Download subsidy cuts and political unrest to threaten consumption growth

Subsidy cuts and political unrest to
threaten consumption growth
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.
The balance of economic growth between emerging
and developed economies is shifting with the US
economy gaining momentum towards the end
of last year. Encouraged by signs of a sustainable
recovery, the Federal Reserve has begun to taper
its monthly purchases of US Treasuries, setting the
foundation for a tighter monetary environment in
the near term. ASEAN’s experience during 2013
showed how vulnerable capital flows to the region
are to the prospect of monetary tightening in the
developed world. Therefore this taper brings with
it renewed concerns about the potential for further
depreciations of ASEAN’s domestic currencies.
Economic Insight
South East Asia
Quarterly briefing Q1 2014
BUSINESS WITH confidence
The eurozone is finally out of recession, but an
inspection of individual member states highlights
the immense variation in performance between
different countries. Worryingly, the return to growth
has yet to translate into a material impact on
employment rates with some countries, including
Spain, nursing the difficulty of an unemployment
rate above 20%. This will hamper demand for
ASEAN’s exports in what is a key market for South
East Asia. While weaker ASEAN currencies will boost
export growth in 2014 and 2015, in the longer term
the further softening of GDP growth rates in China
will continue to hurt ASEAN’s trade performance.
In recent years growth in domestic consumption
has helped to fill the gap left by slower growth in
net exports. As global mineral fuel prices ease back
over coming years, ASEAN economies will benefit
from reduced costs of energy, which would normally
lead to boosts in consumption. However, a number
of subsidy cuts, increased taxation, political unrest
and the economic damage wrought by Typhoon
Haiyan have made this outcome unlikely. These
developments will increase the upward pressure on
prices faced by ASEAN’s consumers, threatening to
hold back increases in consumption even as export
growth remains subdued. This report examines
icaew.com/economicinsight
the various factors that will influence consumer price
inflation over the next few years, starting with an
analysis of the outlook for food prices.
Upward pressure on food prices to remain
Changing food prices form an important component
of consumer price inflation. It is perhaps particularly
pertinent in South East Asia where the perception of
unabated food price growth can spur political unrest.
The global economic backdrop for food prices is less
inflationary for 2014 than it was for the last two years.
Healthier harvests have taken some of the strain off the
global supply of food and should reduce the upward
pressure on food prices over the next few years.
However, as shown in Figure 1, many ASEAN nations will
still experience higher food price inflation in 2014.
Figure 1: Annual inflation for food and
non-alcoholic beverages
Over the next few years ASEAN’s governments are
expected to remain focussed on reigning in public
spending in order to reduce national debt levels and
boost investor confidence in the region. This focus on
convincing investors that ASEAN is financially credible
means that there is a realistic risk of further budget cuts
and tax increases in the short term. Figure 2 shows the
government’s budget surplus as a percentage of GDP for
the largest economies of ASEAN.
12
Cebr forecasts
8
6
4
2
0
2011
2012
2013
2014
Philippines
Malaysia
Singapore
Thailand
Last year, Typhoon Haiyan destroyed rice and sugar
crops, and damaged vast areas of farmland in the
Philippines. Food production in the archipelago will be
hampered in the short term as the agriculture industry
recovers from this recent upheaval. However, a hastier
recovery in the fishing industry will help to mitigate
the damaging economic consequences of the typhoon.
On balance, annual food price inflation is expected to
increase to approximately 4.0% in 2014, up from 2.8%
in 2013, before falling to 3.0% in 2015 and 2016.
Lower government spending to improve
public finances for some ASEAN countries
%
14
10
of harvested rice, which will help to keep food price
inflation down in the short term. However, the baht is
expected to weaken in 2014 as international investors
shy away from Thailand until the country regains some
political stability, meaning that consumers will have to
pay more for their imports. Consequently, food price
growth will accelerate slightly this year, before slowing
over 2015 and 2016.
2015
2016
Indonesia
Source: Badan Pusat Statistik, Thai Bureau of Trade & Economic Indices, Department of
Statistics Malaysia, Singapore Department of Statistics, The National Statistics Office of
Philippines and Cebr forecasts
Figure 2: Government cash budget/surplus as a
percentage of GDP
%
10
8
6
4
Malaysians face the highest percentage point increase
in food price inflation in 2014 as a result of the current
government’s economic policies, which are aimed
at bringing public spending down. The abolition of
the sugar subsidy will have immediate inflationary
consequences, while the impending introduction
of the 6% General Sales Tax, currently scheduled to
come into force in 2015, will further increase prices
that consumers pay for food. Given the government’s
focus on tightening the purse-strings, there is a realistic
likelihood that further food costs will be passed on to the
consumer over the coming years through more subsidy
cuts or an increase in the sales tax. If so, food price
inflation could increase further.
In Indonesia, annual food price inflation will slow from
2014 to 2016, but will still remain relatively elevated
as the impact of last year’s fuel subsidy cut filters its
way through other sectors of the economy. Further
weakening of the Indonesian rupiah, as the US Federal
Reserve continues to taper its monthly asset purchases,
will bring down the spending power of Indonesian
consumers in global food markets. To date, Indonesia’s
rupiah has shown itself to be more susceptible to the
prospect of tapering than other ASEAN currencies.
Therefore, US tapering presents a significant upside risk
to food price inflation in Indonesia.
Government subsidies in Thailand have allowed farmers
to sell rice at a price significantly above market levels,
which has boosted production. As a result, the second
largest ASEAN economy is home to large stockpiles
icaew.com/economicinsight
cebr.com
2
0
-2
-4
-6
Cebr forecasts
2011
2012
2013
2014
Indonesia
Malaysia
Thailand
Singapore
2015
2016
Philippines
Source: Badan Pusat Statistik, Thai Bureau of Trade & Economic Indices, Department of
Statistics Malaysia, Singapore Department of Statistics, The National Statistics Office of
Philippines and Cebr forecasts
Government spending in Indonesia will grow at a
reduced rate in 2014 while growth in net exports, and
to a lesser extent private consumption, will help to
boost government’s tax revenues. As a result Indonesia’s
government deficit should narrow as a percentage of
GDP, bringing the largest economy in ASEAN closer
to balancing its books in 2016. Furthermore, investors
should welcome Indonesia’s intentions to use the vast
savings from last year’s cut in the fuel subsidy to finance
infrastructure development. By reigning in growth
in public spending while refocussing resources on
improving the country’s infrastructure, Indonesia should
see higher investment growth in 2015, which will help to
boost the nation’s tax revenues.
economic insight – south e a st a sia
Q1 2 014
The Malaysian Government will increase public spending
by a lower proportion in the near term compared to
recent years. Already announced cuts in key food and
energy subsidies will reduce the current strains on the
public purse, while the introduction of a 6% General Sales
Tax in 2015 will boost government tax revenues. Both
of these impacts will help Malaysia to narrow its budget
deficit as a proportion of GDP over coming years. Prime
Minister Najib Razak and his administration are aiming to
reduce the public deficit to less than 3% of GDP by 2015,
paving the way for a balanced budget by the end of the
decade. If the government remains committed to this
target, there is a strong probability of further subsidy cuts,
possibly on other food items, or through an increase in
the pace at which fuel subsidies are being phased out.
Government spending in the Philippines will increase as
the authorities provide recovery and rebuilding assistance
to those regions and people affected by last year’s
typhoon. Although this will be mitigated to an extent by
a higher tax take from the construction sector, the overall
impact will lead to an increase in the government deficit
as a proportion of GDP.
The Singaporean Government’s public finances will shine
compared to those of its ASEAN neighbours as economic
growth, a larger tax take and disciplined fiscal policies
boost Singapore’s budget surplus. Tax revenue and
government spending is relatively low in Singapore, which
has helped the city state to earn a reputation of fiscal
prudence. However, economic fundamentals indicate that
tax rates and government spending will need to increase
in the long term. This is because an ageing population
and a low birth rate will lead to an increase in Singapore’s
social welfare and healthcare requirements. Furthermore,
slow productivity growth will continue to challenge
Singapore’s economy despite government measures to
improve output per person. This will add further pressure
on consumers who, as a result, will experience slower
growth in their standard of living.
ASEAN to source more energy from abroad
Energy prices are a key factor determining inflation as
they ultimately feed through into the prices of all goods
and services in an economy. For many emerging markets
in ASEAN, demand for energy is growing at a faster
pace than domestic production. Continued economic
expansion will result in these economies becoming
increasingly dependent on international energy markets
to meet their domestic energy needs. Falling global oil
prices over the next three years will mitigate inflation in
ASEAN but, in general, this greater reliance on imported
fossil fuels will be accompanied by a higher level of
uncertainty about future price movements. The volatility
of international energy markets means that those ASEAN
economies that rely on external sources of energy will
face a higher risk of unexpected price movements in the
future.
Figure 3 shows the proportion of the total supply of motor
and aviation fuel that is imported for the five largest
economies in ASEAN. Demand for this fuel category in
particular will increase significantly over the coming years
as the growing middle class continues to become more
productive and wealthy, driving up demand for cars and
air travel. Consequently, ASEAN’s imports of motor and
aviation fuel will increase by 23% over the next three
years.
icaew.com/economicinsight
cebr.com
Figure 3: Proportion of total supply of motor and
aviation fuel that is imported
%
100
90
Cebr forecasts
80
70
60
50
40
30
20
10
0
2011
2012
2013
2014
Philippines
Malaysia
Singapore
Thailand
2015
2016
Indonesia
Source: Joint Organisations Data Initiative, Cebr forecasts
The majority of the most accessible oil reserves in
Indonesia, which are the least expensive to extract,
have already been depleted. The energy reserves that
remain are less abundant and more costly to extract.
As a result, Indonesia’s oil production will decline over
the next few years and average production in 2014 will
come in below the government’s target of 870,000
barrels a day. Indonesia’s growing economy will
import more mineral fuels to make up the increasing
discrepancy between domestic demand and supply. By
2016 Indonesia is expected to source 70% of its total
supply of motor and aviation fuel through imports, an
increase of seven percentage points since 2013. Such a
significant dependence on external energy producers will
leave Indonesia’s consumers and motorists vulnerable to
unanticipated price volatility in international markets.
Figure 3 belies Thailand’s true reliance on imports for
its energy needs. Approximately 80% of the nation’s oil
demand is sourced through imports, making it one of
the largest net oil importers in ASEAN. A large capacity
for oil processing, however, means that Thailand is a
net exporter of petroleum products, which include
motor and aviation fuel. Nonetheless, this oil refining is
supported by external suppliers and as such the prices
paid by consumers for motor and aviation fuel are heavily
influenced by global energy prices. Although Thailand will
increase its natural gas production in the short term as it
makes use of its significant reserves, the pace of domestic
energy demand growth means that the country will have
grown more dependent on imports for its energy needs
by 2016.
Over the coming years, Malaysia and the Philippines will
see a small reduction in their reliance on external energy
producers for the motor and aviation fuel that they
require. Unlike Indonesia, steady increases in domestic oil
production are expected for these two countries in the
short term. Nonetheless, come 2016, they will still rely on
imported fuel for the majority of their needs. As a result
they will be more open to the inflationary consequences
of any price changes in international markets.
Upward pressure on inflation despite
cheaper energy prices
Falling global oil prices between 2014 and 2016 will mean
that ASEAN countries will not pay for their increased
reliance on external energy providers through higher
inflation. On the contrary, ASEAN will benefit from easing
economic insight – south e a st a sia
Q1 2 014
oil prices, which will also feed through into lower costs
of electricity production. Furthermore, the re-entry of
Iran into international energy markets would increase
the global supply of oil and gas, and would drive down
international energy prices. As a result ASEAN would have
access to cheaper energy and inflation would fall back at a
faster rate.
Indonesia is currently battling to return its current account
to a surplus. A ban on exports of certain goods would
inexorably bring down overall exports and hence widen
the current account deficit. Figure 5 shows Indonesia’s
annual exports of nickel ore, bauxite and copper ore as a
proportion of its total goods exports.
Figure 4: Annual consumer price inflation
Figure 5: Proportion of Indonesia’s exports of goods
that are nickel ore, bauxite or copper ore
%
8
%
16
7
14
Cebr forecasts
6
12
5
10
4
8
3
6
2
4
1
2
0
2011
2012
2013
2014
Philippines
Malaysia
Singapore
Thailand
2015
2016
Indonesia
Source: Badan Pusat Statistik, Thai Bureau of Trade & Economic Indices, Department of Statistics
Malaysia, Singapore Department of Statistics, The National Statistics Office of Philippines and
Cebr forecasts
Figure 4 shows our forecasts for annual consumer price
inflation in the largest economies in ASEAN. Reduced
government subsidies on key fuel and food items in
Indonesia and Malaysia will have positive inflationary
consequences for these ASEAN economies. By passing on
market prices to the end-user, consumers will face higher
energy and food price inflation in the near term. Although
the Malaysian Government will have to be careful that any
further fiscally contractionary policies don’t cause political
unrest, more subsidy cuts are likely to keep inflation
elevated in the short term.
The Federal Reserve’s tapering of bond purchases
will continue to tempt investors’ capital back towards
developed economies, threatening ASEAN’s domestic
currencies. The Indonesian rupiah remains particularly
vulnerable given the nation’s heavy reliance on capital
inflows for investment. A depreciation in the value of the
rupiah will hurt Indonesia’s consumers over the next few
years as they will need to part with more money to pay
for their energy and food needs as import prices increase.
However, easing global fuel prices and calmer food
price growth will help mitigate this somewhat, allowing
inflation to fall back by 2016. In Thailand, the baht will
suffer as investors grow more uncertain about the ability
of the region’s second largest economy to maintain
political stability. As a result of a weakening currency,
overall inflation in Thailand will step up a notch in the
near term.
Indonesia mineral export ban
The recent ban on the export of unprocessed
minerals from Indonesia could have tangible negative
consequences for the largest economy in ASEAN if it is
not repealed after the presidential election later this year.
The current government has implemented this legislation
in a bid to encourage investment in the processing and
refining industries. Major minerals currently produced by
Indonesia that will be affected by this ban include nickel
ore, bauxite, and to a lesser extent, copper.
icaew.com/economicinsight
cebr.com
0
2008
2009
2010
2011
2012
2013
Source: Badan Pusat Statistik, Cebr analysis
The ban on exporting unprocessed minerals could impact
up to 9.2% of the total exports of goods from Indonesia.
A proportion of the lost export revenues will be recouped
by increased exports of processed minerals. Moreover,
a set of 66 relatively large mining companies have been
given temporary exemptions on the condition that they
agree to build smelters in the near future. However,
smaller mining companies have not benefited from the
same leniency. Indonesia’s current smelting capacity will
not be enough to cater for the extra domestic supply
of mineral ores. In the majority of cases, smaller mining
companies will not have the financial backing to invest in
increasing smelting capacity. Therefore, in 2014, Indonesia
could face a substantial loss of export revenues.
Investment could also suffer for a series of reasons.
Firstly, the widening current account deficit will increase
concerns that the Indonesian economy is following an
unsustainable trajectory and will undershoot expected
returns. Secondly, this ban will reduce demand for
unprocessed minerals produced in Indonesia. This in turn
will lower the expected return of direct investment in the
mining sector, thereby deterring investors. Thirdly, by
legislating this ban less than a year before parliamentary
and presidential elections, the Indonesian Government
has created an incentive for large companies to hold off
on investment until the outcome of the election and the
policy stance of the next government are made clear.
Meanwhile, the rupiah could depreciate further as investor
confidence suffers, boosting inflation and hurting private
consumption growth. As a result, investment growth in
2014 is expected to be lower than in previous years before
bouncing back somewhat in 2015.
The potential for this policy to boost Indonesia’s mineral
processing industry is very small. It will take time for
newly-built smelting capacity to enter operation. All
the while a depreciating rupiah and more attractive
investments in developed economies as the Federal
Reserve tightens its monetary policy will make investment
increasingly difficult to finance. This protectionist policy
is likely to lead to an inefficient allocation of resources
as smaller companies that are unable to finance smelters
close up shop. The Indonesian economy is likely to pay the
price for this with lower exports, lower tax revenues, and
potentially through higher unemployment.
economic insight – south e a st a sia
Q1 2 014
Inflation and cooling Chinese economy are
key economic concerns
In 2014 private consumption in ASEAN as a whole will
be torn between the upward inflationary pressure of
recent subsidy cuts in Indonesia and Malaysia, and the
downward pressure of easing global energy prices.
Political uncertainty in Indonesia and Thailand, and the
ban on exports of unprocessed minerals in Indonesia,
will hold back GDP growth in the region to 5.3% this
year. In 2015 export growth will rebound slightly and
consumption will start to increase on the back of calmer
energy prices. Nonetheless, the slowdown in China
will come back to bite in 2016, hampering export
performance and holding back economic growth. More
confident investors with a greater appetite for investments
in emerging markets will mitigate this somewhat. On
balance, GDP is expected to increase by 5.4% in 2015 and
5.3% in 2016.
Figure 6: Cebr forecasts for GDP growth
In Malaysia, the subsidy cuts on sugar and fuel will
have material impacts on consumption, which will be
compounded by the General Sales Tax levy starting in
2015. However, a short-term recovery in exports will fill
the gap, causing overall GDP to increase by 4.9% in 2014
compared to 2013. Provided the Malaysian Government
doesn’t pursue additional aggressive budget cuts,
government spending should help to drive GDP growth of
5.1% in 2015 and 2016.
A slower increase in government spending in Singapore in
2014 compared to 2013 will bring overall growth down to
3.3% this year. This slowdown will also be due to the city
state running down its inventory stock. Faster investment
and stable consumption growth will boost GDP by 3.8%
in 2015. Slimmer investment opportunities for the already
highly productive city will bring growth back down to
3.4% in 2016.
%
8
7
6
5
4
3
2
1
0
after a poor performance during the country’s recession
last year. This would help support growth of 4.8% in
2014. Stronger consumption in 2015 will see overall GDP
increase by 5.1% before the slowing Chinese economy
hampers Thailand’s export performance, pulling GDP
growth down to 4.9% in 2016. Without a quick return
to social order, the nation could see further delays to key
infrastructure projects while private investors would stop
investing in Thailand. This would bring down growth
rates, devalue the baht, hurt Thai consumers and could
have a persistent negative impact on investor confidence.
Indonesia
Thailand
2014
Malaysia
Singapore Philippines
2015
ASEAN
2016
Source: Cebr forecasts
Although inflation will remain elevated in Indonesia,
it is expected to fall back over the next three years as
the impact of last year’s fuel subsidy cut wanes. Easing
energy prices will also help private consumption growth
pick up in 2014. Overall, economic growth will increase
marginally to 5.6%. This would be higher if the recentlyannounced mineral ban was lifted by a new parliament.
Provided the rupiah does not shed too much of its
value, 2015 should see increased investor confidence in
Indonesia as the allure of US yields begins to fade. This will
boost investment, while a recovery in exports will help
to increase growth to 5.9%. Slower net export growth in
2016 will cause GDP to increase by 5.8%.
Provided the recent political unrest in Thailand dissipates
swiftly, and assuming the incumbent Yingluck Shinawatra
remains in power, investment growth should return
icaew.com/economicinsight
cebr.com
This year will see stronger growth in investment and
government spending in the Philippines as the developing
nation recovers from the devastation wrought by Typhoon
Haiyan. Growth in private consumption and net exports,
however, will be subdued. Overall, the Philippines
economy will grow by 6.8% in 2014. This will slow in the
coming years as the same construction and rebuilding
activity that raised GDP growth in 2014 eases back. At
the same time, the lack of infrastructure development,
high poverty levels and unemployment will hold back
performance. We expect GDP to increase by 5.3% and
5.0% in 2015 and 2016 respectively.
In Vietnam, a healthier banking sector with a lower
proportion of non-performing loans will encourage GDP
growth this year. While investment growth is expected
to be robust, the US tapering will take the shine off what
would otherwise have been a stronger performance.
Nevertheless, increased net exports should help Vietnam’s
economy grow by 5.4% in 2014. In following years,
Vietnam is expected to become more open towards
international investors, helping to draw new capital into
its economy. Meanwhile, more government spending,
partially due to the equitisation of state-owned assets, will
also support higher growth rates. As a result, we expect
annual GDP to increase by 5.7% in 2015 and 2016.
economic insight – south e a st a sia
Q1 2 014
Cebr
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