 2026,” said S&P in its 2025 banking outlook.

S&P also flagged downside risks that could be “slow burns” for banks in the region but nonetheless test their business models. These include challenges related to climate change, cybersecurity, and digitalisation. 



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