U.S. Tax Reform to Add Tightening Pressure in Asia, Goldman Says

A mammoth tax package coming in the U.S. will add pressure on Asian central banks to tighten while aiding the region’s exports, according to Goldman Sachs Group Inc.

The tax bill will probably be approved and should support Goldman’s outlook for Asia in the coming year for sustained solid growth, inflation coming off from low levels and interest-rate increases by most regional central banks, according to a research note released Tuesday by Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs in Hong Kong.

“Events outside the region -- particularly in the United States -- are contributing to the reflationary narrative,” Tilton wrote. “The fiscal boost to U.S. growth will aid Asian exports on the margin but has hawkish implications for the Fed” and, in turn, interest rates in Asia.

The tax bill has largely been priced in by financial markets, he said. In addition to the monetary policy effect, it could prompt two additional, though smaller, shifts in economic activity and profits.

If the U.S. marginal corporate tax rate declines to 21 percent from 35 percent -- a move to one of the lowest in major economies from being among the most burdensome -- some shifts in economic activity out of Asia are possible, Tilton wrote. However, he judged that most firms doing business in the region won’t be convinced to move out on tax policy alone.

Second, while repatriation of overseas profits can be seen as a risk for Asia amid more attractive tax rates in the U.S., most of those already are priced in U.S. dollars and the bulk also would be flowing out of Europe or other developed markets.

Outside of U.S. tax legislation, there already were a bevy of factors supporting Goldman’s calls for steady growth, reflation, and monetary normalization in Asia for 2018. Growth across the region has turned higher, and India is poised to add more fuel next year as medium-term setbacks from demonetization and the goods-and-services tax fade.

The forecasts are in line with what most economists have penciled in for Southeast Asia’s biggest economies, according to Bloomberg survey data. Most of the region’s top six economies are set to sustain 2017 momentum, led by the Philippines and Vietnam. Four of the six should see at least benign increases in consumer price inflation, the surveys show.

Food prices are likely to increase much faster in 2018 and this is playing out, starting in places like India, Goldman said. Faster growth relative to potential could spur price growth in economies such as the Philippines and Malaysia, it estimated.

Those developments on growth and inflation have fed into central bank eagerness to move forward on policy normalization a decade after the global financial crisis started brewing.

“Beyond U.S. and Chinese policies, regional central banks have their own reasons for raising rates,” Tilton wrote.