Bangladesh and Vietnam out of six Asian frontier markets are expected to remain among the fastest-growing world economies in 2021.
The Washington-based International Institute of Finance (IIF) has made this update on its outlook for frontier Asian economies, assessing their key risks recently.
According to Wikipedia, a frontier market is a term for a type of developing country's market economy which is more developed than that of a least developed country, but too small, risky, or illiquid to be generally classified as an emerging market economy. Such a market also carries too much inherent risks.
Globally, 27 nations belong to this category.
The IIF said robust domestic demand and competitive manufacturing sectors, coupled with rebounding exports, will be the main growth drivers this year.
It, however, said economic slowdown has kept inflation in check, allowing for expansionary monetary policies with central banks cutting interest rates and taking additional measures to inject liquidity.
Bangladesh's inflation in 2021 may remain above the target, the think tank predicted.
"We expect inflation to remain close to the authorities' respective targets in 2021, under the assumption that oil prices stay subdued and food prices broadly stable."
Inflation in Vietnam is projected to be somewhat below 4.0 per cent due to weak demand while Bangladesh's rate is slightly above the target.
Asian frontier markets have provided significant fiscal support to cushion the Covid-19 blow, the IIF cited.
Bangladesh has also supplied more than Tk 1.0-trillion stimulus to boost the domestic economy, it mentioned.
"We project budget deficits in three countries, including Bangladesh, to be large in 2021 for extra pandemic relief and recovery expenditure, stable capital spending and subdued tax revenue collection".
With already narrow fiscal buffers, the IIF sees significant external financing needs and growing pressure on debt sustainability.
"In Bangladesh and Vietnam, the risk of debt distress is low. There, we expect debt as a share of GDP is expected at 40 per cent and 57 per cent respectively, by the end of the year."
Renewed lockdowns in major trading partners and origins of tourist arrivals to the region, and slow vaccination are the key downside risks, the outlook said.
Both Bangladesh and Vietnam have been more resilient than many emerging markets (EMs) and non-Asian frontier markets (FMs) to Covid-19 shocks, it added.
Bangladesh and Vietnam are among the few that were able to maintain growth in 2020, with Vietnam successfully containing the pandemic.
The IIF said cumulative rate cuts are currently one of the highest in the region.
Sri Lanka is another frontier economy in Asia (250bps since the end of 2019) followed by Vietnam (200bps) and Bangladesh (125bps).
The central banks of these countries also implemented a QE (quantitative easing)-type government bond purchase programme, according to the IIF outlook.
External positions remain manageable in Bangladesh and Vietnam, with the latter's position strongest for current account surplus, an appreciating exchange rate and significant reserve accumulation.
The IIF said Bangladesh's current account deficit is relatively small. Remittance was surprisingly strong in 2020 as lockdown and social distancing measures might have helped migrant workers to remit money back home.
But a significant resurgence of the pandemic in recent months might affect income prospects, it feared.
Frontier Asian countries experienced smaller economic contractions compared to other EM and FM regions, likely due to favourable demographics and structural reforms implemented in the past.
Nevertheless, risks remain from the resurgence of Covid-19 globally as well as the country-specific factors, the IIF observed.