Download Economic Insight: South East Asia

Economic Insight:
South East Asia
Quarterly briefing Q1 2016
Welcome to ICAEW’s Economic Insight: South East Asia,
a quarterly forecast for the region prepared specifically
for the finance profession. Produced by Oxford
Economics, one of the world’s foremost independent
global advisory firms, it provides a unique perspective
on the prospects for South East Asia over the coming
years. We focus on the largest economies of the
Association of South East Asian Nations (ASEAN) –
namely Indonesia, Malaysia, the Philippines, Singapore,
Thailand and Vietnam.
How is the region coping with slower
growth in China?
In this edition of Economic Insight: South East Asia we
discuss the growing economic ties between the ASEAN
economies and China, analyse how China’s economic
slowdown and transition is impacting upon the region,
and look at which countries have the best prospects for
the coming years.
• China’s importance for the region is twofold – both
as a direct customer for output produced in the
region, and as a key driver of global demand for raw
commodities produced in some ASEAN economies.
Moreover, any future moves to depreciate the Chinese
Yuan would impact on ASEAN competitiveness in
global markets.
• The possible slowdown in growth is worrying at a
time when inflation is already very low and central
banks have limited room for manoeuvre to cut interest
rates. Additionally, the recent build-up of private debt
in the region, while less serious than previous credit
cycles, will slow consumer spending growth in the
coming years.
• The ASEAN economies do have policy options to
support growth though. Singapore, the Philippines
and Thailand have fiscal space to support growth,
while across the region efforts to improve the business
environment and the efficiency of government
spending are also aiding confidence.
• Barring shocks, we are therefore confident the region
can expect a modest acceleration in GDP growth in
the years ahead – with Vietnam and the Philippines
picking up to around 6% in 2016-2017.
ASEAN-6 face ongoing headwinds in 2016
Slowing economic growth in China is contributing to
weakness in world trade, lower commodity prices and
more subdued activity in the ASEAN-6 economies.
As these economies continue to struggle with the
challenging global backdrop, it is natural to question
to what extent the rise of China and the commodity
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super-cycle were mistaken for structurally robust growth
in these countries.
In this environment, we expect the strongest performers
to be the economies with solid domestic economic
fundamentals. As such, the economies that are best
placed to weather the difficult global backdrop are likely
to be characterised by:
• a supportive macro policy environment;
• structural reforms to enhance non-commodities
competitiveness; and
• avoidance of excessive domestic debt levels or external
imbalances.
Countries with room to provide monetary and/or fiscal
stimulus to support growth will also be better placed
to cushion their economies from the adverse effects of
slower growth in Chinese demand and avoid the build-up
of disinflationary pressures.
Overall, we expect only a subdued recovery in growth
for the ASEAN-6 economies this year, with risks tilted
to the downside. In particular, a sharper-than-expected
downturn in China would make relative strengths and
vulnerabilities in the region more pronounced.
China’s impact in ASEAN economies
China’s economic slowdown is having a significant
impact on growth in South East Asia, in part reflecting
the importance of regional trade ties. These ties have
grown considerably in recent years as barriers to trade
have been lowered and the region has become more
closely integrated through cross-border supply chains
and intra-regional foreign direct investment (FDI) flows.
In the late 1990s, for example, the US and EU together
accounted for around 37% of the merchandise exports of
the ASEAN-6 economies, while China took just 3% and
other economies in emerging Asia accounted for 17%. By
2014, China’s share had risen four-fold to 12%, the share
of other emerging Asian economies had risen to 25%,
while the US and EU combined share had fallen to 20%.
Figure 1: Destination of ASEAN-6 merchandise exports
Share of merchandise exports (%)
Commodity exporters are doubly exposed due to
China’s substantial impact on global commodity
markets. In the decade to 2012, for example, the
commodity-intensive nature of China’s investment-led
growth accounted for almost 50% of additional global
demand for oil and more than 80% for steel and coal.
But as Chinese demand for such commodities has
slowed, this has been a major driver of declines in the
global price of these commodities.
Although Singapore ranks highest on the measure of
commodity exports as a percentage of GDP, this mainly
reflects the country’s role as a regional trading hub.
To put it another way, the resource-rich economies of
Malaysia and Indonesia have a much higher share of
commodities in total exports. Indonesia has at least
been reasonably successful in diversifying its economy,
reflected in a fall in the ‘primary sectors’ share of GDP
from 31% in 2000 to 22% in 2015.
More worryingly, Malaysia has succumbed to the classic
‘resource curse’, whereby rising commodity prices
force up the exchange rate, making it more difficult
to successfully develop other export sectors. As such,
Malaysia is more exposed to the negative shock to prices
from the commodity down-cycle.
Figure 2: Exports of commodities (2014)
Energy
Philippines
Non-energy
Indonesia
Thailand
Vietnam
Malaysia
70
Singapore
60
0
50
5
10
15
20
25
30
% GDP
EU & US
40
Source: Oxford Economics/UN Comtrade
30
On the other hand, commodities are relatively less
important for other economies in the ASEAN-6, with
Thailand and the Philippines standing to benefit from
lower oil prices as they are net importers of energy.
EM Asia (ex China)
20
10
China
0
1998
means that developments in China should not
significantly constrain their continued industrialisation.
Thailand also appears well placed in the region to
benefit from increased demand for consumer goods
and services as China rebalances. Among the ASEAN-6,
Singapore and Malaysia are likely to be more vulnerable
due to their position in regional supply chains for
electronic goods.
2002
2006
2010
2014
Source : Oxford Economics/Haver Analytics
China is now the largest trading partner for Singapore,
Malaysia and Thailand. It represents the second-largest
trading partner for Indonesia and the third-largest for the
Philippines and Vietnam.
Different countries’ vulnerability to slower growth in
China is also influenced by the nature of their exports.
Countries such as Indonesia, the Philippines and Vietnam
are less exposed to manufacturing sectors where China
has excess capacity, and their wage competitiveness
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Currency and competitiveness
Countries in the region also vary in terms of their
exposure to potential further shifts in the Yuan exchange
rate. In fact, the trade-weighted value of the Chinese
Yuan (CNY) has actually moved remarkably little since
mid-December, despite declining against the USD
recently. But mixed signals and uncertainties regarding
the path of policy in Beijing could trigger more
significant moves in the future.
Owing to solid current account surpluses and fast
productivity gains, we expect the CNY to weaken
modestly in 2016; but our baseline forecast only sees a
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Q1 2 016
relatively small additional depreciation of 3.5% against the
USD from current levels to 6.8 by mid-2016 and to remain
around that level until late 2017. However, two key factors
could spur a stronger effort to depreciate the currency:
• a further strengthening of the USD, possibly as a result
of better US economic data; or
• a deepening recession in key emerging markets such as
Brazil and Russia, which would cause further depreciations
of these currencies against the dollar, and by extension
against the CNY.
Using Oxford’s Global Economic Model, we assessed the
likely implications of a stronger depreciation of the CNY. In
a scenario where the CNY weakens by 10% vs the USD to
7.5 by Q3 2016 and remains around that level until the end
of 2017, our model simulation shows that Chinese exports
strengthen due to the resulting boost to competitiveness
and there is a small positive effect on Chinese GDP growth
(+0.3% in 2016).
But the global picture is less positive. China’s key competitors
in Asia would experience the greatest impacts on GDP
growth as an improvement in China’s relative competitiveness
in manufactured goods sectors hurts these countries’ exports
in particular. Singapore is, by some distance, the hardest hit
in this scenario.
It is also worth noting that we did not include the potential
for an increase in financial stress and risk accompanying the
CNY depreciation in our scenario. Such an addition would,
of course, result in weaker growth across the board than we
report here.
Figure 3: GDP in 10% CNY depreciation scenario
% difference in level of GDP vs baseline, 2016
China
World
UK
Turkey
USA
Brazil
Japan
Russia
India
Australia
Thailand
Eurozone
Argentina
Malaysia
Philippines
S. Africa
Indonesia
Chile
Mexico
Hong Kong
Singapore
Taiwan
Korea
-0.9
But it is developments in factory gate prices (wholesale
prices) that are probably the main current area of concern.
As illustrated in figure 4, wholesale prices are falling
sharply in several of the ASEAN-6 countries, with yearon-year declines in manufacturing wholesale prices of
more than 5% in Singapore and the Philippines. Annual
wholesale price inflation is also in negative territory in
Malaysia and Thailand, while it is close to zero in Vietnam.
Among the ASEAN-6, only Indonesia has annual wholesale
price inflation that has remained clearly in positive
territory.
Figure 4: Manufacturing wholesale prices*
% year
Singapore
Philippines
Thailand
Malaysia
Vietnam
Indonesia
-15
-10
-5
0
5
10
*latest reading
Source: Oxford Economics/Haver Analytics
Wholesale price developments could point to future
developments in consumer prices, although one reason
for caution in interpreting in this way is that they are also
influenced by collapsing commodity prices; especially
lower oil prices which have led to prices of refined
petroleum products (included in manufacturing) diving
sharply over the last year.
The key risk is not a temporary dip in some price levels
but a broader-based negative interaction of a number
of variables that could lead to sustained weak economic
performance. The threat of such a deflationary spiral
unfolding is likely to be especially large in highly-leveraged
economies: falling prices and asset values may create large
negative balance sheet effects whereby indebted firms
and individuals respond to rises in their real debt burden/
falls in their net worth by increasing saving and reducing
spending. This again risks giving rise to negative secondround effects on demand and asset prices.
-0.6
-0.3
0.0
0.3
Source : Oxford Economics
Disinflationary forces are growing
In the wake of China’s economic slowdown, and the
accompanying sharp drop in global commodity prices, much
attention has also been given to the risk of the ASEAN-6
countries sliding into deflation.
Deflation is defined as a sustained fall in price levels, but
there are a variety of different price measures we can look
at in ASEAN, which tell slightly different stories. In terms of
headline consumer price inflation, there are negative readings
currently in Thailand and Singapore, while inflation is also
currently at low levels in Vietnam and the Philippines. That
said, at least part of the weakness in consumer prices is due
to falling energy costs – measures excluding energy costs
generally remain positive across the region.
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Japan’s experience in the 1990s shows that deflation risks
can build very rapidly, given the right shocks. What set
off the deflation spiral in Japan were massive drops in
asset prices that created a credit crunch which then fed
back into further declines in asset prices and demand, in
a classic negative feedback loop. This was exacerbated by
the over-leveraged nature of the Japanese after the ‘bubble
economy’ period of the 1980s.
Are there similar risks in Asia today? In terms of asset price
declines, there have, of course, been sharp recent falls
in stock markets, but recent equity declines are (so far)
much shallower than the 50% drop in Japanese equities
seen in 1990-92. Property price falls were arguably
even more important than the decline in share prices in
generating deflation in Japan, with prices halving from
mid-1991 to mid-1993. But there are few signs of such
cataclysmic developments in Asia today; in most countries,
house prices are still rising (although prices are falling in
Singapore).
economic insight – south e a st a sia
Q1 2 016
There are, therefore, some vulnerabilities that could, if
they worsen further, see the deflation risk profile of some
countries deteriorate quickly. A particular danger, in our
view, is if some or all of these elements interact with high
leverage, underscoring the threat from high private sector
debt levels in some countries. Still, our overall view is that
deflation risks in Asia are not yet acute.
Rising debt burdens increase risks
Surges in private debt of this sort can often end badly.
In Asia there have been a number of historic examples of
such debt surges being followed by significant financial
distress, including the Asian crisis of 1997, the property
bust in Hong Kong from 1997-2003, consumer debt crises
in Korea and Taiwan from 2003-2006, and most recently
a property market boom and bust from which Vietnam is
still recovering.
Figure 5: Private sector debt
% of GDP
China
Japan
Singapore
Q2 2005
Q2 2015
Malaysia
Thailand
Vietnam
India
Philippines*
Indonesia
50
100
150
As the slowdown of growth in China can be characterised
as a shock to demand for the economies of South East
Asia, it may be appropriate for the authorities to mitigate
the impact on their domestic economies through a
loosening of monetary and/or fiscal policy. However, the
capacity to do so varies markedly across the region.
Figure 6: Main policy interest rate of central bank
Compounding the risks to the outlook from disinflationary
forces are high levels of personal and corporate debt
in some Asian economies. While the global financial
crisis (GFC) of 2008-09 was followed by a deleveraging
process in most advanced economies, the low interest rate
environment of recent years has contributed to a surge
in debt ratios in many Asian economies, as illustrated by
figure 5. Since 2005, the private debt/GDP ratio has risen
by around 10 percentage points (ppt) in Indonesia and
the Philippines, with a 20ppt rise in Thailand and more
than a 40ppt rise in Vietnam and Singapore.
0
Policy easing can help some economies
200
250
*Data for 2005 and 2014 from the World Bank
Source: Oxford Economics/BIS/Haver Analytics
Although non-performing loans remain low in most
Asian countries at 1-3% of total loans, there is a risk that
financial distress could quickly escalate if macroeconomic
conditions worsen. So, where do the greatest threats lie in
Asia? In our view, consumer debt is probably the greatest
danger area. Rising household debt has been prominent
in driving up overall private debt ratios in many countries
in recent years, and household debt ratios look high in
several countries – especially debt/disposable income
ratios. Debt/income ratios are close to or above 150%
in Singapore and Malaysia and are well above 100% in
Thailand.
%
Japan
Singapore
Thailand
China
Malaysia
Philippines
Vietnam
India
Indonesia
-2
0
2
4
6
8
Source: Oxford Economics/Haver Analytics
Although central bank interest rates are already low in
some places, negative wholesale price inflation means the
real cost of borrowing is still too high. How appropriate
such a real rate measure is will vary across countries
but in a region where manufacturing is a key sector
and corporate debt levels are elevated, such a real rate
measure is undoubtedly important. This argument looks
especially valid for Thailand and Singapore,1 although
with central bank interest rates in these countries already
below 2% they could quickly find that their main policy
rate is approaching zero (see figure 6), forcing them to
turn to unconventional measures (such as asset purchases,
or ‘quantitative easing’) as seen in several advanced
economies. Malaysia and Indonesia may also find it
difficult to ease interest rates as their currencies have
weakened significantly and appear vulnerable.
In most ASEAN-6 countries, we therefore believe the
onus will most likely be on the government to increase
spending and/or lower taxes to stimulate demand in the
economy, compensating for constraints on monetary
policy. Singapore and the Philippines have the most room
in this regard, although upcoming elections in the latter
could create some uncertainties over policy and politics.
Thailand has rather less fiscal space, but would benefit
from government policies to promote more productive
private sector investments.
Malaysia is likely to be constrained from any substantial
boost to government spending as revenues are dampened
by the decline in oil and gas-related income (almost a
third of government revenue came from oil and gas in
2014) and public debt levels are already close to the
constitutional limit. In contrast, the drop in oil and
gas revenues will have less of an adverse impact on
government finances in Indonesia, where they will be
largely offset by a reduction in domestic fuel subsidies.
Looking across the main Asian economies, there is a
noticeable trend towards slower growth in consumer
spending – particularly in the higher-debt countries. For
example, the pace of consumer spending has slowed in
both Singapore and Thailand, compared to its long-term
average. This suggests that while financial crisis conditions
are not present, the build-up of debt may already be
sapping these countries’ growth potential.
Vietnam is already running an expansionary fiscal stance,
with higher current expenditure having contributed to a
debt-to-GDP ratio approaching 60% this year. A gradual
fiscal consolidation is being planned by the authorities
over the next few years to avoid breaching their 65% of
GDP debt ceiling.
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economic insight – south e a st a sia
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Q1 2 016
Figure 7: Government balances
Risks to the outlook remain tilted to the downside, with
a key threat being a deeper-than-expected slowdown in
China which would have spillover effects in the region
through trade, corporate profits, confidence and financial
markets. Other key risks include more acute financial
market volatility and a tightening of financial conditions as
industrialised countries normalise monetary policy, which
would present challenges especially for countries in the
region with high debt levels.
% GDP
1
0
-1
-2
-3
2015
2016
-4
-5
-6
Vietnam
Malaysia
Indonesia
Thailand
Philippines
Singapore
Source: Oxford Economics/Haver Analytics
Prospects for ASEAN economies, 2016-17
With some recent business surveys suggesting that
demand conditions in the manufacturing sector in South
East Asia are beginning to stabilise,2 we continue to
expect a moderate economic recovery to unfold over the
next two to three years. But the region may still expect
periods of financial market volatility in the near term as it
adjusts to China’s new growth trajectory.
The best performers among the ASEAN-6 will be
economies where growth is underpinned by strong
domestic fundamentals and there is room for policy
support. In this respect, we believe that Vietnam, the
Philippines and Indonesia have the best growth prospects
among the ASEAN-6 countries, reflecting healthy
domestic factors such as low debt, macro-stability and
wage competitiveness, which will help them to continue
gaining market share in low-cost industries.
We expect a more muted recovery in Thailand this year,
however, due to higher vulnerability to global headwinds
which are dampening near-term growth prospects.
Likewise, Singapore is facing a challenging economic
environment and we do not expect growth to pick up to
the long-run trend rate of around 3.3% a year until 2018.
Near-term prospects appear more worrying in Malaysia,
with growth expected to slow in 2016 as it contends with
a terms-of-trade shock from lower oil prices as well as a
weak political environment, which is hampering domestic
demand.
Figure 8: Relative GDP performance
% year
8
7
6
2015
2016
2017
After a disappointing 2015, we expect growth to improve
across most of Asia-ex China in 2016, with the exception of
Malaysia. However, a meaningful recovery appears unlikely
in an environment of sluggish Chinese growth, despite
the US and eurozone growing faster next year. Thus, we
look for a subdued, consumption-led recovery that pushes
overall growth in the ASEAN-6 from 4.3% in 2015 to 4.5%
in 2016 and 4.9% in 2017.
Recent indicators in Indonesia have been mixed. The
protracted slowdown in commodity prices is dampening
incomes, while the labour market has lost momentum.
These factors will weigh on household spending and partly
offset the boost from significantly lower inflation. Given
suitable external circumstances, however, we would expect
the central bank to cut rates further in coming months.
In addition, the proposed 2016 budget projects an 8%
increase in infrastructure spending on the year, which will
provide an additional boost to domestic demand.
In Malaysia, despite the prospect of weaker domestic
demand and ongoing external risks, the authorities have
limited policy room to boost growth. The latest drop in
the oil price is undermining the fiscal position and the
central bank also has little room for manoeuvre given the
vulnerability of the currency to capital outflows. The longrunning scandal over state investment company 1MDB is
also eroding confidence and contributing to risk aversion
across the country. With the government facing substantial
challenges, the risk of a ratings downgrade is growing.
In the Philippines, we expect growth to remain on a
strong footing in 2016. Recent surveys show healthy
business and consumer confidence, while loose fiscal policy
should support activity. Efforts to overcome spending
bottlenecks appear to be working, with government
expenditure growing at a much faster pace in the last six
months than in the preceding year.
In Singapore, domestic non-oil exports – and hence the
manufacturing sector – are expected to remain subdued
over the coming year, so economic growth will be reliant
on the service sector (which accounts for around twothirds of the economy). Stronger government investment
and solid spending by households are expected to support
service sector activity, but services related to oil and reexports are vulnerable to continued weakness in regional
trade.
The economy of Thailand is expected to show a modest
improvement in 2016, but the outlook remains clouded by
the repercussions of unresolved domestic political tensions.
We expect growth to be supported mainly by a continued
solid expansion in consumer spending and robust growth
in tourism.
5
4
3
2
1
0
Singapore
Recent economic news
Thailand
Malaysia
Indonesia
Philippines
Vietnam
Source: Oxford Economics/Haver Analytics
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Growth in Vietnam accelerated to 6.7% in 2015 as FDI
reached record levels and export growth stayed strong
despite depressed commodity prices. Our forecast
shows growth staying in the 6-7% range in 2016-18 as
improvements in trade access compensates for slowdowns
in some key trade partners and non-textile industrial
growth promotes export diversification.
economic insight – south e a st a sia
Q1 2 016
ENDNOTES
1
Singapore uses the exchange rate as its main policy tool, but this analysis still indicates a need to loosen policy.
2
For example, the Purchasing Managers Index in Singapore remained below the 50 ‘no change in output’ mark in
December 2015-January 2016, but was slightly improved relative to earlier months.
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For enquiries or additional information, please contact:
Amy Tee, Head of Marketing, South East Asia
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