Download economic insight: south east asia Quarterly briefing Q3 2014

Economic Insight: South East Asia
Quarterly briefing Q3 2014
Welcome to ICAEW’s Economic Insight: South East
Asia, a quarterly forecast for the region prepared
specifically 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.
This edition looks at the retail banking sectors in
ASEAN nations and their effect on the structure
of their economies. In much of the region, retail
banking sectors are nascent and are expanding
rapidly. Will consumer lending transform the
region from a group of exporting powerhouses
into domestic consumption-oriented economies,
or will they simply inflate unsustainable bubbles
and saddle the region with debt?
South East Asian banking: huge growth
in household debt boosts bank profits
Economic Insight
South East Asia
Quarterly briefing Q3 2014
BUSINESS WITH confidence
A clear trend visible across ASEAN economies is
the growth of total lending to households, led by
retail banks. In Indonesia, they increased 13-fold
between 2001 and 2013, while Singapore’s levels
went up almost fivefold over the same period.
This makes Thailand’s threefold increase in bank
credit to households look modest. A comparison
of household credit growth seen in these countries
to that in the US helps highlight the trend even
further. As Figure 1 shows, a doubling of credit
to US households between 2001 and 2013 is a
humble increase compared to the rises seen in
ASEAN. While comparable data are not available for
Vietnam and Malaysia, anecdotal evidence suggests
that the situation there is not very different. HSBC,
the World Bank and the International Monetary
Fund (IMF) have all warned Malaysia over high
debt levels. Vietnam is attempting to cool its
own household debt growth, while Singapore’s
government recently succeeded in deflating a fastgrowing property bubble. Debt is an important
issue for South East Asia.
Lending is going to consumers on a scale previously
unseen in South East Asian nations. The slope of
Indonesia and Singapore’s graphs increased sharply
after a small dip in late 2008, signalling a quickening
in the pace of new credit extension.
icaew.com/economicinsight
Figure 1 Total credit to households has risen hugely
over recent years
Loans from all sources to households, US$
1400
1200
1000
800
600
400
200
0
2002
2004
2006
US
Singapore
2008
2010
2012 2013
Thailand
Indonesia
Source: Bank of International Settlements (BIS) credit to private sector statistics. Comparable
time series do not exist for Malaysia, the Philippines or Vietnam
South East Asia is awash with capital because banks in
ASEAN nations can borrow from global money markets
at very low costs. The record-low interest rates and
quantitative easing imposed by central banks in the US
and eurozone after the crisis sent capital to the developing
world to earn higher returns. With many advanced
economies stagnating post-crisis, huge foreign direct
investment (FDI) flows to emerging economies allowed
cheap borrowing in much the same way as emergingmarket surpluses lowered Western borrowing costs precrisis. Much of this capital also ultimately traced back to
large ‘quantitative easing’ or asset purchase programmes
designed to stimulate Western economies. South East
Asian nations were among those who benefited from
these – at least until recently, when the Federal Reserve’s
tapering of asset purchases raised expectations that US
rates were going to return to previous levels and caused
great fluctuations in inbound FDI.
Why did this wave of lending go to consumers rather
than business investment? Rapidly rising incomes
and high population growth created fertile ground
for investment in retail banking in ASEAN nations. In
countries like Indonesia and the Philippines, penetration
of financial products was extremely low and growing
incomes made the prospect attractive. Traditionally high
domestic consumption in the Philippines reinforced
this. The retail banking sectors also started out very
concentrated, with entry tightly controlled by the state
in certain ASEAN economies.
The 1997 Asian Financial Crisis (AFC) which beset South
East Asia principally arose out of non-performing loans
to firms rather than to consumers. The ramifications
of that crisis, especially in the hardest-hit economy,
Thailand, are still highly relevant to finance. Reforms
largely related to what went wrong: a high degree of
interconnectedness between firms, unhedged borrowing
in different currencies and timeframes, rigidly fixed
exchange rates, opaque accounting practices, an out-ofcontrol property bubble and a prematurely liberalised
financial system.
After the crisis, Thai economic institutions and financial
legislation were revolutionised. The baht was floated.
Banks were consolidated and capital ratios raised at the
IMF’s behest. Banks that had moved to Thailand for
wholesale business found that moving into retail banking
made more sense. Acquiring majority shares in domestic
banks enabled them to do that; tight regulations
surrounding capital markets make entry by foreign
players tricky.
icaew.com/economicinsight
cebr.com
Now South East Asian banks are the most profitable in
the world: Thailand has two banks in the world’s top 11,
while Indonesia has four.1 Part of their relative success
is due to the reactive caution that US and European
macroprudential regulators are currently displaying.
Profitability in the West has fallen due to rises in banks’
capital ratios and large fines. Profitability is also higher
thanks to South East Asian banks’ ability to lend to
their own large domestic markets that provide high
rates of return while they borrow internationally at
low rates. Retail banking in South East Asia is relatively
concentrated through mergers, another feature
designed to provide stability after the AFC. This means
competition is not yet fierce enough to erode the profit
margins substantially, though the high profitability may
erode itself through attracting new entrants. A further
draw to the sector is the rapid growth in numbers of the
middle class, expected to expand by between 16% and
28% over the next five years across the ASEAN-5.2
The Indonesian banking sector has undergone similar
development to that in Thailand, with strong interest
from Japanese firms – whose own domestic market is
saturated – translating into entry. Banking penetration
in the economy is still low, with a 2012 research paper
estimating 40% of Indonesians hold accounts, leaving
substantial potential for growth.3 Philippine consumer
lending is currently expanding at double-digit annual
rates, even though there are only estimated to be
around 2.5m–4m credit card holders among the
population of almost 100m.
Figure 2 Credit has risen far faster than GDP
Bank loans to individuals as % GDP
300
250
200
150
100
50
0
2002
2004
US
Singapore
2006
2008
2010
2012
Thailand
Indonesia
Source: BIS, Cebr analysis
Economic performance has been stellar in ASEAN
economies over the same period. Thai GDP in real
terms increased by 64% between 2001 and 2013, while
in Indonesia it shot up 92%. But household lending
has grown even faster. Between the end of 2001 and
the latest figures at end-2013, Indonesian credit to
households expanded at more than two-and-a-half
times the rate of GDP. Household debt levels in Thailand
are now at about 82% of GDP, having grown about
75% faster than GDP since 2001, worrying the Bank
of Thailand. Malaysia’s level of household debt stands
at 86% of GDP, up from 60% in 2008, prompting the
World Bank to issue a warning on this risk.
It is not necessarily problematic that lending should
grow ahead of the rate at which the economy does: in
most cases such growth will not lead to instability or
over-indebtedness. In moderation household debt is very
useful, allowing people to stay afloat between jobs, or to
spread a large purchase across several months’ income.
economic insight – south e a st a sia
Q3 2 014
Subsistence farming makes incomes fluctuate, which
banking can smooth through saving and borrowing.
Additionally, the retail banking sector is currently highgrowth and is thereby pulling up the growth rate of the
economy overall.
Moving away from export-driven growth
The defining pattern of East Asian industrialisation has
been growth through transforming their economies from
rural backwaters to manufacturing export powerhouses.
Most East Asian economies focused on exports in
the early stages of development and then moved to
rebalance the economy between production for their
own and for overseas markets. So far, South East Asia has
followed this trail blazed by Japan, Taiwan, South Korea
and Hong Kong.
Abandoning subsistence farming for manufacturing is
a sharp jump up in value added, but what to specialise
in next? At this point there has been a choice of paths,
with some East Asian economies moving more towards
finance and others moving more towards high-technology
services or the very highest echelons of the manufacturing
value chain, that is, engineering and design. Taiwan and
Korea epitomise the latter path while Singapore does the
first; Japan steers a course between the two. This process
involves a progressively shrinking emphasis on goods
exports. Some South East Asian economies have started
to make the transition.
Figure 3 Goods exports as a share of GDP have already
peaked in the most-developed ASEAN economies
Goods exports, % GDP
200
180
160
140
120
100
is more important. The cyclical argument does not explain
the decline just before the recession between 2005 and
2007. Further, China’s ports are overtaking Singapore
in shipping volumes. Shanghai overtook Singapore in
2010 and several others in China are at similar levels with
faster growth rates. While goods exports will continue
to contribute to Singapore’s economy, high value-added
services will be increasingly dominant.
Moving towards a consumption-driven
growth model
While a successful strategy for early development, the
downside of export-driven growth is that opening
economies up exposes them to external shocks over
which policy has no control. For example, growth in
Mexico fluctuates with the fortunes of the huge US market
to which it exports so much. This lack of control makes
a rebalancing towards domestic consumption desirable,
while an expanding credit market facilitates the process.
China is an increasingly important market for ASEAN
economies, with Malaysian exports to China increasing by
five percentage points between 2004 and 2013 to stand
at 12.2% of GDP. Dependence on one export market is
risky for Malaysia, especially since many of these exports
are commodities. First, the terms of trade are moving
against commodities – meaning that they buy less of
other goods and services. Second, China itself intends to
rebalance away from investment spending and towards
consumer spending, which will be less intensive in
commodity demand.
Given the risks, it is safer to have a balanced economic
mix of domestic investment and consumption and
export demand, with a diversification of export markets
within that. China is making such a transition. Having
shown some reorientation away from export-driven
growth already, it is currently making a notable shift from
investment to consumption-led growth.
Figure 4 Declines in the share of consumer spending
flatten out and begin to show upward momentum
80
60
40
Consumption spending, % GDP
20
0
100
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
US
Thailand
Philippines
Vietnam
Singapore
Malaysia
Indonesia
80
Source: IMF International Financial Statistics, Cebr analysis
60
US
Vietnam
Thailand
Philippines
Malaysia
Indonesia
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
20
1984
With the exception of Thailand and Vietnam, which
still lag most of the other regional economies in percapita incomes, the declining importance of goods
exports reflects a changing industrial mix. For example,
though Singapore has long been an international
financial centre, other cities in the area such as Kuala
Lumpur, Jakarta and Manila are becoming increasingly
involved in financial services.
40
1982
Figure 3 shows the ratio of goods exports to GDP in
the six large ASEAN economies. The recent trends in
Indonesia, Malaysia, the Philippines and Singapore are
unmistakably downward, while two of the less-developed
economies – Thailand and Vietnam – are still showing
increasing goods exports as a share of GDP.
Singapore
Source: World Bank World Development Indicators, Cebr analysis. Three-month moving averages
used, to smooth fluctuations
An important question is whether the declining
importance of goods exports in Singapore is cyclical,
and therefore related to the global economic downturn,
or structural; related to Singapore’s own evolution away
from a shipping hub and towards higher value-added
services such as finance. While both play a part, the latter
Figure 4 shows private consumption by households in
six ASEAN nations plus the US, as a percentage of
GDP. The other components of GDP are government,
investment and net export spending. The lines
representing consumption in Thailand, Malaysia,
Singapore and Vietnam, broadly show declines over
the period between 1980 and just before 2000, and are
stabilising now. In the two richest ASEAN economies,
icaew.com/economicinsight
economic insight – south e a st a sia
cebr.com
Q3 2 014
Singapore and Malaysia, the graphs have even started
to climb back upwards, Malaysia having reached a nadir
over 1998–1999 and Singapore reaching its own in 2007.
The Philippines’ line shows a gentle rise in consumption
over most of the period, while Indonesia’s decline may
be just starting to flatten out.
As countries become richer, market economies tend to
develop new ways of persuading consumers to spend
while governments, keen to promote further growth,
provide a safety net to discourage excessive saving out
of fear for the future. Singapore’s latest government
budget, in which it used accumulated public savings to
run a small deficit over the 2014–2015 financial year, was
widely seen as an attempt to boost demand through
expanding welfare coverage for the so-called ‘Pioneer
Generation’, meaning older Singaporeans. A social safety
net allows people to spend considerably more, freed from
the necessity of building a personal insurance pot against
mishaps. Singapore’s consumption share in GDP is barely
half of that in the US, although the countries’ per-capita
GDPs are similar.
Figure 5 Higher domestic consumption means less to save
Gross national savings, % GDP
60
48
36
24
12
0
US
Philippines Thailand Vietnam Indonesia Malaysia Singapore
2010
2011
2012
2013
2014
Source: IMF World Economic Output
Fears of an unsustainable property bubble building
As Figure 5 illustrates, saving rates for ASEAN economies
show the other side of the rising-consumption coin. These
have traditionally been far above those in the US and
other Western economies, especially in Singapore.
Over the last four years, the largest ASEAN economies
have shown a clear trend of putting aside less as they
spend more.
This highlights the risks of promoting lending. Most
economists would argue that the US and the UK, even
post-crisis, rely too much on domestic consumption and
could do with higher investment and higher exports,
given these economies have low productivity growth
and persistent current-account deficits. Their high debts
also bear a large part of the responsibility for the financial
crisis. The ASEAN economies are a long way from this
predicament, although they clearly face some dangers
in the movement towards higher debt and higher
consumption economies.
A number of factors make high consumer lending
potentially destabilising for an economy. High leverage
itself is dangerous in a system: when wage growth slows
and households start to struggle with repayments, the
businesses owed money struggle with wage bills. This is
because they base decisions on future income streams
being ever-larger. In turn, the employees of those
businesses fall into difficulty. Compared to an economy
where people spend out of present earnings only, a
downturn in a high-debt economy is amplified.
icaew.com/economicinsight
cebr.com
A striking similarity which today’s situation shares with the
1997 AFC is the search for yield, with investors tempted by
high returns in South East Asian economies while Western
economies offer relatively unattractive returns. The
crisis was largely fuelled by a property bubble: opaque
accounting meant many investors, believing they were
investing in equities in high-growth companies, were
unwittingly betting on property prices rising. A property
bubble is often linked to a rise in household debt as it
expands the collateral of would-be borrowers, a pattern
evident in the US and UK property markets in the run-up
to the global financial crisis. The rise of retail banking
encourages both forms of borrowing.
Singapore’s government has recognised the potential
danger. Singapore’s property market in the past has been
characterised by spectacular rises and deep corrections
following them, two of the largest occurring in 1997
and 2008. The government recognised four years ago
that rises in prices were becoming unsustainable and
intervened to cool the market. After introducing a series
of measures that had insignificant effects, it recently
brought in a total debt servicing restriction. Borrowers’
total monthly mortgage repayments were capped at 60%
of income. This had a clear, immediate impact, halving
the volume of transactions and prompting forecasts of a
20% fall in prices in the market over the medium term, of
which 6% has happened so far. The managed downturn
in house prices is likely to slow consumer spending with
it (Q1 showed a quarterly decline of 1.2%) which may
provide a gentle drag on growth in the short term but is
preferable to a sharp correction later.
Singapore’s government appears to have grasped that
while financing consumption of goods and services is
useful for rebalancing growth, financing expenditure on
the property market can cause as much harm as good
to an economy. It depends on whether that market is
experiencing a speculative bubble where demand feeds
on itself, or whether the market can raise supply in
response to high demand.
Malaysia’s macroprudential regulator brought in
measures to cool its housing market in 2010. Compared
to Singapore, measures have been less ambitious and
correspondingly less successful, comprising a Real Capital
Gains Tax and later a doubling of the minimum price for
foreigners buying houses. Property prices have shown
little sign of slowing since. On 10 July the Central Bank
raised the policy rate from 3% to 3.25%.
Strong growth underpinned by low interest rates in the
Philippines is stoking fears of a property bubble in Manila.
Inflation is relatively low and economic policymakers are
keen to maintain rapid growth; however, property prices
in Manila’s financial district, already at a record high, are
projected to rise 8% over this year. Last summer the IMF
warned that the Philippine economy faced a risk from
a domestic asset price bubble, including in real estate,
following a 6.8% quarter-on-quarter rise in property
investments in Manila during Q2 2013. It appears the
Central Bank may be struggling to keep up with the
situation, having only just constructed an index to measure
the level of property prices. Meanwhile in Vietnam, the
government in 2013 introduced policies designed to curb
lending to households, especially on credit cards.
Domestic consumption as a share of GDP in much of
South East Asia is low by international standards and an
increase would be welcome from the point of view of
macroeconomic balance. The retail banking sector has
facilitated a gradual increase in domestic consumption
and helps to rebalance ASEAN economies between
production for export and for domestic consumption.
economic insight – south e a st a sia
Q3 2 014
However, during the run-up to the financial crisis many
suggested that US and UK policymakers allowed credit
growth to offset weak wage growth in lower earnings
groups, artificially raising the standard of living. Ultimately
this raised the number of non-performing loans and
contributed to the financial crisis. It is important that
economies with already high consumption rates, such as
the Philippines, take care to avoid this.
Near-term ASEAN performance to be
affected by further power struggles in
Thailand and friction with China
Economic output in Thailand fell at a quarter-on-quarter
rate of 0.6% in Q1 2014. The political unrest is likely to
persist. Mid-May saw the military suspend civilian rule
and declare martial law, although the army’s General
Prayuth claimed Yingluck Shinawatra’s government remains
technically in office. While the situation is currently peaceful,
it seems full resolution of the root causes of instability
remains elusive. If the military government does not hold
elections, unrest is likely to escalate. If it does hold elections
a compromise may be possible, but the underlying problem
of polarisation between the establishment in Bangkok and
poorer rural regions in the North may have hardened due
to recent events. Thailand is expected to see weak growth
of 2.0% over 2014 (Figure 6).
Another flashpoint in the region is the disputed South
China Sea, located between the Philippines, Vietnam
and China. Oil rigs installed by Chinese state-owned
companies irked Vietnam, while subsequent protests in
Vietnamese cities, which turned violent with foreignowned factories looted and burned, prompted many
Chinese migrant workers to leave the country. China
has responded by instructing Chinese state-owned
firms not to bid for projects in Vietnam. One economic
implication of the cooling of relations between ASEAN
countries and China may well be more support from
Japan, which offered $20bn in aid and loans to ASEAN
members last December. Near-term costs could be high
for Vietnam as China is a large source of demand for
its exports, investment in its industry, and even labour.
But beyond short-term troubles, competition between
the two economic giants for influence over South East
Asia should leave these countries the long-term winners.
While Chinese investors have set up factories employing
workers in poorer ASEAN nations, Japanese consumerfacing companies such as retail banks in Indonesia should
improve standards of living. Japanese bank lending to
ASEAN rose to $180bn last year, a record increase.
The imposition of a goods and services tax (GST)
in Malaysia of 6% will dampen consumption from
its introduction in April 2015, but not drastically. Its
downward pressure on inflation, currently high, should
stall the need for the Bank of Malaysia to raise rates and
thereby enable rapid growth to continue. Much of its
effect may even be offset by consumers bringing forward
purchases, as happened when Japan hiked a similar tax
from 5% to 8% in April 2014 – this provided a welcome
boost, while the depressive effect is not yet evident in the
latest data. Malaysia’s public finances will be improved
in the medium term by the tax. More threatening is the
steep rising trend in property prices, which Malaysia’s
regulators have so far struggled to dampen. Though we
have nudged up this year’s forecast to reflect its breakneck
speed, worrying property market developments are a
considerable downside risk to growth.
An unexpected downturn in manufacturing caused
Singaporean output to contract quarter on quarter by a
seasonally adjusted and annualised 0.8%. With one-off
factors contributing, the slowdown is unlikely to persist.
Figure 6 Unrest hits Thai growth outlook while
Philippines surges ahead
GDP growth in ASEAN economies over 2014-2016
7
6
5
4
3
2
1
0
Thailand
Singapore
2014
Malaysia
Indonesia
2015
Vietnam
Philippines
2016
Source: Cebr analysis
Indonesia elected Joko Widodo as its seventh president,
the ex-Jakarta mayor who is seen as a reforming populist
and as removed from the political establishment. Policy
specifics are unclear at this stage, but his tone puts less
emphasis on economic nationalism and self-reliance than
his predecessor’s did. Stock markets generally welcome
the prospect of further opening in ASEAN’s largest
economy. This reaction, together with a likelihood of
higher public spending on pro-poor policies (based on his
record in Jakarta), prompts a slightly higher forecast.
Fundamentals in the Philippines have shown the economy
to be particularly strong lately. Its government debt is
now investment rated after upgrades from three agencies
last year, meaning it can afford significant borrowing
for infrastructure investment including ongoing
reconstruction work related to last year’s typhoon.
The Philippine economy, heavily biased towards
consumption, is therefore experiencing a boost from
construction and investment.
icaew.com/economicinsight
cebr.com
economic insight – south e a st a sia
Q3 2 014
1 Citibank research reported in Financial Times online edition, ‘Southeast Asia offers bank profit surprise’, 23 June 2014
2 From a study by Macquarie Group. ASEAN-5 refers to Indonesia, Malaysia, the Philippines, Singapore and Thailand.
3 Kadomae, The Rise of Retail Financial Services in Indonesia, Nomura Journal of Capital Markets, Spring 2012, Vol. 3, No. 4.
http://www.nicmr.com/nicmr/english/report/repo/2012/2012spr03.pdf
Cebr
The Centre for Economics and Business Research is an independent consultancy with
a reputation for sound business advice based on thorough and insightful analysis.
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.
ICAEW is a world leading professional membership organisation that promotes,
develops and supports over 142,000 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:
Marie Lake
T (+65) 6407 1527
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 2014 MKTPLN13264 08/14