Download economic insight SOUTH EAST ASIA Quarterly briefing May 2012

economic Insight
South East Asia
Quarterly briefing May 2012
Power struggles come to light
as ASEAN economies expand
more slowly
Welcome to ICAEW’s Economic Insight : South East Asia,
a quarterly forecast for the region prepared directly
for the finance profession. Produced by Cebr, ICAEW’s
partner and acknowledged experts in global economic
forecasting, 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.
The temperature of Asian economies is cooling further
according to the economic growth thermometer.
Outside of Japan, which is making slow but steady
progress in recovering from last year’s natural disaster,
the emerging nations of the region are settling into
a period of muted expansion. Both India and China,
each with a population much larger than the whole
of ASEAN, are trying to maintain the progress made
that has seen them burst onto the global stage. The
emergence of domestic power struggles – between
the state and international business in India and
between political factions in China – is starting to take
its toll on business confidence there. Uncomfortable
as they may be, these developments highlight that
emerging economies are part of a wider social and
political context that must evolve alongside a society’s
productive capacity.
BUSINESS WITH CONFIDENCE
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High oil prices have a comparatively low
impact on many ASEAN nations
Some countries stand to benefit from rising energy prices,
namely exporters of the black sludge that powers the
global economy; the balance of imports and exports is
what matters. Some countries produce large quantities of
crude oil, but then export it to be refined abroad, either
because they lack refineries or because they cannot process
all the oil produced owing to its grade or quantity. The
refined produce, for instance in the form of marine fuel oil
or petroleum, is often imported by producing nations.
Figure 1 shows the value of oil imports and exports as a
share of GDP. Unsurprising given its large output and small
economy, Brunei’s oil exports account for nearly 80% of
GDP. Some countries export substantial amounts, with
Malaysia and Vietnam selling the equivalent of 8.4% and
10.1% respectively of their annual output. However, both
also buy a similar amount, leaving them with surpluses of
2.5% (Malaysia) and 1.6% (Vietnam).
Singapore is a special case because it only produces a small
amount and hosts large oil refineries in its capacity as a
trading hub on one of the world’s major shipping routes.
With a large manufacturing base, the country has net
imports of 4.0% of GDP. The Philippines and Indonesia
run similar deficits, while countries without any production
themselves – Cambodia and Laos – fully rely on imports:
7.6% for Laos and 5.0% for Cambodia. Despite substantial
own production, Thailand spends 12.5% of GDP on buying
oil from abroad, indicating that its economy is very energy
intensive. Overall, most ASEAN nations are only moderately
affected by the oil price because they produce much of
their own consumption.
Figure 1 : Value of oil trade as a proportion of gross
domestic product in 2011
%
80
70
60
50
40
30
20
10
0
-10
Exports
Imports
Vietnam
Thailand
Singapore
Philippines
Malaysia
Laos
Indonesia
-20
Cambodia
Besides weak exports to ailing Western economies, high
commodity prices are a drag on the global economy, even
if some ASEAN nations benefit from favourable terms of
trade. Apart from the price of money in the US – ie, the
Federal Reserve’s policy interest rate – the cost of crude oil
is probably the most important price in the world. Which
ASEAN nations stand to benefit from high oil prices? What
will be the impact on inflation and growth? Are there social
and economic policy consequences? We explore these
questions in the following pages.
play an important role in this. Some countries subsidise
fuel, which often results in the budget deficit rising with
oil prices. Although expensive, such policies reduce the
impact of oil on inflation, which is the topic of the next
section.
Brunei
Further afield, such interdependence is what makes the
eurozone’s sovereign debt crisis unpredictable. Politicians
need to provide an environment in which private enterprise
can thrive while public finances are restructured. The
necessary reduction in public spending is leading to social
tensions though, occasionally derailing the well-intentioned
efforts of political leaders through the democratic
process. Adjustments of the size and the role of the state
are necessary to prepare Western economies for ageing
populations and weaker long-term growth prospects.
The US still manages to evade these topics, partly thanks
to healthier demographics, but it will also have to make
substantial changes to the social contract in coming
years. A supportive economic environment helps in this
endeavour. The US labour market has created 1.4m jobs
over the past eight months, but five years on the financial
crisis is still with us.
Net exports
Source : International Monetary Fund
Global price pressures are set to keep
inflation at fairly high levels across the
region
The oil price is the most important example of a
realisation in global commodity markets: the rediscovery of scarcity. With hundreds of millions of Asian
consumers starting to spend on consumer goods,
transport and better food, prices for both mineral and
agricultural commodities have risen sharply. Expensive
oil explains much of this as it is the main energy price,
and because producing commodities is energy intensive.
Another factor that can be expected to lead to generally
higher inflation is the end of surplus labour in China.
With most of the previously idle country population
now engaged in gainful employment, China’s wages
have been going up; declining prices for consumer
goods may thus be a thing of the past. Some countries
stand to benefit as producers open factories in low cost
countries, but others will struggle to adapt to a China
competing with them as it moves up the value chain.
Regional integration that allows for more economies of
scale could help ASEAN in this regard, and also keep a
lid on inflation. In Indonesia, prices are still expected to
go up by nearly 6% on average per year, partly due to
a lack of infrastructure that creates bottlenecks. Also,
a reduction in fuel subsidies needed to protect public
finances will push up prices for many Indonesians as well
as for Malaysians at some point in time. See Figure 3
for the projected inflation trajectory of the other major
countries in the region.
From these numbers we can thus see that not just Brunei,
which is almost completely reliant on its petrochemical
industry, but also Malaysia and Vietnam currently stand to
gain from a rising oil price that increases the export surplus.
By contrast, with refining margins stable, rising prices hurt
Thailand, Laos and Cambodia most. Domestic policies also
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Figure 3 : Annual consumer price inflation, actual and
forecast (dotted), %
Country focus: INDONESIA
%
Indonesia is of special interest to ASEAN watchers
because it is the region’s dominant economy. Due to
its large population – two in five ASEAN citizens are
Indonesian – the country accounts for 39% of regional
output. With the rise of the East in the global economy,
Indonesia is set to become one of the major players in
an increasingly multi-polar world, as the cliché rightly
has it. The emergence of a large domestic middle
class is transforming the country from a commodity
maker and source of relatively cheap labour to a fullyfledged participant in global consumer society. From
an expenditure perspective, this means that growth is
being driven by consumer expenditure. Another angle
is a look at the different sectors that first produce the
income that is later spent.
Figure 2 compares last year’s composition of national
output by sector with that projected for 2020. What
causes the changes between the two dates? Basically,
sectors that are expected to grow more slowly than the
national economy shrink as a proportion of it – some
pieces are unable to keep up as the pie gets bigger.
Correspondingly, those sectors that grow faster than the
economy become a bigger part of it.
Over the period, we expect services to increase their
share of national output by six percentage points to
54%. That is a large amount considering the relatively
short time frame, driven by an expected service sector
growth rate of 7.8% per year compared with GDP
growth of about 6.1%. The rise in demand comes
from higher household spending on travel, tourism,
entertainment, but also from more health and education
services as well as business services that support an
increasingly complex industrial base. Although still
growing at a healthy rate of about 5.0% per annum,
manufacturing will shrink in relation.
Heavy investment in mining capacity will support the
industry and lead to rising volumes, but the even faster
increase in other sectors means that mining and
quarrying will shrink by one fourth as a share of output;
agriculture is in a similar situation. This sounds surprising
given the enthusiasm about Indonesia resource wealth
and the opportunities offered by selling raw materials
to China, but it really highlights that Indonesia, a symbol
for the wider region, is learning to stand on its own
feet. Export earnings such as those from commodities
will allow for more imports, limiting their direct
contribution to economic growth. But history suggests
that growing economic sophistication goes hand in
hand with a thriving service sector, and Indonesia will
be no exception to this.
Figure 2 : Sector composition of Indonesia’s output,
2011 actual and 2020 forecast
2011
2020
11%
Agriculture
8%
48%
26%
8%
Mining
54%
10%
6%
Manufacturing
23%
Construction &
Utilities
Services
Source: Bank Indonesia, Cebr
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8%
14
12
10
8
6
4
2
0
-2
2004 2005
2006
2007
2008
Thailand
Singapore
Malaysia
Indonesia
2009 2010
2011
2012
2013 2014
Philippines
Source : International Monetary Fund, Cebr
Richer nations are more unequal, but
take tentative steps towards a welfare
state
Policies such as fuel subsidies are controversial because
they benefit some groups within a country at the
expense of others. Higher social spending essentially
means more redistribution within a society, generally
driven by policies that are aimed at limiting income or
welfare discrepancies. Most industrialised countries have
a long-standing welfare state that has evolved over a
long period. By contrast, most developing countries
have traditionally relied more on social institutions such
as family support to create safety nets that protect the
vulnerable.
One measure of economic inequality within a country is
the Gini coefficient, which measures income inequality.
The higher the coefficient, the more unequal a given
society. A value of one (or 100% in Figure 4 on the
next page) means that all the income is in the hands
of one person while everybody else earns nothing. The
opposite case of an index reading of zero means that
everybody has the same income as anyone else. The
range of figures across the world goes from a minimum
of about 0.25 to about 0.7. Japan and several European
countries show the lowest inequality by this measure
whereas African and Latin American countries display
the highest.
Within ASEAN there are fairly large differences between
countries. Thailand, a country that was never colonised
and still has an influential monarchy, is at the top of the
range with a reading of 0.53. It is followed by Malaysia,
the Philippines and Singapore, which have fairly high
coefficients. Further down the scale, and thus exhibiting
lower inequality, are countries with low output per
capita. Nominally communist Laos is the least unequal
country for which figures are available, but a similar
reading for Indonesia suggests that widespread poverty
rather than more redistribution may be the underlying
cause.
A comparison with Asian countries China and India
shows that ASEAN’s income inequality is similar to
that of its large neighbours. It is significantly higher
than in the Organisation for Economic Co-operation
and Development (OECD) though, which generally
has extensive public welfare systems that serve to
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reduce income discrepancies. Redistributive policies
put in place by the Thaksin Shinawatra government
and now continued by his sister Yingluck Shinawatra
suggest that Thai society prefers a more balanced
income distribution. Similarly, moves to reduce positive
discrimination of ethnic Malays in Malaysia and an
increase in health and retirement spending in Singapore
point to the desire for more public welfare as countries
grow richer.
this should recover to 6.2% next year and to 6.5% in
2014 as the economy resumes its domestically-driven
growth path.
Given Singapore’s trade dependence as a port city
and commerce hub, the country’s Monetary Authority
is likely to ease the Singapore dollar’s appreciation
in 2012 while trade slows, but balance the need to
support the economy with inflation control. In 2012,
public and private investment should tide the economy
over a slow period, but growth is still forecast to drop
to 2.5% this year. The country is well positioned to
disproportionately benefit from regional prosperity
by providing business services. In 2013 and 2014, this
should help the economy to expand by 3.5% and 4.2%
respectively.
Figure 4 : Gini coefficients
Thailand
Malaysia
Singapore
Philippines
China
The floods that hit Thailand last year are still making
their effect felt as production in many industrial estates
is only slowly starting to resume. Over the course of
2012, reconstruction efforts and a surge in government
spending should boost output growth substantially.
State support to the economy should temper a likely
goods trade deficit this year caused by weak export
markets and the need to import machinery for
reconstruction. For 2012, we expect GDP to rise by
4.8%, a level likely to be maintained until 2014.
Vietnam
India
Indonesia
Laos
OECD
0
0.1
0.2
0.3
0.4
0.5
0.6
Source : World Bank, Statistics Singapore, OECD
Across the region growth is set to dip in
2012 due to weak export markets
A sharp growth reduction prompted the State Bank of
Vietnam to cut rates by one percentage point early this
year. Monetary easing should support the economy and
help a banking system awash with bad loans. For 2012,
we expect growth of 5.4%, followed by an increase to
6.4% in 2013. Expanding from a low base, Vietnam may
pick up some of China’s manufacturing industry, but
it needs to reform its economy to fulfil the promise of
prosperity.
Although the countries of ASEAN differ widely, their
expected growth performance is remarkably similar to
one another. A group of overlapping trading partners
plays a role in this, meaning that demand fluctuations
are affecting one country much like its neighbours.
Secondly, increasing regional integration means that
the countries are more interdependent. This trend offers
opportunities to countries such as Cambodia that have
much development potential, but would benefit from
investors with regional expertise to realise it. The latter
point relates to a trend of increasing intra-Asian trade
that makes the region more self-reliant. So far that has
been beneficial, but it also harbours risks. Overall, more
diversified trading patterns should benefit the ASEAN
nations.
With its strong export industry, Malaysia relies more
on Western demand than some others. On the flipside,
strong foreign direct investment gave the country a
boost and helped it achieve growth of 5.1% in 2011.
That growth rate is likely to fall, but at 4.2% GDP
expansion helped by strong industrial production early
in 2012 the Malaysian people will still benefit from rising
living standards and near-full employment this year.
Further ahead, a pick-up of the semiconductor industry
cycle and continued elevated commodity prices are
expected to bring GDP growth of 5.2% in 2012 and
5.6% in 2014.
The Philippines are also affected by lower export
earnings from the electronics industry. As in some other
countries of the region, 2012 should see a significant
rise in government spending, stabilising GDP growth
at the 3.8% level. Falling unemployment and moderate
inflation are expected to result in increasing household
spending and thus lift output expansion to 5.0% in 2013
and 5.4% in 2014.
Domestic demand in Indonesia continues to grow on
all fronts. While household consumption is on a steady
upwards path, it is business investment and government
spending that are pushing output up. For 2012, we
anticipate growth of 5.8% due to a temporary fall in
export growth and sub-par household spending, but
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With its political opening continuing apace, the
economy of Myanmar will also become more
integrated with the world economy if the promising
reform progress can be maintained. The suspension
of sanctions on the country is luring investors on
exploration missions, which should soon translate into
significant foreign investment for the country that was
previously primarily focused on neighbouring China. As
a result, we have increased our growth forecast to 5.5%
in 2012, rising to 6.2% by 2014.
Figure 5 : Forecasts for annual gross domestic
product growth rates, %
%
8
7
6
5
4
3
2
1
0
Malaysia
2012
Indonesia
Philippines Singapore Thailand
2013
Vietnam
Myanmar
2014
Source: Cebr
economic insight – south e a st a sia
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After years of focus on economic
management, politics is again taking
centre stage
Forecasts are central scenarios that represent the
analyst’s best guess of how events will unfold.
Conceptually the future is best thought of as a range of
scenarios, each with its own outcome and probability
of occurring. The central scenario is the most likely one
according to the analyst’s opinion, but it inevitably
glosses over the other possibilities. To represent a more
complete picture, we highlight key risk factors that can
jeopardise the central scenario.
The narrative of a possible eurozone implosion is familiar
and needs little additional exposition. Similarly, a
possible hard landing of the Chinese economy triggered
by a crash in the property sector or a breakdown of the
export industry is widely recognised. High oil prices
have recently joined the litany of risk factors that may
pull the rug under global growth.
Closer to home, a resurgence of a more fundamental
issue is evident though. As mentioned earlier, politics
have lately stepped to the forefront of drivers that may
impact growth. The purge of Bo Xilai in China showed
the world that the supposedly technocratic regime is
still ridden with ideological differences that last broke
into the public arena during the Tian’anmen protests of
1989. In neighbouring India, corruption and populist
policies have scared foreign investors and undermined
the reformist reputation of Prime Minister Manmohan
Singh. In the context of these events, concerns about
the longer-term growth outlook for the Asian giants
have made a comeback after falling into oblivion for
some time.
Similar political dissent looms in several ASEAN nations.
Moves in Thailand to alter the constitution in order
to allow a prison-free return of former Prime Minister
Thaksin Shinawatra may again cause paralysis because
fundamental disagreements persist in Thai society. In
Indonesia, the current government is losing authority
early into its current term, again due to damage done by
corruption scandals, while Malaysia faces similar issues.
Even in Singapore, the People’s Action Party’s support is
slowly eroding, heralding a gradual shift towards a more
inclusive style of governance.
Among the prevailing enthusiasm about Asian economic
growth, the political and institutional evolution that
needs to accompany a bigger and more complex
economy took a back seat. The challenges described
above indicate that ASEAN nations are indeed evolving,
but tensions emerge. History suggests that institutional
change is often a ‘lumpy’ process rather than a gradual
one, but that needn’t be a problem as long as countries
adapt successfully. ASEAN growth prospects still look
bright, but only if society can grow alongside industry.
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