Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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 BUSINESS WITH confidence icaew.com/economicinsight 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 icaew.com/economicinsight oxfordeconomics.com 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 economic insight – south e a st a sia 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. icaew.com/economicinsight oxfordeconomics.com 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. icaew.com/economicinsight economic insight – south e a st a sia oxfordeconomics.com 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 icaew.com/economicinsight oxfordeconomics.com 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. Oxford Economics Oxford Economics is one of the world’s foremost advisory firms, providing analysis on 200 countries, 100 industries and 3,000 cities. Their analytical tools provide an unparalleled ability to forecast economic trends and their economic, social and business impact. Headquartered in Oxford, England, with regional centres in London, New York, and Singapore and offices around the world, they employ one of the world’s largest teams of macroeconomists and thought leadership specialists. ICAEW is a world leading professional membership organisation that promotes, develops and supports over 145,000 chartered accountants worldwide. We provide qualifications and professional development, share our knowledge, insight and technical expertise, and protect the quality and integrity of the accountancy and finance profession. As leaders in accountancy, finance and business our members have the knowledge, skills and commitment to maintain the highest professional standards and integrity. Together we contribute to the success of individuals, organisations, communities and economies around the world. Because of us, people can do business with confidence. ICAEW is a founder member of Chartered Accountants Worldwide and the Global Accounting Alliance. www.charteredaccountantsworldwide.com www.globalaccountingalliance.com For enquiries or additional information, please contact: Amy Tee, Head of Marketing, South East Asia T (+65) 9108 1517 E [email protected] ICAEW 9 Temasek Boulevard #09–01 Suntec Tower Two Singapore 038989 icaew.com/southeastasia ICAEW Chartered Accountants’ Hall Moorgate Place London EC2R 6EA UK icaew.com © ICAEW 2016 MKTDIG14765 03/16