Download economic insight SOUTH EAST ASIA Quarterly briefing February 2012 asean centraL banKs are

economic Insight
South East Asia
Quarterly briefing February 2012
ASEAN CENTRAL BANKS ARE
PUSHING THE STIMULUS BUTTON AS
FALLING EXPORTS HURT GROWTH
Welcome to ICAEW’s Economic Insight: South East Asia, a
quarterly forecast for the region prepared directly for the
finance profession. Produced by Cebr, our partner and
acknowledged expert 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.
Many emerging markets have been slowing, with India
and Brazil notable examples that were until recently
performing well. Falling commodity prices and slowing
export demand are prompting central banks to turn
on the stimulus tap. In the second half of January
alone, the central banks of Indonesia, Thailand and the
Philippines all cut their policy rate, with more expected
to follow suit. This puts the final nail in the coffin of the
‘decoupling’ theory of growth in advanced and emerging
economies. Emerging markets will be affected by low
Western demand, and the latest global projections
show that richer countries will lag in terms of growth as
governments are unable to provide the kind of stimulus
programmes executed during the financial crisis. Exports
are suffering in Asia and beyond and some countries have
slowed more than previously anticipated, prompting
a downward revision of growth forecasts. The general
trend remains that ASEAN should continue to do well by
international standards as investment and consumption
keep the growth engine humming.
BUSINESS WITH CONFIDENCE
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The eurozone, still a throbbing headache for the world
economy, may yet invalidate these assumptions. Some
progress is being made however, with visible progress on
fiscal integration. Also, the European Central Bank’s provision
of nearly m500bn of credit to the eurozone banking sector
eased the financial strain at a crucial point. Contracting bank
lending was leading to another credit crunch, but this was
stopped by the massive injection of liquidity that is similar
to US and UK quantitative easing programmes. In a positive
development, signs of a strengthening US recovery suggest
that it may be able to pick up some slack resulting from
Europe’s weakness. However, the following section suggests
that ASEAN is better-advised to place its growth focus more
with other emerging and developing countries than with
the ailing West.
countries, 1.0% for the US, 0.1% for Japan and 0.2% for
the eurozone. The obvious implication is that new markets
will play an increasingly important role while traditional
customers from advanced economies are taking a back
seat over the coming years.
Figure 2: Exports as a percentage share of GDP
%
250
200
150
100
50
Figure 1: GDP Index, 2007 = 100
160
Indonesia
150
140
Thailand
130
Philippines
Vietnam
2014
2013
2012
2011
2010
2009
Source: World Bank, Cebr analysis
110
100
90
2008
Singapore
Malaysia
120
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1995
170
1996
0
180
2007
2008
2009
2010
2011
2012
2013
2014
ASEAN
Japan
Eurozone
China
US
Emerging and developing countries
Source: IMF, Cebr analysis
Emerging markets surge ahead as advanced
economies struggle
One definition of the end of a recession is when output has
regained the peak reached before falling in the downturn.
By this measure, the large Western economies are still in
the recovery process – see figure 1 for an illustration. The
US barely managed to climb back past its previous output
level in 2011 while the eurozone and Japan remain below
the output level reached before the global financial crisis hit
in 2007. The eurozone sovereign debt crisis means that the
region is only expected to reach the prior peak output level
in 2014 – a seven-year recession. Following the March 2011
earthquake and tsunami, Japan is in a similar position. With
a GDP index of 95.8% of the 2007 level, it is expected to
take until 2014 to regain prior levels of value added.
This is in stark contrast to star pupil China which continues
to outpace even other emerging countries despite already
being the world’s second-largest economy. In the course of
2011, output surpassed 150% of the 2007 level and is on
track to reach 180% in 2014. This projection is dependent
on steady growth in excess of 7% per annum, a tall but
realistic order. In March 2012 we will publish the first edition
of Economic Insight: China that takes a closer look at the
country’s material progress.
ASEAN largely managed to escape recession thanks to its
increasing ties to the East and the rising importance of
domestic markets. In 2011, output stood at 119% of the
2007 level, a strong result despite being a fair bit lower than
the overall group of emerging and developing countries.
By 2014, output is expected to stand at 139.4% of the 2007
level, a compound annual growth rate (CAGR) of 4.9%. This
compares with CAGRs of 6.3% for emerging and developing
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Export growth is no longer the growth
engine for many ASEAN nations
Although ASEAN is often understood to be highly
dependent on export markets, a closer look at the figures
reveals that there are large differences even between the
six major economies of the region. Figure 2 illustrates that
export dependence is rising for some countries while it is
falling for others.
At 207.7% of GDP, the value of Singapore’s exports is the
second-highest in the world after Hong Kong. Both cities
owe their enormous trade levels to large ports and their
status as regional trading hubs. Export volumes in relation
to output fell as trade plummeted during the global
financial crisis and currently stands at about the level of
2003. This is expected to pick up again, rising gradually
to 216% of GDP and will thus remain lower than during
the pre-crisis peak as local incomes rise and the domestic
markets strengthens.
Indonesia, the Philippines and Malaysia – together
accounting for six in ten of the region’s population – are
projected to have stable export shares of GDP near the
2011 level in the coming three years. Within this group,
Malaysia is most exposed to the vagaries of external
demand due to its export/GDP ratio near 100% of GDP,
whereas Indonesia and the Philippines stand closer to
30%. These numbers show that GDP growth in large
parts of ASEAN is much less dependent on the global
economy, allowing for steady growth through a period
of weak external demand.
Thailand and Vietnam are climbing the ladder of
exporters as they develop their manufacturing bases.
Vietnam is becoming attractive for makers of labourintensive products due to rising wages in neighbouring
China. Its rising connectedness into the global supply
chain is evident in a near-tripling of exports as a
proportion of GDP over the past decade, from 32.8% in
1995 to a projected 93.3% in 2014, by which time it will
nearly equal Malaysia on this measure. Thailand’s exports
are only set to grow from 2014 onwards since the recent
flood damage set its expansion back.
economic insight – south e a st a sia
february 2 012
Figure 3: Government debt as a percentage share
of GDP
Figure 4: GDP per capita, 2011 US$
60,000
%
120
50,000
100
40,000
80
30,000
60
20,000
40
10,000
20
Singapore
Malaysia
Thailand
Philippines
2011
Average
Singapore
Brunei
Malaysia
Thailand
Indonesia
Philippines
Vietnam
Laos
Cambodia
2016
2015
2014
2013
2012
2011
2010
2009
2008
2006
2007
Indonesia
Myanmar
0
0
2020
Source: IMF, UN Population Division, Cebr analysis
Source: IMF
Public debt poses little risk for ASEAN
Given the economic turmoil created by high levels of public
debt in the eurozone, and possibly also the US and Japan
in coming years, it’s worthwhile to evaluate if ASEAN faces
a similar risk. Figure 3 illustrates the current debt load of
the region’s five major economies for gross debt. It is worth
bearing in mind that net debt is a better indicator but no
internationally comparable figures for this are available for
the region.
As with exports, Singapore takes the top spot in the
ranking for gross debt. After peaking at 105.0% of GDP in
2009, the city state’s gross debt burden has come down
to about 93.5% in 2011. This is expected to be pushed
down further by continuing budget surpluses, reaching
81.7% of GDP in five years’ time. Although that figure
still appears high, it is balanced by government assets
that are not reflected in the gross debt figure, including
investments in sovereign wealth funds Government
Investment Corporation and Temasek Holdings. Over
half of public debt is owed to the national pension fund,
with the rest mainly aimed at ensuring effective and
liquid capital markets. Cebr’s calculations suggest that in
reality Singapore has no net government debt. Having run
consistent budget surpluses and invested both these and
pension savings wisely, the statistics that show Singapore’s
high gross public debt give a misleading impression and
are no cause for concern at present, as is reflected in the
low yields on Singapore Government bonds.
Malaysia, which comes second in the list of five countries,
has gross debt at 55.1% in 2011. This is expected to rise by
a marginal 2.3 percentage points. The other countries have
relatively low debt/GDP ratios as well as a largely stable
or declining outlook. The Philippines and Thailand are set
to maintain a manageable debt burden, with little change
forecast, meaning that debt will grow roughly in line with
GDP. At current policies, Indonesia is on track to lower its
debt burden below 20.0% by 2016.
The main risk to public finances in the region could
arise from a banking crisis that requires large bail-outs,
especially in Singapore. The country has a financial sector
(as measured by bank balance sheets) of similar size to that
of the UK when adjusted for output. However, a re-run of
the Asian financial crisis is unlikely due to strong external
reserves in the region and the local housing market appears
fairly stable. In sum, only in the unlikely case of a severe
financial crisis, if excessive spending takes hold or if tax
revenues crash will ASEAN’s stable and sustainable public
finances be threatened.
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Differences in living standards between
ASEAN nations are set to widen over the
coming decade
Stable public finances are a precondition for a stable
macro economy, which is crucial for the expansion of
living standards over time. This section looks at trends
in living standards with a longer time horizon than the
other forecasts included in this publication. However,
it should be noted that income per head does not
take account of the distribution of wealth and it is thus
possible that the majority of the population fails to
benefit even if GDP per capita is growing.
The forecast shows that wide discrepancies in living
standards between the ASEAN nations will remain
largely unchanged over the course of the present
decade. Singapore is expected to pull ahead due to
strong economic growth and a low population growth
rate, bringing its CAGR of per capita income to 2.7% for
the decade – high growth for an advanced economy.
Brunei, on the other hand, faces faster population
growth and lower economic output expansion, yielding
1.0% per capita income growth that is at the bottom
of the spectrum. This means that Brunei’s income per
capita would grow from $32,730 to $35,950, whereas
it is expected to grow from $45,910 to $58,710 in
Singapore (all figures in 2011 US$).
High population growth is holding back the Philippines
and Malaysia from achieving higher per capita income
growth rates. Their per capita income CAGR is projected
to amount to 3.1% and 3.3% respectively. However,
for the decade, that still means an increase of over one
third. Lower income economies Laos, Cambodia and
Vietnam are set to achieve double that, growing by
about two thirds between 2011 and 2020. At this rate,
Vietnam should achieve a similar GDP per capita level in
2020 as the Philippines has now.
Until 2020, the difference in annual GDP per capita
between a Singaporean and an average ASEAN citizen
will grow from $41,830 to $53,880. We can thus
conclude that faster growth in lower income economies
means some convergence of living standards, but figure
4 shows just how small this convergence is likely to be.
economic insight – south e a st a sia
february 2 012
Lack of progress and slowing in China
pull down some growth forecasts
ASEAN’s local giant Indonesia should slow in 2012 as a
downturn in Europe and lower growth in main trading
partner China take their toll. But with a reduction of
annual GDP growth to 5.6% for the year, the economy
is still going strong and should power a big share of the
region’s growth. Bank Indonesia, which sits on large
foreign currency reserves, may soon reduce its policy
interest rates to less than the record low of 6%. Looser
monetary policy should support consumption that will
probably be impacted by a reduction in fuel subsidies
that lowers discretionary income. The lifting of the
country’s debt rating from junk status to investment
grade due to healthy public finances should help to
attract foreign investment and we expect growth to
pick up to 6.2% in 2013 and further to 6.6% in 2014.
Export-dependent Malaysia will be unable to duck
strengthening global economic headwinds. At the same
time, uncertainty about future government policies in
view of a possible snap poll for parliamentary elections
could slow the private sector’s pace of investment and
the introduction of a value-added tax and subsidy
cuts may dampen otherwise solid domestic demand.
An anticipated fall of annual GDP growth to 3.8% in
response to falling commodity prices and a challenging
environment for electronics makers. A cyclical upswing
of the semiconductor industry could support growth
from the second half of 2013 and help GDP growth by
5.3% for the year. Rising output will likely be supported
by a thriving service sector and strong export earnings
that are projected to result in growth of 5.7% in 2014.
The combination of falling export earnings (due to
falling demand from large Western economies) and
a decline in government spending have hit growth
in the Philippines last year. From a peak of 7.6% in
2010, growth in 2011 is estimated to have halved to
3.8%. The economy is expected to expand at a similar
rate of 3.9% in 2012 as delays in public infrastructure
investment decline, but remittances, a key income
source, decline. One upside of a double-dip recession
in Europe is that corporate cost pressures may broaden
the expansion of the outsourcing sector, an increasingly
important export earner. The positives should outweigh
dampening factors, leading to growth of 5.0% in 2013
and 5.3% in 2014.
Singapore’s unemployment rate is at a full employment
level of 2.0%, but there are storm clouds ahead for
the country’s economy. A marked slowing of exports
and a leading Purchasing Managers’ Index indicator
consistently below the contraction point of 50 suggest
that growth will slow considerably going into 2012.
Cebr has revised growth forecasts down to 3.2%. This
should pick up again in 2013, reaching 4.1% as the
country’s strong manufacturing and services industries
capitalise on rising prosperity in Asia. Looking further
ahead, the introduction of protectionist policies such
as stamp duty on new house purchases by foreigners
without permanent residence may result in somewhat
lower foreign investment and immigration. Singapore’s
growth trend remains fairly high though and should
result in output growing by about 4.3% in 2014.
Although strenuous efforts held off the waters from the
centre of Bangkok, the worst floods in half a century in
Thailand submerged short-term growth prospects. The
economy is likely to have expanded only 1.4% year on
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year, with supply chain disruptions dragging on well into
2012. However, public and private sector reconstruction
spending should support domestic demand and lead
to growth of 4.1% for the year. In 2013, greater tourist
numbers and a strong demand for agricultural produce
are expected to contribute to annual GDP growth
of 4.6%, rising to 4.8% in the following year as the
region’s dynamism fully reasserts itself.
A large current-account deficit continues to haunt
Vietnam and may deteriorate in 2012 as exports
slow. High inflation is hurting purchasing power and
the combined effect of these factors is that growth
prospects have fallen further. Forecasted growth for
2012 is 5.3%, rising to 6.2% in 2013 as exports begin
to recover. If the macroeconomic problems can be
overcome and the dong can escape excessive volatility,
strong investment and good trade prospects should still
lift Vietnamese output to 6.8% in 2014.
Figure 5: Country-level GDP growth forecasts
%
8
7
6
5
4
3
2
1
0
Indonesia
Malaysia
Philippines
2012
Singapore
2013
Thailand
Vietnam
2014
Source: Cebr analysis
A sharp drop in Chinese growth or
a Euro implosion would derail the ASEAN
prosperity train for some time
The preceding forecasts show that the region is
expected to do well compared to other parts of the
world that have slowed sharply as the advanced
economies battle to climb out of the long recessionary
trough many still find themselves in. The main apparent
risks to these largely upbeat growth forecasts lurk
unchanged in the background. A disorderly default or
even exit of a large European economy would likely
beat down shaky consumer and business confidence
and impact Asian business via a renewed credit crunch.
Although outright recession may be avoided, such an
event would probably crimp growth rates well into
2014.
One need be no astrologer to recognise that the Year
of the Dragon may bring momentous change to China.
Although the Communist Party will seek continuity
and stability in the upcoming change of leadership,
2012 could bring three decades of average annual GDP
growth in excess of 10% to an abrupt end. Massive fixed
asset investment that feeds on itself cannot continue
indefinitely. The powerful government will use all tools
at its disposal to keep a cooling of the overheated
construction sector from freezing the momentum of the
Chinese economy, but it’s possible that this will not be
enough. For the time being though, ASEAN’s horoscope
looks auspicious.
economic insight – south e a st a sia
february 2 012
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