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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 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: Leisl Pillay 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 MKTPLN12930 02/14