APAC banking outlook to remain stable with China reopening amid ongoing inflation and geopolitical uncertainties

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Chief economists and industry experts deliberated the outlook for global and regional economies in Asia Pacific, the dominant trends and challenges to look out for, the effects of inflationary pressures, geopolitical instability, and the long-awaited reopening of China.

We talked to John Gong, vice-president of Research and Strategy at the University of International Business and Economics campus in Israel; Radhika Rao, senior economist at DBS Bank; Selena Ling, chief economist and head of treasury at OCBC; Steven Cochrane, chief APAC economist with Moody’s Analytics; and Matthew Oostveen, chief technology officer for Asia Pacific and Japan at Pure Storage.

Global economic activity has experienced a broad-based and sharper-than-expected slowdown, with inflation at its highest in several decades. In Asia Pacific, the economy is expected to improve, and the banking industry will remain broadly resilient. The profitability of banks will benefit from rising interest rates, although higher interest rates may negatively impact asset quality and funding costs.

With borders reopening, China’s economic recovery will be on track. Gong predicted that China will see around 5% growth in gross domestic product in 2023. However, he pointed to insufficient demand being a problem. Ling observed that the reopening of China came earlier than expected and that domestic consumer confidence is a key risk for China. Meanwhile, Cochrane projected another hike or two through the first quarter into April of 2023 and some easing of monetary policy late in the year or early next year.

Rao said: “Inflation is going to come down in most countries because of the high base effect, but there are bigger structural factors that could keep inflation as a recurring problem.”

In terms of the banking industry, Ling commented that the rising interest rate environment is beneficial for net interest margin, but that we will see more defaults when loan growth slows down. Cochrane added that the cost of funds would remain high and stressed the importance of cost management for banks.

Oostveen shared his perspectives on the disruptor ChatGPT, the use of artificial intelligence (AI) to generate content, and decentralised finance (DeFi). He said: “It’s not far off where we’ll have ChatGPT-4 which will not just increase the capability of ChatGBT-3 by an order of magnitude but by three orders of magnitude. The level of intelligence that we’re starting to see exhibited by these AI creations is quite phenomenal. Banks are responding to technology trends by increasing their investment in data science, as well as research and development within the DeFi space.”

Key discussion points:

  • Reopening of China, real estate risk and population decline
  • Inflationary pressures, monetary policies and economic recovery
  • Credit outlook for the APAC banking industry in a volatile climate
  • The future of crypto and digital banks
  • Development of ESG and sustainable finance

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