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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 icaew.com/economicinsight 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 icaew.com/economicinsight cebr.com economic insight – south e a st a sia MAY 2 012 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 icaew.com/economicinsight cebr.com 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 economic insight – south e a st a sia MAY 2 012 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 icaew.com/economicinsight cebr.com 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 MAY 2 012 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. ICAEW ICAEW is a professional membership organisation, supporting over 138,000 chartered accountants around the world. Through our technical knowledge, skills and expertise, we provide insight and leadership to the global accountancy and finance profession. Our members provide financial knowledge and guidance based on the highest professional, technical and ethical standards. We develop and support individuals, organisations and communities to help them achieve long-term sustainable economic value. Because of us, people can do business with confidence. Cebr Centre for Economics and Business Research ltd is an independent consultancy with a reputation for sound business advice based on thorough and insightful research. Since 1993, Cebr has been at the forefront of business and public interest research. They provide analysis, forecasts and strategic advice to major multinational companies, financial institutions, government departments and trade bodies. For enquiries or additional information, please contact: Leisl Pillay T +65 6407 1554 E [email protected] icaew.com/economicinsight cebr.com economic insight – south e a st a sia MAY 2 012 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 MKTPLN11134 05/12