Download economic insight SOUTH EAST ASIA Quarterly briefing Q1 2013

economic Insight
South East Asia
Quarterly briefing Q1 2013
South east Asia stands ready
to overcome another year
of global headwinds
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 past year was a turbulent time for the world
economy. The eurozone saga dragged on, the
Arab Spring swept further across the Middle East,
extreme weather pushed up global food prices and
worries about the US fiscal cliff unsettled markets.
The latter has been settled for the time being,
but fiscal consolidation in the US still faces major
political and economic challenges.
In Western economies the structural problems of
population ageing and rising fiscal entitlements
are endangering the solvency of nations that were
believed to be risk-free borrowers just a few years
ago. Combined with unconventional monetary
policy designed to cushion the aftershocks of the
financial crisis, trust in the G7 nations as custodians
of global political and economic stability is being
eroded.
BUSINESS WITH CONFIDENCE
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Amid these developments, the global balance of power
is shifting east at a fast pace. But 2012 has also exposed
fractures in the seemingly inexorable rise of Asian giants,
India and China. Disappointing growth and doubts
about whether high growth rates can be sustained are
one aspect of this. Another is that the political stability
of both countries was damaged; in India scandals and
policy U-turns exposed some ineptitude in the political
class, while in China the legitimacy and control of the
Communist Party was being undermined by a growing
number of public protests and a technology-driven rise in
the freedom of expression.
ASEAN did well economically against this background,
which is expected to continue to remain difficult in 2013.
This report concludes that a similarly strong performance
can be maintained over the forecast horizon if the global
economy gathers momentum despite the challenges
facing various quarters. As a motor of world growth,
much depends on China. But the next section shows that
this dependence is a two-way street with ASEAN.
ASEAN supports Chinese exports as
eurozone and Japan trail off
The rise of China has made a large contribution to
the economic success of South East Asia over the past
decade. Although there is direct competition on some
labour-intensive goods, manufacturing in countries such
as Malaysia and Thailand has long moved up the value
chain. Semiconductor makers, for instance, provide
high-value-added components for assembly in China.
Now that China itself increasingly produces sophisticated
products, countries with lower labour costs – especially
Vietnam – are benefiting from a shift in labour-intensive
manufacturing as many factories relocate away from
China’s coastal regions. Meanwhile, the immense hunger
for raw materials driven by China’s investment in physical
infrastructure and productive capacity has pushed up raw
materials prices, providing a boost to ASEAN export
earnings.
Trade goes both ways, however. Figure 1 illustrates the
growing importance of ASEAN as a buyer of Chinese
products. Rising incomes and consumer spending have
boosted purchasing power across the region, allowing
households to buy more and more Chinese-made
products ranging from clothing to consumer durables
such as air-conditioning units and iPads. As a result,
measured on a 12-month rolling basis, the share of
Chinese exports going to ASEAN has been rising steadily,
going from 6.5% at the beginning of the 2000s to hit
the 10% mark in December 2012. As overall exports have
risen steeply, this rise in trade share has meant a 12-fold
increase in the nominal dollar value of trade since 2000.
This picture contrasts with a falling share for traditional
economic heavyweights, Japan and the eurozone. In
early 2000, Japan was still the most important customer
of China behind the US, but its export share has fallen
from 16.5% then to below that of ASEAN, with 7.4% at
the end of 2012. The eurozone has been falling back in
terms of its Chinese export share since the financial crisis.
A recession expected to last well into next year or even
beyond means that it’s becoming a less important trading
partner. NAFTA, the free trade area comprising Canada,
Mexico and the US, has been better able to maintain
its purchases from China, but as emerging markets’
hunger for consumer goods swells, it too will see a falling
share of China’s foreign sales. Taken together, the key
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industrialised nations accounted for 61.4% of Chinese
exports in early 2000; this had fallen to 53.6% at the end
of last year, with a clear downward trajectory.
Figure 1: Chinese exports to selected regions as a
share of total Chinese exports, 12-month rolling basis
%
25
20
15
10
5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
ASEAN
Japan
EU
NAFTA
Source: General Administration of Customs of the People’s Republic of China
Exports to ASEAN have not only risen, the region has
more than compensated for the fall in exports to Europe.
Figure 2 demonstrates that ASEAN purchased $34bn
more Chinese goods in 2012 than in 2011, compared with
a fall of $22bn for the EU and near stagnation for Japan.
The ASEAN increase has been as big as that of NAFTA
but, since the base is lower, it has represented a 20.2%
annual rise, compared with just 9.1% for North American
buyers. As economies mature, services generally become
a larger part of the economy. Although what is produced
locally – think haircuts – increased economic development
often results in the purchase of services from specialised
providers abroad, a topic we turn to next.
Figure 2: Chinese exports in 2011 and 2012 and
change over this period, $bn
$bn
450
400
350
300
250
200
150
100
50
+34
+3
0
+34
-22
-50
EU
2011
Japan
2012
ASEAN
NAFTA
Change
Source: General Administration of Customs of the People’s Republic of China
Services trade is a future growth area
Along the path to ‘industrialisation’, the services rather
than the manufacturing sector eventually becomes
dominant in most nations. In South East Asia, this trend is
only just starting for most member states. Figure 3 shows
services as a share of the economy, as well as the trade
in services, and that a higher per capita income usually
comes with a more service-heavy economic structure.
Measured as the sum of services imports and exports, at
86%, Singapore has by far the highest services trade share
of the region’s economies. This is due to its large port,
tourism, and highly developed financial services industry.
The share drops to 52% for the Philippines, 51% for
Malaysia and 46% for Thailand.
Although it has a similar income per head as the
Philippines, Indonesia has a lower services share of exports.
Much of this can be explained by the Philippines’ success
economic insight – south e a st a sia
February 2 013
in exporting services. Thanks to its strength in outsourced
services, helped by a large English-speaking population
and low wages, it exports services are worth 8% of GDP,
compared with services imports of 6%, a surplus of 2%.
Even Singapore, with its strength in financial and business
services and its position as a logistics hub, has a services
trade deficit of 1% of GDP. Of the five major ASEAN
economies, only Thailand also has a services surplus,
which is the subject of the next section, tourism.
Figure 3: Services trade and production of services
as a share of GDP
rate than outside arrivals. Despite the lack of clear official
data beyond 2010, it appears that tourism is booming
in Myanmar following its speedy economic opening. A
rough calculation suggests 565,000 visitors in 2012, more
than double the level of 2009.
Figure 4: Inbound tourism, millions, 2011
(2010 for Myanmar)
25
20
%
100
15
90
10
80
70
5
60
50
10
ASEAN tourists
Thailand
Indonesia
Brunei
Myanmar
Laos
Cambodia
Philippines
Vietnam
Non-ASEAN tourists
Source: World Tourism Organization
Services output as % of GDP
(2010 for Myanmar)
%
140
25
120
20
100
15
80
10
60
40
5
20
0
Number of trips (millions)
0
Myanmar
Overall tourist numbers are being pushed up by intraregional travel, as ‘tourism’ includes business travel. The
region’s integration is evident in the fact that arrivals from
within ASEAN grew by 34.5% from 2007 to 2011, a higher
Figure 5: Outbound tourism, millions, 2011
Cambodia
In terms of non-ASEAN tourists, Thailand leads the
way with 13.5m arrivals in 2011. This translates into an
economic contribution of 7.1% of Thai GDP, according to
the World Travel and Tourism Council. Singapore follows
with 7.8m arrivals and Malaysia with 5.8m. Between 2007
and 2011, tourist arrivals from outside the region went up
by 28.6% and the lower income countries Laos (67.7%),
Cambodia (43.0%) and Vietnam (42.2%) saw the fastest
increases.
Economic development is slowly changing this pattern.
The line in figure 5 shows the growth rate in the
number of outbound trips on the right scale, indicating
a rising number for those countries where residents are
undertaking few trips. The exceptions are Brunei, which
only has few trips due to its small size, and Myanmar,
a country that only recently started opening up to the
outside world. In line with their high rates of economic
growth, Laos (97%), Cambodia (132%) and Vietnam
(87%) are not only receiving more visitors, their citizens are
themselves travelling abroad more.
Laos
The numbers reveal that Malaysia is the biggest tourist
destination, ahead of Thailand. Despite its undoubted
attractiveness as a destination, a closer look reveals the
reason for this; three quarters of the 24.7m tourist arrivals
are from within ASEAN and, of these, Singapore accounts
for 13.4m. Being separated by a short bridge, Singaporean
residents, many with family ties in Malaysia, travel across
the border on a regular basis. Malaysian residents account
for just 21% of Singapore’s ASEAN tourist arrivals, whereas
Indonesians make up 48% of arrivals. Taken together,
Malaysia and Singapore account for nearly two thirds of
intra-ASEAN tourists. There is large variation across the
region. For instance, 80% of tourists travelling to Laos
came from the region in 2011, compared with just 8%
travelling to the Philippines. Overall, about half of the
80.5m tourist trips in ASEAN in 2011 took place within
the region, a share that sinks to a third if Singapore and
Malaysia are excluded.
Brunei
Tourism is a major industry in South East Asia, providing
substantial employment and foreign currency earnings
for many of the ASEAN nations. Being renowned across
the world for its natural beauty and rich history, this
particular type of services export has long been a source
of development for the region. Figure 4 compares the
scale and origin of tourism for the 10 countries.
Outbound tourist numbers provide another perspective on
the rise in travel across the region. Led by Singaporeans’
19.4m trips, ASEAN residents took 51.9m trips abroad
in 2011. Indonesians travelled only 1.1 times more than
Malaysians despite having a population eight times larger.
Geographical distance and population explain much of
the difference, with incomes per capita providing the third
piece of the puzzle. Singaporeans and Brunei residents
took an average of 3.7 and 3.3 trips respectively in 2011,
whereas Indonesians went abroad 0.03 times. In other
words, an average of only one in 33 Indonesians left the
country that year. Myanmar is at the end of the spectrum
of officially documented travel, with an average of one in
104 travelling abroad in 2010.
Vietnam
Intra-regional tourism is growing fast
Foreign trips becoming more popular
Philippines
Source: Singapore Department of Statistics, Department of Statistics Malaysia, Office of the
National & Social Development Board of Thailand, Philippines National Statistics Office, Badan
Pusat Statistik, CIA World Factbook
Thailand
External services trade as % of GDP
Philippines
Malaysia
Malaysia
Indonesia
Singapore
Singapore
0
Indonesia
20
Singapore
Malaysia
30
Thailand
0
40
Growth rate (%) 2007–2011
Source: World Tourism Organization
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economic insight – south e a st a sia
February 2 013
Strong growth fundamentals to support
growth across the region
The nations of ASEAN generally find themselves in an
economic sweet spot of manageable inflation, moderate
interest rates and rising prosperity that is feeding through
to increasing household consumption. Having got
through an unsettled year for the global economy in
2012, the outlook for the coming years remains positive.
The supportive macroeconomic environment in ASEAN
is helping the increasingly integrated economies of the
region to power ahead. We now turn to the countryspecific outlook to gauge where the five major economies
that together account for about 90% of regional output
are going.
A general election is due this year in Malaysia but, with
the ruling party likely to be re-elected, it is unlikely that
political factors will derail the economy. High energy
prices providing a boost to the value of oil and gas
output have been an important factor supporting the
economy and are projected to give further impetus
to growth. Partly helped by government investment
aimed at laying the foundations for future prosperity,
the Malaysian economy is projected to grow by 4.3% in
2013. Exceptionally low inflation means that there is little
pressure to raise interest rates, supporting private sector
investment into 2014, for which we expect growth to
accelerate slightly to around 4.4%. Rising living standards
should promote steady increases in consumer demand,
leading to a rise in output of about 4.6% in 2015.
Indonesia is also benefiting from low inflation that
enables the country to maintain an accommodative
monetary policy. If commodity prices remain at elevated
levels, the region’s dominant economy should continue
to benefit from outside investment. Investor confidence,
helped by a strong sovereign debt rating, has made the
country a darling of capital markets. A large population
and stable macroeconomic and political conditions put
it on par or even ahead of the BRICS countries, most of
which stumbled in their quest for prosperity in 2012. For
this year, another good performance of 5.9% GDP growth
is expected. In 2014, rising export growth thanks to rising
productive capacity should allow for an upturn in growth
to about 6.2%. In the medium term, heavy investment in
infrastructure will test the government’s implementation
capacity, but this is crucial to keep price pressures low and
foster further growth, which is expected to come in at
about 6.4% in 2015.
As incomes rise in Indonesia, its neighbour Singapore
is likely to benefit from rising tourism spending thanks
to its modern amenities, particularly the casinos that
have proved to be a draw to tourists from the region.
However, the end of 2012 was a weak period for the local
economy and this fragility is expected to persist into this
year, with GDP growth of about 2.6%, somewhat below
the medium-term growth outlook. Rising living costs
may force more tightening of the exchange rate, while
additional curbs on both domestic and foreign property
ownership are designed to limit housing cost rises. By
2014, a rise in world trade as well as the benefits from a
free trade agreement with the EU are likely to boost the
country’s fortunes again, both via logistics services and
the crucial manufacturing sector that has been struggling
somewhat. In 2014, output is projected to rise by about
3.4%. Further ahead, Singapore’s strength in services
should allow it to benefit from further regional integration.
By 2015, we expect growth to reach about 3.5%.
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The end of the reconstruction boom in Thailand means
that the economy’s growth rate should fall to about
4.4% in 2013. However, with the need to import foreign
capital goods receding, the manufacturing powerhouse
should return to a current account surplus. A rise in the
minimum wage and other redistributive policies will
support broad-based rises in household spending and
lift output by about 4.8% in 2014. Both growing public
expenditure and a rising deficit pose manageable risks to
fiscal stability given low public debt, but political stability
remains a concern. If major uncertainty in this area can be
avoided and if further low inflation allows a continuation
of the present loose monetary policy, then we expect GDP
to grow by 4.7% year on year at the end of the forecast
horizon in 2015.
In contrast to Thailand, the Philippines are enjoying
an unusual period of political stability that is helping
consumer and business confidence and promoting a
positive outlook for the private sector. Consumption
remains the major growth driver and is expected to pull
GDP up by about 5.2% in 2013. With food-price inflation
likely to be moderate in the medium term barring major
environmental upsets, low interest rates should bolster
investment and allow for growth in the region of 5.5% in
2014. A low fiscal deficit should enable the government to
implement ambitious investment plans necessary to equip
the country for a more prosperous future. Nevertheless,
there are risks to these plans stemming from the potential
for misallocation of resources and uneconomical projects
resulting from relatively weak enforcement of good
governance practices. Given such concerns, we anticipate
an easing in the pace of output expansion to about 4.8%
in 2015 after a period of strong growth.
Taken as a whole, the ASEAN region including Cambodia,
Laos, Myanmar, Brunei and Vietnam is on course for a
successful three years to 2015. Driven by the powerful
giant, Indonesia, that accounts for two fifths of regional
output, value added in South East Asia is forecast to
grow by 5% in 2013. Rising wages, increasing availability
of consumer finance and competitive manufacturing
and mining sectors are the key drivers that have been
remarkably steady amid muted global growth. A rise in
the growth rate to 5.4% in 2014 is projected, thanks to
faster trade growth being felt from the end of this year
onwards. Although still small, the low income economies
of Laos, Cambodia and Myanmar will play an increasingly
important role as they become integrated into global
value chains and open up their markets to global players.
Partly due to this supportive factor, regional output is
projected to increase by 5.5% in 2015.
Figure 6: Forecasts for annual gross domestic product
growth rates, %
%
7
6
5
4
3
2
1
0
Indonesia
Malaysia
Philippines
2013
Singapore
Thailand
2014
2015
ASEAN
Source: Cebr analysis
economic insight – south e a st a sia
February 2 013
Falling commodity prices, a slump in China
or currency wars could spoil the party
The current expectation is that ASEAN should continue
to outperform the global economy, raising its economic
weight and its political influence. The positive outlook
depends on a supportive international economic
environment though. Apart from natural catastrophes,
which may always affect growth, various risk factors are
apparent for the region.
Commodity prices are a major part of the risk profile
for ASEAN. The region has benefited from elevated raw
materials prices for energy, minerals and agricultural
produce. Driven by the rise of consumption in emerging
markets, these remain at exceptionally high levels by
historical standards. A return to lower costs and thus
falling export earnings for producing nations clearly
presents a risk. China has loomed large in these markets
and a slump in the world’s second-largest economy would
have a substantial impact on commodity prices. Given
the growing importance of China as a trading partner,
a substantial drop in the East Asian giant’s growth rate
would also hurt merchandise exports and affect services
ranging from logistics to financials.
The eurozone is another obvious risk. It has eased somewhat
in investors’ perceptions as peripheral country bond yields
have fallen but, with a prolonged recession taking place, the
risk of an implosion of monetary union actually continues to
rise – it’s only a matter of time until new flashpoints emerge.
The European Central Bank is likely to be forced to boost
liquidity at some point, a factor that impacts on an emerging
issue of contention, currency levels. With Japan adopting
an open-ended monetary stimulus, all the major developed
country central banks are effectively supressing the value
of their currencies via monetary expansion and sheltering
domestic producers from international competition. Given
the trade dependence of many ASEAN countries, these
policies may hit exports and investment.
Finally, geopolitical tensions in the South China Sea are on
the increase. Plans by the government of the Philippines
to refer its territorial dispute with China to the United
Nations are indicative of things to come. Japan has already
experienced the economic fallout from political tension
through a fall in export earnings and ASEAN may be
similarly affected in future. The rise in living standards
requires Asia to manage its evolving balance of power. If
this can be achieved, the long-term ascent of the region
rests on solid foundations.
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