Download economic insight SOUTH EaST aSIa Quarterly briefing Q3 2013 chinese slowdown sends

economic Insight
South East Asia
Quarterly briefing Q3 2013
Chinese slowdown sends
ripples through ASEAN
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 and Thailand.
The world economy is growing but remains relatively
subdued. The US economy has continued to expand
after struggling somewhat towards the end of 2012.
Recent concerns that the Federal Reserve would rein
in its monthly $85bn-worth of asset purchases put
capital markets on edge and led to the emergence of
a peculiar situation where positive economic data led
to falls in asset prices. To curb this volatile behaviour
US policy-makers specified that asset purchases would
only cease when the US unemployment rate fell to
6.5%. This has calmed markets for now, but only
time will tell if this attempt at forward guidance will
succeed at easing the transition from loose to tighter
monetary conditions.
While growth finally returned to the eurozone in the
second quarter of 2013, the overall picture for the
region masks significant variations in performance.
In Spain, Italy and the Netherlands economic activity
continued to contract. Furthermore, for peripheral
members of the currency union, their commitment to
the euro makes it impossible to devalue their domestic
currency, forcing policy-makers to implement public
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spending cuts and tax rises that have contributed to a
collapse in economic activity. Hence, unemployment rates
are shockingly high and output remains way off peak.
While there are modest signs of improvement, profound
challenges persist for the eurozone and a convincing
recovery is still a distant prospect.
The most significant development in the global economic
landscape is the slowdown in China. After average growth
of 10.5% over the last 10 years we forecast that the world’s
second largest economy will grow by only 7.2% in 2013.
Easing demand for Chinese exports since the financial
crisis has called time on the rocket-speed growth rates
experienced by the economy in the past. This has farreaching implications for the rest of the world, not least for
the ASEAN economies which are closely integrated with
China in the global value chain. China’s slowdown against
a backdrop of an already weak global economy has further
dampened the demand for ASEAN’s commodities and
other exports – traditionally drivers of growth in the region.
This has shifted attention away from exports and towards
domestic consumption as the new engine of growth in
ASEAN. In this report we examine this development and
forecast the role that domestic consumption could play in
supporting growth over the coming years.
ASEAN export growth crumbles
under weak demand
During the financial crisis global demand contracted
sharply before rebounding over the next couple of years.
However, since its recovery world trade has been growing
more slowly than before. The CPB World Trade Monitor
shows total volume of world trade growing annually by
3.2% on average since 2011, compared to an average 6.6%
in the 10 years before the crisis. The consequences of this
have been felt across the world and economies that had
previously relied on external demand to drive economic
growth were forced to look elsewhere. Figure 1 illustrates
the extent to which the slowdown in external demand has
impacted ASEAN exports.
Figure 1: Real annual growth in exports of goods and
services from the five largest economies in ASEAN,
measured at constant prices
%
25
20
15
10
5
0
-5
-10
Indonesia
Thailand
Malaysia
2010
2011
2012
Singapore
Philippines
2013*
*2013 growth rate based on Q1 2013 which is the latest period for
which data is available.
Source: Badan Pusat Statistik, Office of the National Economic & Social Development Board of
Thailand, Department of Statistics Malaysia, Singapore Department of Statistics and The National
Statistical Coordination Board of the Philippines
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Export growth is slowing down in the five largest
economies of South East Asia. The latest available data
for Malaysia, Singapore and the Philippines show that the
amount of goods and services exported fell year on year
by 0.6%, 4.2% and 7.0% respectively in Q1 2013. As these
growth rates are only based on the first quarter of this year,
they do not reflect the stronger performance of the US
economy or the marginal improvement in the eurozone in
recent months. While these growth rates may improve later
in the year, it is abundantly clear that, in the big picture,
export growth is weakening. Key drivers of this decline
are the economic contractions and the tighter lending
environments prevailing in the developed economies of the
western hemisphere during and after the financial crisis.
In the West, consumption and hence demand for foreign
goods and services has retreated, hurting ASEAN’s exports.
The recent economic slowdown in China has served as
another key factor undermining performance in ASEAN’s
exports. China is an important trading partner of ASEAN’s
– data from the International Monetary Fund (IMF)
shows that last year 11.5% of all the goods exported by
the five largest economies of ASEAN were sold to China.
As China undergoes its much-discussed balancing away
from exports and investment, towards consumption,
GDP growth will continue to slow over the coming years,
softening its demand for ASEAN exports. Furthermore, the
Bank of Japan’s commitment to double the monetary base
over two years and the subsequent depreciation of the yen
is likely to impact Japan’s demand for goods and services
produced by ASEAN. An understanding of what this
means for growth requires an analysis of the fundamental
economic conditions that have powered the development
of ASEAN – namely, the potential for productivity growth in
South East Asia.
Large population to facilitate
continued gains in productivity
For Indonesia, Thailand, Malaysia and the Philippines,
large, growing populations and the potential for
productivity improvements provide a strong backdrop to
their economies. In these countries healthy investment in
physical and human capital is increasing the amount of
output that each worker can produce. Singapore, however,
is subject to much tighter constraints in terms of the size of
its population and its territory. Approximately 446m people
currently live in the five largest economies in ASEAN.
Of these people some 55.6% live in Indonesia, 14.5%
in Thailand, 21.9% in the Philippines, 6.7% in Malaysia
and only 1.2% in Singapore. Singapore has been able to
industrialise and increase its labour productivity at a much
quicker rate than other members of ASEAN but as a highly
developed economy the air is thinning and productivity
gains are now becoming harder to achieve.
The IMF estimates that average output per person in
Singapore was $52,000 in 2013. This is 5 times larger
than that in Malaysia, 8 times larger than Thailand, 14
times larger than Indonesia and 18 times larger than
the Philippines. The higher the labour productivity in an
economy, the more difficult it is to further increase this
productivity by a given amount. As an economy reaches
its production possibility frontier (quite literally the level
of production that can be supported by the current
state of technology) it becomes more difficult to achieve
a given level of productivity growth. This is because it
requires far more investment and resources to develop
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new technologies than it takes to adopt already existing
technologies. Crucially, this is not to say that Singapore has
reached the peak of its productivity. The key point is that
the other ASEAN economies will find it easier to increase
their labour productivity simply because they have a larger
scope to improve. Figure 2 shows the recent trends in
productivity growth in ASEAN as well as our forecasts for
the future.
Figure 2: Annual growth in real GDP per capita in the
five largest economies in ASEAN
Singapore experienced the largest drop with annual
growth falling from 33% in 2008 to just 2% in 2009.
While growth rates also slid for the remaining four
economies, encouraging economic fundamentals and
a positive outlook for productivity growth kept credit
availability reasonably strong.
Figure 3: Annual growth in the total value of loans
for the five largest economies in ASEAN
%
35
%
Cebr
forecasts
30
14
Cebr forecasts
12
25
10
20
8
15
6
10
4
5
2
0
0
-2
Indonesia
Thailand
Singapore
Philippines
Indonesia
Thailand
Singapore
Philippines
Malaysia
Malaysia
Source: International Monetary Fund, Cebr forecasts
Fundamentally, productivity gains imply rising real incomes
and higher purchasing power which creates the right
conditions for increases in consumption expenditure and
improvements in living standards. This is shown in the data
– in Indonesia, Malaysia and the Philippines growth rates in
private consumption have accelerated since 2010. However,
while robust growth in private consumption will support
overall productivity increases as export growth weakens in
coming years, it will not completely fill the gap. Economic
capacity cannot be transferred instantaneously between
different sectors or production areas. There will always be
a lag as workers are retrained, new capital is invested and
new supply chains are developed. Therefore, we forecast
that annual growth in productivity will fall over the short
term in Indonesia, Thailand and Singapore as ASEAN feels
the impact of the slowdown in China. An improvement
in global demand in 2015 will allow productivity growth
to increase again. Similarly, in the Philippines productivity
growth will slow down from 2013 to 2015 but will begin to
pick up after this.
Strong productivity growth in ASEAN has also created the
potential for workers to borrow from future income in order
to smooth their consumption over a greater number of
years. By increasing the amount that consumers can spend
right now, expanding credit markets in ASEAN are an
important factor influencing the growth of consumption.
Tighter global monetary
conditions to put brakes on
credit growth
Source: Bank Indonesia, The Bank of Thailand, Central Bank of Malaysia, Monetary Authority of
Singapore, Central Bank of the Philippines, Cebr forecasts
The resurgence in loan availability since 2010 can be
explained by the loose monetary conditions engineered
by central banks in the developed world, and in particular,
the US. The three rounds of quantitative easing embarked
upon by the Federal Reserve between the end of 2008
and the present day have flooded US capital markets with
liquidity, causing yields in the world’s largest economy
to fall. In the hunt for greater returns, investors targeted
emerging markets with the result that much of this increase
in liquidity has been soaked up by ASEAN and other
developing regions.
We expect that the Federal Reserve will begin to taper its
asset purchases by early 2014, and possibly towards the
end of this year, as improvements to the US economy push
the unemployment rate on the right course to reach the
central bank’s target of 6.5%. Global capital markets are
notoriously difficult to predict, but as monetary policy
in the US is tightened, yields in the US will rise. This will
reduce the flow of capital to ASEAN, which in turn will
pull down growth in the total stock of loans. We forecast
that annual growth in total loans will fall in Indonesia,
Singapore, Thailand and the Philippines from 2012 to 2015
as their financial markets lose the recent buoyancy brought
to them by the Federal Reserve’s steps to flood markets
with new liquidity. We also forecast that annual growth
will fall for Malaysia in 2013 and 2014 but will then pick up
again in 2015 as investor capital returns to take advantage
of the opportunities for growth. This initial slowdown in
the expansion of credit availability will limit the extent to
which consumers can borrow from future income to boost
consumption today and therefore will have a tempering
effect on consumption growth rates over coming years.
Before the financial crisis struck the total stock of loans in
ASEAN was increasing at a robust pace as shown by Figure
3. The collapse in investor sentiment and the resulting
financial crisis caused growth rates to tumble in 2009.
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Hot money could test
resilience of ASEAN’s capital
markets
Just as ASEAN economies are benefiting from the
influx of capital flows driven by loose monetary
policy in the US, they could suffer when the
unwinding of asset purchases causes this tide of
liquidity to recede. It is likely that this will drag down
growth in the availability of capital in 2014 and
2015, but this in itself would not be a devastating
development. The real danger would come if
investors’ expectations shifted significantly to
incorporate the belief that ASEAN currencies will
depreciate more than previously anticipated. In
this situation investors would withdraw their funds
from the region causing its domestic currencies to
depreciate, compounding the flight of capital out
of ASEAN, and perpetuating a vicious circle. Figure
4 shows that an element of wariness already exists
among investors.
Consumption to contribute
a bigger slice to growth
Historically the remarkable increase in productivity in
ASEAN has been biased towards goods and services that
have been exported to the rest of the world. However, the
developed world’s appetite for cheaply produced goods is
constrained by tighter credit and squeezed real incomes.
The balance of output growth in ASEAN will now shift in
favour of private consumption and away from exports.
Figure 5 shows our forecasts for growth in consumption
for the region.
Figure 5: Cebr forecasts for annual growth in real
private consumption for five largest economies in
ASEAN
%
9
8
7
6
5
4
Figure 4: Depreciation of currencies against
the US dollar, from 2011 peaks to beginning
of August 2013
3
2
Vietnamese
Dong
Philippines
Peso
Singapore
Dollar
Malaysian
Ringgit
Thai
Baht
%
Indonesian
Rupiah
1
0
Indonesia
2012
Thailand
2013 F
Malaysia
Singapore
2014 F
Philippines
2015 F
0
Source: Badan Pusat Statistik, Office of the National Economic & Social Development Board of
Thailand, Department of Statistics Malaysia, Singapore Department of Statistics, The National
Statistical Coordination Board of the Philippines, Cebr forecasts
-5
-10
-15
-20
-25
Source: Macrobond
Indonesia has reacted to its depreciating currency
by upping interest rates, sending a clear signal to
markets that it is committed to protecting the value
of the rupiah. In contrast, Thailand’s interest rate
cut in May led to worries that the second largest
economy in ASEAN prioritised stimulating output
growth over returns to foreign investors. However,
the reluctance to cut interest rates further in spite
of slowing growth suggests that the authorities are
aware of the importance of avoiding further currency
depreciations.
Strong underlying fundamentals for the region and,
crucially, low debt to GDP ratios mean that the onset
of tighter monetary policy in the US will not trigger
currency crises on the same level as that seen in the
late 1990s. Gross government debt to GDP ratios for
Indonesia and the Philippines are falling. While these
ratios have been increasing in Thailand, Malaysia and
Vietnam, they still remain relatively low, standing at
an estimated 45.9%, 56.0% and 50.9% respectively
in 2013. On balance, although the tapering of asset
purchases in the US will tighten capital flows into
ASEAN, a more resilient region should prevent this
from snowballing into a crisis.
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We expect that annual consumption growth will decrease
in Indonesia in 2013 due in part to the headwinds of a
softening China and tighter monetary policy in the US. This
year the Indonesian Government made the first cut in fuel
subsidies since 2008 which has driven inflation upwards,
reducing the purchasing power of consumers. However,
the large Indonesian population and a fast growing middle
class will accelerate increases in consumption in 2014 and
2015. During this period the Indonesian consumer will
become a stronger contributor to growth, moving from
driving 47% of GDP growth in 2012 to an expected 58%
in 2015.
In Thailand, a high household debt to GDP ratio of
approximately 80%, a relatively high exposure to external
demand from China and lower growth in the total stock
of loans will cause consumption growth to slow in 2013.
Similarly, high household debt levels in Malaysia, coupled
with recently announced policy measures aimed at curbing
mortgages and personal loans, will dampen consumption
growth over coming years. By 2015 consumption growth
rates will have picked up for both countries in response
to a stronger global economy and further increases in
productivity. For Thailand the proportion of overall growth
driven by consumption will slightly increase from 53% in
2012 to 54% in 2015. For Malaysia we forecast that it will
increase from 68% to 77% over the same period.
Consumption growth in the Philippines will increase
marginally in 2013 on the back of relatively loose monetary
policy, before falling in 2014 and 2015 respectively.
While this economy has a huge scope for increases in
productivity, high unemployment and high poverty levels
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AUGUST 2 013
will limit increases in consumption in the near term. In
Singapore annual growth in consumption is forecast to
rise as the global economy improves. However, the more
developed city state will not experience the same high
growth rates as its neighbours since it is not facing the
same degree of catch-up growth. The proportion of GDP
growth driven by consumption will fall for both Singapore
and the Philippines, as increases in consumption will be
outweighed by increases in exports driven by recovering
external demand.
As another ASEAN economy which is closely connected
with the fortunes of China, we expect that Malaysia will
suffer from the Chinese slowdown with GDP growth falling
to 4.3% in 2013 and 4.0% in 2014 – down from 5.6%
in 2012. Although inflation remains low in this member
of ASEAN, the tapering of asset purchases in the US will
constrain the flows of liquidity entering the country and
will act as a drag on investment. However stable
productivity growth and increasing household
consumption should allow output growth to increase
marginally to 4.1% in 2015.
Growth to stumble but ASEAN
will stay on its feet
Estimates indicate that in the second quarter of this year
Singapore’s economy grew at its fastest rate in over two
years. This growth was buoyed by resurgence in the
manufacturing of electronics and robust performance
in the biomedical sector. The volatility of the biomedical
sector calls into question the sustainability of this boost
in the growth rate, while continued contractions in the
nation’s non-oil exports suggest the economy could be
experiencing an inventory cycle. Nonetheless the services
sector will help GDP growth recover from 1.3% in 2012 to
2.8% in 2013. The increasing attractiveness of Singapore
as a commercial hub for the growing wealth in South East
Asia and the wider emerging world will support robust
expansion in financial and business services. We forecast
economic growth will increase to 3.5% in 2014 and 3.7%
in 2015.
Growth in ASEAN will decelerate to 4.7% in 2013 from
5.5% last year. This slowdown will be largely driven
by easing demand from China while a squeeze on the
availability of capital in 2014 and 2015 as US monetary
policy is tightened will also hold back growth. Despite this,
robust domestic consumption combined with improving
external demand conditions in late 2014 through 2015
will drive growth of 4.8% in each of these years. Figure 6
shows our forecasts for real GDP growth for the six largest
economies of ASEAN and for the region as a whole.
Figure 6: Cebr forecasts for annual growth in real GDP
for six largest economies in ASEAN
%
6
5
4
3
2
1
2013
2014
ASEAN
Vietnam
Philippines
Singapore
Malaysia
Thailand
Indonesia
0
2015
Source: Cebr forecasts
In Indonesia, the government took an axe to the fuel
subsidy, causing inflation to jump to its highest level
in over four years and reducing the spending power of
consumers. This will constrain consumption growth while
the Chinese slowdown will continue to soften commodity
prices, hurting Indonesia’s export earnings. Meanwhile, the
unwinding of quantitative easing in the US will reduce the
availability of capital, causing growth in investment to ease.
We forecast that GDP growth will slow to 5.5% in 2013
before dipping again in 2014 to 5.3%. An improvement in
external demand should bolster the economy, leading GDP
to grow by a marginally higher 5.4% in 2015.
Reduced demand from China has had a significant
impact on Thailand’s exports and the economy is now
in a technical recession. Recent market volatility for Thai
assets points towards the possibility that tighter monetary
conditions down the road will limit investment. We
forecast that GDP growth will fall to 3.7% in 2013, down
from 6.5% in 2012. Increases in government spending on
infrastructure, Thailand’s large population and improving
global demand should see economic growth pick up to
4.2% in 2014 and 4.3% in 2015.
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Strong growth in consumption and government spending
in the Philippines will drive output up by 5.3% in 2013.
While this is down on 2012, when GDP grew by 6.8%, it is
0.6 percentage points higher than average annual growth
over the previous five years. Further government spending
on public infrastructure projects will cause growth to tick
up a notch to 5.4% in 2014 before high unemployment
and poverty levels, and a requirement to lift interest rates
in response to tighter monetary conditions in the US will
drag growth rates back down to 4.6% in 2015.
In Vietnam a firmer handle on inflation and indications
that policy-makers are keeping a close watch on price
growth should increase confidence within the economy.
A cooler Chinese economy and the consequential softening
of commodity prices, particularly in crude oil, will be
a drag on demand for Vietnam’s exports. The overall
impact on exports will be mitigated to an extent by the
recent devaluation of the dong while robust consumption
and significant increases in government spending will
help insulate growth rates from falling. We forecast GDP
in Vietnam to rise by 5.0% in 2013 and 2014. Stronger
demand for exports in 2015 will push this up to 5.5% as
global demand improves further.
In summary, we expect that the slowdown in China
and tighter global monetary policy will bear down on
ASEAN to an extent over coming years. However, the
core drivers of productivity growth, a large, growing
labour force and a healthy underlying economy will
safeguard ASEAN’s continued development into a
future where the region is less focused on what it can
produce for consumers in other nations, and more
focused on what can be produced and consumed by
its own citizens.
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