Download Macroeconomic Policy in Southeast Asian Countries and the Global

Macroeconomic Policy in Southeast Asian Countries and the Global Financial Crisis
Bhanupong Nidhiprabha
Abstract
Southeast Asian countries did not suffer severely from the Global Financial Crisis (GFC).
Their economies rebounded sharply within a year. The second round effect of the GFC is the
global impact of the US policy response. The quantitative easing monetary policy employed
by the Fed led to volatile capital inflows and currency fluctuations. Empirical evidence
indicates that adverse consequences of the GFC depend on structure of the economy as well
as macroeconomic policy applied in response to shocks from export shortfalls. A new
economic environment has emerged when China’s business cycle and movements of the
Yuan affect the conduct of macroeconomic policy in Southeast Asian economies.
1. Introduction
In 2009, the Global Financial Crisis (GFC) reduced demand for exports of Southeast Asian
countries, where exports is a major growth driver. Recession in developed countries led to
contraction in output of Asian countries through export shortfalls. Expansionary and
accommodative monetary policy in response to recession in developed areas, through low
interest rates and liquidity injection caused massive capital inflows to Southeast Asia.
Consequently, Southeast Asian currencies appreciate substantially and exacerbated export
downturn. Southeast Asian countries experienced dissimilar impacts of the GFC, although
their growth paths tend to move closely together. We answer the question why some
countries performed better than others during the time of the crisis by examining
vulnerability and resilience when Southeast Asian countries experience external shocks.
Factors such as structure of aggregate demand and the role of macroeconomic policy
response must have contributed to the depth and duration of recession in the aftermath of the
global economic slowdown.
Section 2 discusses the impact of GFC on export and output. Section 3 examines the impact
of the GFC on the financial sector. Section 4 analyzes business synchronization in Southeast
Asian economies. Section 5 reviews macroeconomic policy response in terms of fiscal and
monetary policy. Exchange rate policy is also examined in light of rapid capital movement.
Section 6 provides concluding remarks.
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2. Impact of the GFC on Growth and Current Account
Because of trade and capital liberalization in Southeast Asian Economies have been
integrated through increasing ASEAN volume of trade, impact of GFC was transmitted to
through monetary and trade channels. Domestic interest rates and capital flows were directly
affected, in particular in countries where capital markets are closely connected to world
financial centers. The direct impact of the GFC on the real sector is through falling export
demand from high-income countries hit by the GFC. It can be said that the 2008 GFC differs
from the 1997 Asian Financial Crisis (AFC), since Southeast Asian financial institutions were
only mildly affected in 2009. Thus, the impact of the GFC was more pronounced in the real
sector than the financial sector.
Malaysia and Singapore, which are the top two high income countries in the region,
experienced considerable growth fluctuations. In 2001, the year of a mild recession in the
US, their output growth declined more than the average of Southeast Asian Economies. In
2009, the impact year of the GFC, output in Malaysia and Singapore contracted more than
other countries in the region. Yet, in just one year after the crisis, both countries showed
resilience by experiencing a spectacular rebound.
Southeast Asian Economies are vulnerable to external shocks from global economic
fluctuations. Except in 2009, Indonesia’s growth rate was lower than the average growth rate
in the region. Since 2000 Myanmar’s economy has expanded at a higher rate than the
regional average, because of low base income level, increasingly open economy and more
reliance on market mechanism. One of the reasons behind differences in output growth is
underlying economic structure that exposes each country to external shocks through
differences in trade and capital flow linkages.
Singapore, the most opened economy, has an average share of exports to GDP at 210 percent
between 2000 and 2011. On the other hand, Myanmar’s average share of export to GDP is
less than one percent. Thus, whether a country performs poorly in the aftermath of the GFC
depends on the importance of exports in GDP. Malaysia and Singapore’s volatile output
growth and relatively stable growth of Myanmar economy are extreme cases. Indonesia, the
largest economy in the region, depends less on exports, with accounted for 31 % of GDP.
Indonesia will not be subjected to virulent export fluctuations as much as countries with
higher export dependency such as Cambodia (59%), Thailand (66%), and Malaysia (106%).
During the GFC in 2009, Vietnam and Cambodia, whose export dependency ratio was greater
than 60 percent, experienced a deep contraction in output. Figure 1 clearly demonstrates that
Southeast Asian economic growth rates were synchronized in terms of boom and bust caused
by global output fluctuations. Exceptionally high degree of globalization implies overexposure of the economy to external shocks. It is imperative to examine the merit of exportdriven growth strategy. If Southeast Asian economies rely more on domestic-demand led
growth, can the countries still exploit the economies of scale and competitive environment of
outward-oriented development strategy? The answer to this question is related to availability
of effective macroeconomic policy to dampen magnitude of business cycles and shorten the
2
length of recession. The V-shaped recovery is a pattern of Southeast Asian Economies in the
aftermath of global economic slowdown in 2001 and 2009.
Figure 1
Source: ADB Statistical Data Base
World trade volume fluctuates more widely than world output growth. As such rapid world
economic expansion translates into an acceleration of export and output growth in export-led
growth economies. Similarly, a decelerating world output growth results in poor export
performance and a much lower GDP growth rate in export-dependent countries.
This is what happened in 2001, 2009, and 2011 (Figure 2). Synchronized output growth is
caused by similar degree of export exposure to the world market. Figure 2 compares the
average export growth rate between the period 2000-2008 and the aftermath of the GFC.
After a sharp rebound in 2012, ASEAN growth slowed down sharply in 2013. No Southeast
Asian economies were spared from the impact of world recessions. Strong rebound of exports
of Southeast Asian Economies bode well for the resilience and flexibility of the export sector
in response to changing demand conditions.
3
Figure 2
Source: ADB Statistical Data Base
After the 1997 Asian Financial Crisis (AFC), saving-investment gap in the region was
expanded as a result of investment collapse. With wider investment-saving gap, Southeast
Asian economies in general experience current account surplus. The GFC reduced exports
and therefore lowered the size of current account surplus in 2008. An enlarged current
account in Indonesia, Thailand, and the Philippines, and Singapore was due to output
contraction in 2009, which also curtailed import growth.
Table 1: ASEAN-5: Current Account Surplus After the GFC
Indonesia
2000-2007
2008
2009
2010
2011
Malaysia
2.8
0.0
2.0
0.7
0.2
Philippines
3.1
5.1
4.5
3.4
3.6
1.0
2.1
5.6
4.5
3.1
Singapore
18.7
14.7
19.0
21.8
24.6
Thailand
3.0
0.8
8.3
4.1
1.7
Source: ADB Statistical Data Base
It should be noted that current account surplus may not necessarily imply the strength of the
economy. A fast growing economy would require importation of capital goods. If demand for
imports is income elastic, surplus current account deficit might reflect low growth and
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enlarging saving gaps. This is the case of Thailand and the Philippines, where investment
opportunities were relatively low in 2009 and 2010.
Table 2: Current Account Deficit (% GDP)
Cambodia
2002-2007
2008
2009
2010
Lao PDR
-4.2
-10.1
-8.9
-8.0
Myanmar
-1.4
1.5
-1.1
0.5
Vietnam
3.6
4.9
3.1
3.3
-3.3
-11.9
-6.8
-4.0
Source: ADB Statistical Data Base
Although Lao PDR and Myanmar experienced current account surplus prior to the GFC, their
surplus declined in 2009. Vietnam and Cambodia have sustained current account deficit for
many years. A large increase in current account deficit in the two countries as the world
economy slowed down at the onset of the GFC in 2007, requires an examination of their
exchange rate policy whether overvaluation of their currencies prevent external equilibrium
adjustment. Another reason for experiencing current account deficit is foreign direct
investment. When CLMV countries receive massive capital inflows in the form of FDI, it
usually drives up imports of machinery and construction materials. In 2013, Laos
experienced trade deficit for the first time in recent decades because in 2011 and 2012 FDI
rose more than 40%. The large deficit would put the pressure on the kip because the country
has reached a critical low level of international reserves.
Figure 3
Note: Elasticity of Lao exports is based on Thailand’s export growth. All estimated. Coefficients are statistically significant
at 0.01 level of confidence.
5
The impact of growth slowdown in China in 2013 led to dismal export performance in the
region. When Thai economy decelerates, exports of Laos to Thailand will be adversely
affected. The regional economy has been connected by increasing trade intensity of the years
of trade liberalization within the group. Laos’ major exports are hydropower to Thailand.
Table 3: Impact of the GFC on ASEAN Export Growth: 2009-2011
Brunei Darussalam
Cambodia
Indonesia
Lao PDR
Malaysia
Myanmar
Philippines
Singapore
Thailand
Viet Nam
2000-2008
18.4
13.9
12.7
17.2
10.3
20.7
4.2
13.3
13.3
21.0
2009
-32.0
-14.2
-15.0
-3.6
-21.1
8.8
-21.7
-20.2
-13.7
-8.9
2010
30.2
29.7
35.4
65.8
26.5
17.7
34.0
30.6
28.7
26.5
2011
33.1
35.8
29.0
6.1
14.4
3.9
-6.7
16.5
16.0
34.2
Source: ADB Statistical Data Base
The impact of GFC on ASEAN can be observed from Table 3. The export slump in 2009
was a sharp contrast to the high export growth from 2000 to 2008. The sharp rebound of
exports in 2010 and 2011 bodes well for the resilience of these economies, pointing out to the
strong world income effects on imports, despite strengthening ASEAN currencies.
Table 4: Aggregate Demand: Structural Differences and Similarities
Percent to GDP (Average 2006-08)
Brunei Darussalam
Singapore
Malaysia
Thailand
Indonesia
Viet Nam
Philippines
Cambodia
Myanmar
Private consumption
19.2
38.8
44.7
53.7
62.3
65.2
74.1
79.5
82.6
Exports
Tax revenue
72.1
210.4
105.7
66.4
31.2
68.5
42.6
59.1
0.2
Source: ADB Statistical Data Base
6
33.7
12.9
14.5
15
12.7
24.1
13.6
9.8
3.9
Because of high level of average propensity to consume in low income countries, their fiscal
stimulus will have stronger impact than high-income countries such as Singapore and Brunei.
3. Impacts of the GFC on the Financial Sector
Evidence of the nexus between growth and financial development are abundant. Strong
economic growth requires financial resources. In developing countries, where direct finance
through capital markets is not pervasive, bank credit remains fundamental source of indirect
finance to investors. ASEAN economies in Asia are bank-based economies, relying heavily
on bank credit expansion for capital accumulation. The ratio of bank loan to GDP is regarded
as a measurement of financial deepening process. Figure 4 indicates that Laos and Cambodia
are still at the early stage of economic development. The bank credit to GDP ratio in both
countries is much lower than other ASEAN-5.
Figure 4
ASEAN Bank-Based Economies
160
Bank loan (% GDP)
140
Cambodia
120
Indonesia
100
Lao PDR
80
Malaysia
60
Philippines
40
Singapore
Thailand
20
Viet Nam
0
Source: ADB
While the corresponding ratio in Malaysia and Thailand are above 100 % of GDP, it is
considerably lower in Singapore, where direct finance for investors are available in stock and
bond markets. The ratio demonstrates the strength of the economy. Low output growth
generates low demand for bank loans. During the boom, the demand for bank credit increases
and banks are more willing to lend than during the slump. The impact of the GFC can be
observed from Figure 4. Except Singapore, the rising trend of the bank-GDP ratio stagnated
in ASEAN-5, which reflects a slowdown in economic activities. Even in Vietnam, where the
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bank credit expanded much faster than GDP growth, bank loan growth had decelerated in
2008 before resume the rising trend, which continued since 2000.
When banks have large loan exposure to the export sector, the GFCadversely affected bank
performance. Since the 1997 Asian financial crisis, in most Southeast Asian economies, nonperforming loans have declined steadily from 2005 to 2011. In 2009, there was a small surge
in the level of non-performing loans, but it was well below 4 percent (Figure 5). In addition
to low exposure to export sector, Southeast Asian commercial banks invested little in
collateral debt obligations backed by the US subprime loans. Southeast Asian banks remain
healthy and did not suffer from the GFC.
Figure 5
Source: ADB
Singapore banks experienced the lowest level of non-performing loans, thanks to strong
growth of the real sector. Banks in Indonesia and Malaysian were able to reduce the NPLs
down to 2 percent in 2011, thanks to the strength of both economies. The rate of return on
bank equity of banks in strong recovery economies increased considerably once a rapid
recover occurred in line with bank credit expansion. Thailand had the highest rate of nonperforming loans among the ASEAN-5 countries (Figure 5). Thai banks did not perform well
in 2006 and 2007 due to uncertainties from political turmoil. Nevertheless, the declining
trend of NPLs continued from 2005 to 2011. Southeast Asian countries were well prepared
as they underwent financial reform after the 1997 crisis. Prudential rules and regulations have
been established before the eruption of the GFC.
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It has been argued that the lack of developed capital and bond markets in developing
countries attributed to the AFC. The existence of the so-called original sin can be viewed in
Figure 6. The percentage of stock market capitalization in Singapore and Malaysia is the
highest in ASEAN countries. Financial factors matter in economic development. Firms in
these economies have alternative means of financing investment projects, thereby relying less
on bank borrowing. Other countries in the region, with lower level of development, exhibit
lower value of stock market capitalization. Firms in these economies rely relatively more on
bank loan than firms in Singapore and Malaysia. In 2003, there was a rebound from the
2001world recession. Share prices in Singapore, Malaysia, Indonesia and Thailand also
increased in response to economic upturn.
Note the peaks and the troughs of the market capitalization between 2000 and 2011. There
are remarkable similar. The 2008 GFC severely hit ASEAN stock markets. The depth of the
cycle was far more in ASEAN countries with more open capital markets. The rebound are
also more spectacular in countries with closer ties with world capital markets.
Figure 6
Stock Market Capitalization
300
Percent to GDP
250
Indonesia
200
Malaysia
150
Philippines
Singapore
100
Thailand
Viet Nam
50
0
Source: ADB
Southeast Asian business cycles have become synchronized since these countries opened up
their capital account and began reducing tariff among group members. Movement of Stock
prices in Singapore, Indonesia, Malaysia, the Philippines, and Thailand are increasingly
related, due to the fact that financial and real sectors of ASEAN-5 have been firmly
integrated. Not only their money market interest rates are moving in line, stock market
returns in these countries are also moving together.
9
Using Singapore rate of return on the stock market as a benchmark, the correlation
coefficients of stock returns between ASEAN-5 were above 0.9 at the height of the GFC
between 2008 and 2011 (Figure 7). But in 2006, the correlation of stock return in Thailand
and the Philippine markets was below 0.5, indicating that domestic conditions still matter for
investor sentiment. Capital inflows from developed and trouble economies into Southeast
Asian economies demonstrated how portfolio investors in the US and Eurozone regarded
these economies as a buoyant region with strong growth potential.
Figure 7
Source: ADB
Co-movements of stock prices in ASEAN-5 bode well for the impact of external factors on
ASEAN-5 market sentiment. In 2012, the correlation coefficients declined in Indonesia and
the Philippines. Domestic factors have exerted influence on the market rate of return. As
long as the wealth effect on consumption is weak, consequences of volatile stock markets on
private consumption will be small. A more serious risk is in the fluctuations of the exchange
rate resulted from rapid capital inflows and outflows.
A danger of ASEAN capital market integration is that shocks can be transmitted easily in
time of boom and bust. Southeast Asian economies must create instruments to cope with
future shocks. Macroeconomic policy response must be readily available to cope with
external shocks caused by over-exposure to globalization. As the Quantitative Easing (QE)
monetary policy of the Fed is tapering off, there will be a sudden outflow of portfolio
investment. Under this situation, ASEAN currencies would depreciate and adversely affect
the export sector.
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4. Business Cycle Synchronization
The evidence that international capital flows contributed to business cycle synchronization
was provided by Kim and Kim (2013). Capital movements caused boom-bust cycles in the
region. Booming output is driven by consumption and investment following capital market
liberalization. If this hypothesis is true, output contraction will occur after the Fed ends
quantitative easing policy, because of massive capital outflow would flee Southeast Asian
countries. ASEAN economies would succumb to another recession as a consequence of the
Fed’s liquidity tapering monetary policy.
Fumihide (2011) used a dynamic general equilibrium model for eight East Asian developing
economies and found that increases in business synchronization are largely attributed to
growing fragmentation of production and network trade. Jean-Pierre and Essahibi ( 2011)
provided the evidence that increasing bilateral trade in East Asia resulted in increased longrun business synchronization, while short-run cycles are related to individual country shocks
and convergence of macro policy responses to shocks. Fabio and Rasmus (2008) found
evidence that business synchronization in East Asia reflect strong export synchronization
rather than consumption and investment dynamics, while the oil price and the yen-dollar
exchange rate also play a role in synchronizing activity. Cortihas (2007) shows a positive
correlation between intra-industry trade and business synchronization in ASEAN.
Figure 8:
Output Growth Correlation: ASEAN-5
Source: ADB
11
Bilateral trade intensity and growing network trade explain high correlation of output growth
among Singapore and other ASEAN-5 countries (Figure 8). Reliance on export-led growth
strategy leads to co-movements of ASEAN-5 growth rates. Distance also determines volume
of trade between countries with common boarders. Similar export pattern implies that a
positive or a negative demand shock from the world market can affect output growth.
In the group of transition economies, CLMV growth rates are also closely related. The
correlation coefficient of output growth rate between Vietnam and Myanmar was 0.94, 0.88
for Vietnam and Cambodia, and 0.84 for Cambodia and Myanmar. Thus business cycle
synchronization also exhibits among CLMV countries. Except for Vietnam, Cambodia,
Laos, and Myanmar share common border with Thailand. Business cycle in CLMV must also
synchronize with the ASEAN-5.
Figure 9:
Business Cycles Synchronization: ASEAN-5 and CLMV
Source: calculated principle components of growth rates
Principal Growth Components (PGC) of output growth rates in ASEAN-5 and CLMV
countries are illustrated in Figure 9. Between 2000 and 2011, the correlation coefficient
between the two series is only 0.52. Nevertheless, the two growth cycles have moved more
closely after 2007, after the region experienced the GFC. Southeast Asian economies have
been more integrated to the world economy through increasing volume of intra-ASEAN
regional trade. During 2000 and 2011, ASEAN-5 countries have relied heavily on exports as
an engine of growth. Using the same principal component analysis to extract common export
growth rates from the two regional groups, we find that the correlation coefficient of the
principal components of ASEAN-5 export growth and the PGC for output growth is at 0.94,
indicating that export cycles and growth cycles are closely related. Thus boom-bust cycles
are related to export cycles. A common export demand for commodity shocks would lead to
similar pattern of output fluctuations. Furthermore, using the PGC measures, ASEAN
growth cycles are related to CLMV export cycles with a correlation coefficient of 0.6. The
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ASEAN-5 and CLMV are increasingly interconnected in such a way that booms and busts in
ASEAN-5 can generate spillover effect to neighboring countries’ exports.
Growth was driven by private consumption in ASEAN-5 (Figure 10) The world recession in
2001 witnessed a decline in household consumption in Singapore, Malaysia, and Thailand. In
In 2009, the GFC also hit ASEAN-5 badly in terms of reduction in consumer spending.
Indonesia and the Philippines did not suffer much from the GFC because consumption was
not severely affected. How to maintain private consumption is the key question to minimize
the impact of export demand shocks during the world economic downturn.
Figure 10
Source: ADB
The GFC hit the economy indirectly through its impact on private consumption. A sharp fall
in private consumption was caused by output contraction. With uncertainty, consumers
revised their expected income downward. When consumers postponed purchasing consumer
durables, excess output capacity rises. Postponement of private investment was due to low
capacity utilization in plants and equipment. Indonesia’s private consumption did not
contract, unlike other ASEAN countries. Since Indonesia has a larger share of consumption
expenditure in GDP, Indonesia did not suffer much, unlike Thailand, Singapore, and the
Philippines.
In general, consumption share in GDP falls as the level of per capita income rises. If a lowincome country experiences an export shortfall, it can offset the fall by stimulating domestic
demand through fiscal spending and by maintaining domestic consumption. The recession
will be deeper in countries where private consumption share is low, in particular when
consumer confidence was subdued. In an economy with large share of private consumption,
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fiscal multiplier will be higher than high-income countries with a smaller share of private
consumption in GDP. In this type of economy, fiscal stimulus does not need to be massive
provided that consumer confidence remains high. In 2007, when investor sentiment and
consumer confidence was low, fiscal stimulus was not effective as it should have been under
stable political situation.
Lipsey and Sjoholm (2011) argue that Indonesia has received lower Foreign Direct
Investment (FDI) than other countries in the region because of poor business environment,
inefficient government institutions, low level of human and infrastructure capital formation.
Athukorala and Swarnim (2011) observe that Malaysia’s relative attractiveness for FDI in the
region has eroded due to dualistic investment regime and narrow domestic human capital
base. Nevertheless, Malaysia benefits from a complementary FDI relationship with China as
a location of high-end activities within global production networks.
If FDI is a small proportion of total capital formation, fluctuation on total investment will
depend on factor affecting domestic investment. And if FDI is complementary to domestic
investment, investment cycles will be dictated by investment environment which is also
shaped by macroeconomic factors.
Figure 11
Corporate Income Tax Rates
40
35
percent
Vietnam
30
China
Thailand
25
Indonesia
Singapore
20
Malaysia
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
15
There is a race for ASEAN countries to cut corporate income tax to attract FDI Singapore
has led the group of cutting corporate tax rate. Vietnam has been aggressive in reducing the
tax from 35 % in 1998 to 25% in 2013. By 2013, Indonesia, Vietnam, and Malaysia and
China employ the rate of 25%. Thailand followed China in terms of a sudden cut in the
corporate tax rate from 30 % to 20% within two years. At this rate, Thailand’s corporate
income tax rate is the second lowest rate in the region, next to Singapore.
14
Timing of the tax cut is crucial as it meant for stimulating foreign and domestic investment in
time of economy slowdown. It remains to be seen whether cutting tax rate can divert FDI,
because there are other fundamental factors determining the attractiveness of FDI. Note that
the role of automatic fiscal stabilizer will be reduced because of lower tax rates.
Figure 12
Source: ADB Statistical Data Base
Capital formation slowed down in 2008 and 2009 when the GFC hit the region, because
investor sentiment and consumer confidence had deteriorated. Bad news on the collapses of
financial institutions, stock market crashes in developed countries, and intensified Eurozone
debt crisis delayed investment decision. Since investment is an important source of output
fluctuation, to reduce deviation from long-term growth path, macro policy must stabilize
investment fluctuations. The rebound of investment in 2010 was brief because of imminent
double-dip recession in Europe and the US. Decelerating output growth in China and India
further dampened investment outlook. It has become clear that these Southeast Asian
economies bear the brunt of the GFC with a large fall in capital formation, which would
ultimately affect their long-term growth path. An important question is whether low interest
rates can revive private investment in these economies.
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5. Macroeconomic Policy Responses
If public debt in Southeast Asian economies has not reached a critical level, expansionary
fiscal policy can still be used to stimulate private spending to compensate export shortfalls in
anticipation of the imminent world recession. Likewise, as long as the key policy rate of the
Central Bank is far above zero, expansionary monetary can be employed to stimulate
consumption and investment expenditures.
Tang et al. (2013) investigate the effectiveness of fiscal policy of ASEAN nation and
concluded that government spending has weak impact on output, while tax increase has
expansionary impact on output due to concern over public finance during Asian and global
financial crisis. Fiscal spending can be used as a short-term countercyclical policy in
Thailand. If Tang’s hypothesis is true, a tax reduction can produce unconventional impact on
output contraction. Green (2010) find that although monetary policy was employed in
response to the global financial crisis in Southeast Asia, fiscal expenditure was slow to be
used. It should be noted that even if discretionary fiscal policy was too slow to react to
business cycles, automatic fiscal stabilizers can help mitigate the impact of global financial
crisis.
Singapore has run budget surplus before the GFC. From 2000 to 2008, Singapore ran budget
surplus at 6.4 % of GDP on the average (Table 6). However, the surplus declined in the
aftermath of the GFC. Expansionary fiscal policy was employed to raise domestic aggregate
demand to compensate a decline in exports. Unlike other countries that regularly run budget
deficit, Southeast countries with sufficient fiscal space can conduct expansionary fiscal policy
to compensate shortfalls of external demand. Budget deficit of the Indonesia government is
low relative to other ASEAN countries. The government did not have to resort to fiscal
stimulus as much as Malaysia, the Philippines, and Thailand. These three ASEAN countries
are more exposed to trade shocks and they rely less on domestic consumption.
Table 6: Budget Deficit After the GFC
CLMV
Cambodia
Lao PDR
Myanmar
Viet Nam
(% GDP)
2000-08
2009
2010
2011
-1.6
-3.7
-2.4
-1.4
-6.3
-3.3
-4.6
-3.9
-3.1
-2.2
-4.5
-4.5
-4.5
-1.2
-4.4
-2.8
6.4
-1.7
-1.6
-6.7
-3.7
1.6
-3.9
-0.7
-5.4
-3.5
7.7
-2.4
-1.2
-4.8
-2.0
4
-1.8
-2.5
ASEAN-5
Indonesia
Malaysia
Philippines
Singapore
Thailand
Source: ADB
16
Public spending was enhanced in Southeast Asian economies in response to the Global
Financial Crisis. Countries that usually run budget deficit were able to stimulate their
economies during the recession. Because of responsive of tax revenue to output, budget
deficit declined relative to GDP when the V-shaped recovery took place.
For transition economies, the GFC led to enlarged budget deficit. A sharp fall in tax revenue
coupled with a rise in public spending caused a large budget deficit in Cambodia, Vietnam,
Lao PDR, and Myanmar (Table 6). Similar to other ASEAN economies, the deficit situation
improved when the economy turned around.
Vietnam, Thailand, the Philippines, Indonesia, and Myanmar experienced lower tax revenue
in 2009. The GFC did have an impact on tax revenue. Except Malaysia, Southeast Asian
countries were able to collect more tax revenues after the economic recovery in 2010. Tax
revenues rise and fall with output growth; thereby producing some degree of automatic fiscal
stabilizers.
In terms of monetary policy instruments available to respond to changing external demand,
countries with less sophisticated financial institution would find it difficult to cope with
external shocks. Pham and Riedel (2012) argued that financial sector liberalization precludes
Vietnam from pursuing an independent monetary policy to control inflation. Pegged
exchange rate and free capital inflow complicate the conduct of implementing monetary
policy in addition to the lack of monetary policy instruments, resulting in highest inflation
rate in Southeast Asia.
Singapore is an open economy with free flows of trade and capital. The movement of the
SIBOR rate is in line with the Libor and the federal funds rate. Some Southeast Asian
countries that have yet to develop the financial sector and capital markets do not possess
monetary policy instruments similar to those which have already established the link between
money and capital markets. Viewed in this light, expansionary monetary policy can mitigate
the impact of global slowdown, using conventional instruments such as key policy rate of the
central bank.
17
Figure 13
Source: ADB
When interest rate differentials are narrower, monetary policy stance is relatively more
expansionary than the rest of the world (Figure 12). In 2007, Indonesia, Malaysia, the
Philippines, and Thailand aggressively cut their policy rates. The expansionary monetary
policy continued between 2010 and 2012 in response to global economic slowdown.
The money market interest differentials among Southeast Asian nations have been narrowing
since 2002, in particular for Indonesia, Malaysia, and the Philippines. With more open
capital account, it is very difficult to pursue an independent monetary policy. Nevertheless,
the Bank of Thailand has raised the interest rate to ward off inflationary pressure, thereby
creating a wider interest rate gap which can lead to more capital inflows. As a result, the baht
has strengthened against the dollar relative to other currencies in the region. Consequently,
stronger domestic currencies can dampen inflationary impact from maintaining low interest
rate policy that might stimulate domestic demand.
Table 7: Growth Rate of Broad Money: ASEAN-5
Indonesia
2005-06
2007
2008
2009
2010
2011
Malaysia
Philippines
Singapore
Thailand
15.6
16.3
15.9
12.8
7.1
19.3
14.9
13.0
15.4
16.4
9.5
13.4
9.5
7.2
14.4
10.7
15.4
7.7
10.7
6.5
13.4
12.0
11.3
8.6
10.0
6.3
9.2
6.8
10.9
15.2
Source: ADB
18
From 2007 to 2011, money supply and the price level in Indonesia grew faster than other
ASEAN-5 countries (Table 7). The rupiah would also depreciate further because of rising
inflationary pressure. In 2013, Bank Indonesia raised its key policy rate by 25 basis points to
6 %, ending its loose monetary regime to curb rising inflation, despite weakening global
commodity prices and investment activity. Inflation in Indonesia was suppressed by
subsidized fuel prices. However, acceleration of inflation would occur when the fiscal
burden of the fuel subsidy is so high that the government has to phase out the program.
Inflationary expectations will rise when food prices increases following more realistic fuel
prices. The central bank will have to raise the key policy rate to contain inflation. There is
always a trade-off between price stability and output growth.
In transition economies, financial development is taking place with widespread financial
services provided by commercial banks. While Singapore, Thailand, Malaysia, Indonesia and
the Philippines controlled their monetary growth effectively, Vietnam, Cambodia, Myanmar,
and Lao PDR let their money supply grew rapidly (Table 8). For fast growing transition
economies, where the demand for money increases more rapidly than income, inflationary
pressure will be mitigated as the velocity of money will not rise. Inflation in Myanmar and
Lao PDR remained subdued, as opposed to Vietnam and Cambodia.
Table 8 : Growth Rate of Broad Money: CLMV
2005
2006
2007
2008
2009
2010
2011
Cambodia
Lao PDR
Myanmar
Vietnam
15.8
40.5
61.8
5.4
35.6
21.3
21.5
7.9
26.7
38.7
18.3
32.4
39.1
25.2
27.3
27.3
29.9
14.9
30.6
42.5
30.5
30.9
29.7
46.1
20.3
29.2
33.3
12.1
Source: ADB
Notwithstanding the prevalent dollarization in CLMV, their monetary growth rate is much
higher than other ASEAN-5. During the transformation from rural to urban areas, the demand
for money would increase. If excess supply of money exists as a result of financing budget
deficit, inflationary pressure will build up. In 2012, property prices in Laos increased by 15
% , as a result of foreign investment in large-scale real estate projects.
19
Figure 14
Source: ADB
As observed by Takagi and Kozuru (2010), output and price correlations in Asia have
increased in post-crisis Asia. Shocks originating within the region have risen. Increasing
interdependence results in co-movements of output and price cycles. The greater regional
interdependence does not imply weaker linkages with the rest of the world.
It is not only output cycles that are synchronized, inflation trajectories in Southeast Asia
show a similar pattern: decelerating during the slump in 2009 and accelerating after the
recovery. These countries experiencing booms and busts at the same time would also have to
withstand excess demand pressure on the price level. Price stability in Southeast Asian
economies depends largely on the ability to control money supply, which is the result of
exchange rate policy and method of financing deficit budget. Southeast Asian economies are
subject to similar external supply shocks that would temporarily threaten price stability, but
price stability can be maintained in the long run provided that aggregate demand can be kept
in line with production capacity. In other words, if inflation is driven by demand side, there
will be a trade-off between growth and price stability. High output growth must be sacrificed
to curb inflationary pressure. If inflation is driven by supply side such as energy shocks,
output growth and inflation rate would be negatively correlated. Fiscal policy and monetary
policy must be coordinated to strike the balance between price stability and output growth.
20
Figure 15
Source: ADB
Other Southeast Asian economies that depend on exports of traditional commodities would
not allow their currency to appreciate to the extent that their exports would be hampered.
Myanmar and Cambodia has maintained exchange rate stability. Lao PDR had fixed the kip
since 2003 and let it depreciate by more than 30 percent in 2005. The Bank of the Lao-PDR
has consistently used a managed floating exchange rate regime to maintain the exchange rate
stability. With continued capital inflows, Lao PDR has allowed its currency to appreciate
against the dollar and depreciate against the baht of Thailand, its major trading partner.
The Vietnam dong has depreciated more than 45 percent since 2000, because it has to resist
the real exchange rate appreciation caused by high inflation. The rate of depreciation of the
dong accelerated after the GFC, making Vietnamese exports more competitive in the markets
where they compete with other Southeast Asian countries. The currency depreciation can
also lead to higher imported inflation rather than adding to gain in international
competitiveness. Vietnam has endured the highest inflation rate in the region. However, the
high rate of currency depreciation would not hurt the banking sector if Vietnamese banks do
not borrow heavily from abroad in dollars and it can attract more foreign investment from
neighboring countries. Inflationary expectations are important as it can generate speculation
in property and foreign exchange markets. After a steep devaluation, inflation may be
accelerating if it fuels inflationary expectations. As long as there is a large difference in the
official and the market rates of the dollar, activity in the black market remains. In 2012,
inflation in Vietnam was 9.2 %, yet monetary policy was expansionary. The State Bank of
Vietnam made cuts in several key policy rates more than six times to stimulate demand. In
21
2012, GDP grew by 5 %--the lowest growth rate since 1999. In Vietnam, tt seems that growth
is a major priority compared to price stability.
If growth is driven by exports, an economy can be subject to loss of international
competitiveness caused by domestic currency appreciation. Since 2000, Malaysia ringgit,
Singapore dollar, and Thai baht have appreciated substantially against the dollar, despite
intervention by the central banks. While the peso had depreciated from 2000 to 2004, it has
been on the rising trend against the dollar since then. Indonesia experienced more fluctuations
in its currency value, but it has appreciated after the global financial crisis. During the US
mild recession in 2001 and the financial turmoil in 2009, domestic currencies of these
Southeast Asian economies similarly appreciated against the dollar. This rising trend still
continued into 2013.
Brunei, Singapore, and Thailand experienced currency appreciation the most, followed by
Malaysia. Indonesia experienced the lowest appreciation rate, while the Philippine peso
reversed the depreciation trend and regained its original value in 2000. Currency appreciation
is a natural consequence of surplus balance of payments. An attempt to resist to the trend of
currency appreciation can be counter-productive as undervaluation of domestic currencies
can further complicate macroeconomic management. The fear of appreciation can be
unwarranted since exports are more sensitive to the output effect of changing world trade
volume than substitution effect of the currency appreciation.
Figure 16
Source: ADB
The currency appreciation did not hurt exports as much as the appreciation rate, because
some of these countries’ exports also require imported intermediate products. The fact that
export structure of these Southeast countries has changed from final to intermediate
manufactured products implies that the loss of competitiveness caused by currency
appreciation would be proportional to their export composition. The lower is the share of
22
final manufactured exports in total exports, the greater the burden of currency appreciation
imposed on exports.
Because of large capital inflows into Southeast Asia in the aftermath of the GFC,
appreciation of currencies should not be resisted. Although currency appreciate might slow
down exports, it can also mitigate the impact of imported inflation. By resisting the trend of
currency appreciation, the central banks must intervene in the foreign markets. Accumulation
of international reserves leads to expansion of the monetary base, which result in rising price
levels in the non-traded sector caused by expansion of domestic credit. Adverse
consequences of the Dutch disease have been demonstrated in the form of property bubbles in
Southeast Asian countries before the 1997 Asian financial crisis. With increasing flows of
capital into Southeast Asia, in particular CLMV countries, they might commit the same
policy mistake as some ASEAN-5 did in the early 1990s.
Because of its increasing importance in the global economy, Chinese output growth shapes
the business cycle of Southeast Asia. In addition, the movement of the renminbi affects
direction of Southeast Asian currencies. To explore this hypothesis, we use the Real
Effective Exchange Rates (REER) indexes, a measurement of the competitiveness provided
by the BIS, to examine the influence of renmini, compared with the yen and the dollar. A
Vector Autoregressive Regression (VAR) is used to capture responses of REER of the
ASEAN-5 countries to changes in the REER of the yen, the dollar, and the renminbi. Using
monthly data provided by BIS from January 2000 to June 2013, we divide the data into two
sets: before and after the GFC. The impulse response profiles are reported in Figures 17 and
18. In both periods, ASEAN currencies were affected by the dollar, the yen, and the renminbi
in descending order. An appreciation of these three currencies causes depreciation of ASEAN
currencies.
In the period prior to the GFC, from 2000 to 2007, the dollar had the greatest impact,
followed by the yen, on the movements of the REERs. An appreciation of the dollar caused
an immediate depreciation of ASEAN currencies longer than 10 months. After the GFC,
during 2008-2013, the influence of the renminbi has the greatest impact on ASEAN
currencies, dominating the dollar and the yen. Depreciation in the dollar and the yen cause
appreciation of the renminbi, which in turn causes depreciation in ASEAN-5 currencies. The
peak of the impact occurred within three months for the baht, the peso, and the rupiah, while
it takes six months to see the largest depreciation of the ringgit. An appreciation of the
renminbi causes an abrupt depreciation of the Singapore dollar, due to its greater flexibility.
The impact of a change in the movement of the renminbi is longer than 10 months.
Renminbi depreciation leads to losses of competitiveness of the ASEAN currencies. Viewed
in this light, a slowdown in China’s economic growth and depreciating renminibi call for a
more aggressive stimulus from fiscal and monetary policy in anticipation of a recession
brought about by China’s business cycles.
23
Figure 17: ASEAN-5 REER Responses: 2000-2007
Response of BAHT to Cholesky
One S.D. Innovations
Response of PESO to Cholesky
One S.D. Innovations
0.0
0.0
-0.2
-0.4
-0.4
-0.8
-0.6
-1.2
-0.8
-1.6
-1.0
-2.0
1
2
3
4
5
6
RENMINBI
7
8
YEN
9
10
1
2
USD
3
4
5
6
RENMINBI
Response of RINGGIT to Cholesky
One S.D. Innovations
7
8
YEN
9
10
USD
Response of RUPIAH to Cholesky
One S.D. Innovations
.1
.4
.2
.0
.0
-.1
-.2
-.4
-.2
-.6
-.3
-.8
1
2
3
4
5
6
RENMINBI
7
8
YEN
9
10
1
2
USD
3
4
5
6
RENMINBI
Response of SINGDOLLAR to Cholesky
One S.D. Innovations
8
YEN
9
10
USD
Response of RENMINBI to Cholesky
One S.D. Innovations
.10
.8
.05
.6
.00
.4
-.05
.2
-.10
.0
-.15
-.2
-.20
-.4
-.25
7
-.6
1
2
3
4
RENMINBI
5
6
7
YEN
8
9
10
1
USD
2
3
4
RENMINBI
24
5
6
7
YEN
8
9
USD
10
Figure 18: ASEAN-5 REER Responses, Jan 2008- June 2013
Response of BAHT to Cholesky
One S.D. Innovations
Response of PESO to Cholesky
One S.D. Innovations
.3
.3
.2
.2
.1
.1
.0
.0
-.1
-.1
-.2
-.2
-.3
-.4
-.3
1
2
3
4
5
YEN
6
7
8
RENMINBI
9
10
1
2
USD
3
4
5
YEN
Response of RINGGIT to Cholesky
One S.D. Innovations
6
7
8
RENMINBI
9
10
USD
Response of RUPIAH to Cholesky
One S.D. Innovations
.2
.4
.2
.1
.0
.0
-.2
-.1
-.4
-.2
-.6
-.3
-.8
1
2
3
4
5
YEN
6
7
8
RENMINBI
9
10
1
2
USD
3
4
5
YEN
Response of SINGDOLLAR to Cholesky
One S.D. Innovations
.08
6
7
8
RENMINBI
9
10
USD
Response of RENMINBI to Cholesky
One S.D. Innovations
1.6
.04
1.2
.00
-.04
0.8
-.08
0.4
-.12
-.16
0.0
-.20
-.24
-0.4
1
2
3
YEN
4
5
6
7
RENMINBI
8
9
10
1
USD
2
3
YEN
25
4
5
6
7
RENMINBI
8
9
USD
10
6. Concluding remarks
In 2008, Asian developing countries’ growth rates slowed down in the aftermath of the
Global Financial Crisis which began in 2007. With a decline in exports caused by the global
recession, economic uncertainty and pessimism further dampened private consumption and
investment. Some Southeast Asian economies performed relatively well compared to other
countries, given a similar structure of export dependency on the world economy. Their ability
to stabilize aggregate demand by fiscal stimulus helped maintain the growth of aggregate
demand, despite a sharp fall in exports in 2009. Public debt in these countries is manageable
thereby providing sufficient fiscal space to respond to export demand shocks.
Southeast Asian economies’ business cycles have become synchronized by impacts of
foreign capital flows and supply-chain effects of the global economic slowdown on network
trade. Southeast Asian financial sectors have been less vulnerable to external shocks as a
result of strengthened rules and regulation by Central Banks. When key policy interest rates
were reduced, Asian bank credit did not expand rapidly because of enlarging savinginvestment gaps that started since the collapse of investment after the 1997 financial crisis.
Although exchange rates of these countries appreciated against the US dollar, their shrinking
exports do not adversely affect output growth as long as they can manage to compensate
export shortfalls by stimulating domestic demand.
Boom-bust cycles are related to export cycles, which are affected by the world economic
activity and policy responses of giant economies. The appreciation of the real effective
exchange rates of ASEAN-5 and subsequent losses of international competitiveness
necessitate policy makers to rethink stabilization strategy by taking into account increasing
influential role of the Chinese business cycle. China’s exchange rate policy produces a new
environment which calls for a reassessment of exchange rate policy in Southeast Asian
economies.
Foreign direct investment in the region has increased considerably and will be intensified by
a newly adopted outward-orientation policy of Myanmar. Whether Vietnam, Cambodia, Lao
PDR, and Myanmar can escape adverse impact of Dutch disease depends on the flexibility
and effectiveness of countercyclical macroeconomic policy in reigning domestic monetary
growth. In response to future global shocks, fiscal and monetary policies must be well
coordinated to ensure a rapid revival of domestic demand to produce a minimal departure
from the trend growth path.
26
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