Download Economic Insight South East Asia Roundup of 2015 and future prospects for ASEAN

Economic Insight
South East Asia
Quarterly briefing Q4 2015
Roundup of 2015 and future prospects
for 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, Thailand and Vietnam.
Large economic changes lie ahead, with
potentially serious implications for ASEAN
2015 has been an eventful year for the world
economy. In January, the long-awaited European
quantitative easing (QE) programme gave the
eurozone another false dawn of recovery, and since
then things have faltered with key economies such as
France struggling to grow. Syriza’s victory in Greece
started a long game of brinksmanship that put the
future of the eurozone in doubt, with many still
believing the debt-ridden country will abandon the
euro over the coming years.
The summer revealed a more immediate threat to
world growth, with a torrent of weak economic data
from China and the crash of the Shanghai stock
market. There’s no doubt now that growth in the
world’s second largest economy is decelerating, and a
sudden slowdown may be on the cards.
The US has also been a source of uncertainty this
year, with many expecting the Federal Reserve to
start raising interest rates. It has yet to do so, but
a rate rise, when it comes, risks pulling funds away
from emerging markets and back into the US. A lot
of Asian companies hold substantial sums of dollardenominated debt and could be hard hit by a rate
rise.
Overall, there are five main issues faced by
policymakers in ASEAN which will affect growth rates.
While all of these are already present, the questions
are whether they will intensify, and how they will
impact ASEAN members.
1 A continuation of low commodity prices.
2 China’s slowing growth rate.
3 Growth in other markets continuing to disappoint.
4 Generally weak world trade.
5 Uncertainty over when the US Federal Reserve will
raise interest rates.
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All of these issues are a risk to economic performance in
ASEAN – something we explore in detail in this report.
Turn of the commodity super-cycle already
impacting ASEAN
Recently, no sector has fared worse than commodities.
The end of China’s long investment and construction
boom has reduced the demand for raw materials, hitting
commodity exporters hard. Indonesia has seen a slump
in coal exports of 18% so far this year, and Malaysia’s
ringgit plummeted to a 17-year low in August as oil
prices fell.
Diversification of these economies away from raw
materials is now essential, since commodity prices are
likely to remain subdued for some time. In the long
term, diversification should lead to a wide range of
benefits, including greater opportunity for product
differentiation and lower volatility in export earnings.
However, the temporary effects will be unwelcome for
ASEAN economies, potentially triggering exchange rate
crashes, holes in budgets and falls in creditworthiness.
Volatility in earnings is inescapable for commodity
exporters in ASEAN, making it hard for governments to
predict the future sustainability of the public finances.
One factor behind this is that commodity extraction
takes place with a lag. When prices are high, mining
firms start new projects. These take some time to begin
producing. Therefore when a crash in demand occurs,
capacity creation is effectively still responding to prices
that prevailed a year or more ago, causing production
to keep rising. This creates a glut of raw materials and
makes the downward swing in commodity prices more
pronounced. For example, the Indian state oil producer
still plans to invest in a petrochemicals plant in Iran.1
Another issue with commodity dependence is that raw
materials are undifferentiated, meaning that exporters
have to compete on price alone. If commoditydependent countries in ASEAN diversified further into
differentiated products, they could create more value
and boost the size of their economies. Ultimately,
dependence on a narrow range of products with low
value added is not a traditionally successful development
strategy.
Now is the time for these economies to continue
to move towards knowledge industries, higher-skill
manufactures and services. Policymakers know this and
have exploited the period of high prices adeptly without
neglecting investment into better long-term options.
For instance, Malaysia rose two places to 20th in the
World Economic Forum’s 2015 Global Competitiveness
Index, while the Philippines has risen more places since
2010 than any other country.2 This ranking compares
countries on features critical to development such as
institutions, infrastructure, business sophistication,
health and education. Malaysia is highest among the
‘transition’ economies which are moving from being
efficiency-driven to innovation-driven, and hopes
to reach high-income status by 2020. Elsewhere,
Singapore’s tech sector is currently booming. Against
a backdrop of low inflation and wage growth,
Singaporean knowledge workers’ wages are expected to
rise by an annual 4.3% in 2016.3
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Slowing global export markets hitting the
region
The South East Asian region has historically powered
growth through exports. At present, its major export
markets are growing at a lacklustre rate. Figure 1b shows
that 31% of ASEAN exports go to the US, eurozone
and Japan, down from almost 50% in 2000 but still
important.
There are concerns about the strength of all
%
100
three markets – especially the eurozone and Japan.
80
Figure 1a: ASEAN exports by region, 1999
%
60
100
40
80
20
60
0
40 Indonesia
20
0
Malaysia Philippines Singapore Thailand
Eurozone
US
Rest of ASEAN-6
Indonesia
Japan
China
Total
ASEAN
India
Rest of world
Malaysia Philippines Singapore Thailand
Eurozone
Vietnam
US
Rest of ASEAN-6
Japan
Vietnam
China
Total
ASEAN
India
Rest of world
Figure 1b: ASEAN exports by region, 2014
%
100
80
%
60
100
40
80
20
60
0
40 Indonesia
20
0
Malaysia Philippines Singapore Thailand
Eurozone
US
Rest of ASEAN-6
Indonesia
Japan
Vietnam
China
India
Rest of world
Malaysia Philippines Singapore Thailand
Vietnam
Source: IMF direction of trade statistics, Cebr analysis 4
Eurozone
Total
ASEAN
US
Japan
China
Total
ASEAN
India
The eurozone is the biggest concern among advanced
Rest The
of ASEAN-6
Rest of world
markets.
currency area’s
failure to achieve consistent
and robust economic growth has exposed the flawed
design of a currency union without a common fiscal
policy or jointly held debt. Some of the largest
economies in the eurozone, such as Italy, have struggled
to grow at all.
For economies that would like to sell to Europe’s large
consumer market, this creates problems as demand
remains weak. The response of policymakers has
exacerbated the problem, with an overemphasis on fiscal
austerity, meaning that it’s very hard for a number of
European countries to generate an economic recovery
– such as Greece. Some economists have warned that
ECONOMIC INSIGHT – SOUTH E A ST A SIA
Q 4 2 015
the eurozone could suffer a ‘lost decade’ reminiscent of
Japan’s 1990s. Parallels include banks’ reluctance to lend
to the real economy, an ageing population and large
levels of public- and private-sector debt.
Japan itself is facing challenges, which will hit businesses
in ASEAN that export to it. In 2013, Prime Minister
Shinzo Abe launched an ambitious strategy to reflate the
economy involving government spending, monetary
easing and structural reforms. The Bank of Japan
launched an unprecedented third QE programme in 2014,
intending to increase its balance sheet by 15% per year.
While growth improved modestly, it faltered somewhat in
2014 and prospects of getting back onto a steady upward
path remain doubtful. Negative inflation has returned for
the first time since 2013, with headline prices falling 0.1%
in August. The Philippines sends 22.5% of its exports to
Japan, almost double ASEAN’s average. President Benigno
Aquino’s administration has achieved generally strong
growth up to now, but relying on slower markets means
it exports significantly less of its economic output than
it did. By necessity, it is increasingly reliant on household
spending to drive growth.
Although the US saw a stronger and faster recovery
than Japan and the eurozone, it has not been smooth,
and remains incomplete until certain factors show
improvement – such as the labour market participation
rate and productivity. Recent job creation data from the
US has been surprisingly negative, raising concerns that
businesses in ASEAN exporting to the US may be in for a
hard time. The Trans-Pacific Partnership (TPP), the largest
trade deal in history recently signed by 12 Pacific Rim
nations, may improve trade with the US somewhat: 53%
of businesses in TPP countries surveyed recently thought
the effect on jobs would be positive.5 However, as many
signatories in the region already have bilateral deals with
the US, the effect is likely to be relatively modest.
A common feature of the eurozone, US and Japan
post-crisis is growth failing to reach potential. The US is
closer to its long-term average rate, but its progress on
productivity disappoints. This has raised the worrying
possibility of a significantly slower growth rate in the
medium term. As Figure 2 shows, the eurozone in
particular is struggling to achieve average pre-crisis rates
of economic growth.
Figure 2: US and eurozone growth rates and average
of two economies, %, 1999–2015
Even emerging markets are suffering at the moment.
Brazil, for example, has slipped back into recession. The
real concerns, however, centre on China, with new doubts
over the ability of Chinese policymakers to manage the
long-anticipated slowdown and prevent a sudden crash in
growth rates.
Many were caught off guard by the inability of the
Chinese authorities to fully prevent panic in financial
markets over the strength of the country’s economy.
With their infallibility now in doubt, Chinese policymakers,
and their reported growth figures, are under scrutiny.
Observers increasingly turn to alternative measures of
output based on data such as freight and electricity
use, which for a long time have indicated activity below
officially reported levels, and suggest a sharper recent
slowdown.7 For ASEAN, exports to China now account
for 12% of total external demand, up from 3% in 1999,
so China’s economic cooling is a major concern. As
commodities feature heavily in these trade flows, volumes
as well as prices will be hit in comparison to recent years.
ASEAN must refocus its export markets
Figure 3 shows potential post-crisis paths for world GDP
and trade. Though not as pessimistic as the much-talkedabout ‘secular stagnation’ hypothesis, these allow for
slightly slower levels of expansion, compared to pre2007, in major OECD economies. China’s slowdown
constitutes the most pressing danger: exports to China
were the main reason that ASEAN growth powered on
while the advanced markets have remained weak. For
the Philippines, China accounted for 29% of additional
exports between 1999 and 2014; including Hong
Kong (where goods often pass through en route to the
mainland), the figure rises to 43%.
Figure 3: Projection for world trade against GDP,
1991=100
500
400
300
200
%
6
100
4
2
1991
1995
2000
2005
2010
World Trade
(optimistic)
(pessimistic)
ASEAN GDP
(optimistic)
(pessimistic)
2015
2020
World GDP
0
Source: CPB World Trade Monitor, IMF, Cebr analysis 8
-2
-4
-6
1999
2001
2003
Eurozone
2005
2007
US
2009
2011
US+EZ growth
Source: IMF, Cebr analysis 6
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2013
2015
Raising trade within the region could offset the risk that
ASEAN exports will suffer from a Chinese slowdown.
It would also suit the region to export more to India, a
rare example of a major economy whose growth has
sped up recently. As a net importer of commodities,
Indian consumer confidence has been buoyed by recent
increases in spending power, making the large consumer
market more attractive than usual. India’s share of
ASEAN’s exports has already expanded rapidly, from 1.5%
in 1999 to 5.0% in 2014. Much of the extra demand has
come from Indonesia and Malaysia, which supply India
with commodities such as coal and palm oil.
ECONOMIC INSIGHT – SOUTH E A ST A SIA
Q 4 2 015
Diversification away from trade in goods is
also important
As relatively trade-dependent economies, a risk for
ASEAN’s performance over the coming years involves
developments in the growth of trade. Over time, ASEAN’s
specialisation has evolved from assembly of inexpensive,
labour-intensive goods to products requiring higher skill
levels. The region is important to Japanese and Chinese
companies as a manufacturing hub, many of whom set up
factories in Vietnam, Thailand and Indonesia. Production,
therefore, takes place across different economies. These
arrangements make ASEAN highly dependent on trade.
As manufacturing has become more complex and
modular, supply chains now spread across the world.
The trend towards offshoring meant that global trade
grew significantly faster than output before the crisis,
and shrank faster when it hit. Each extra item demanded
by a final consumer generates a series of transactions –
extra trade in inputs, extra manufacturing of parts, extra
assembly and then shipping to the consumer. Where
these take place between different countries, they count
towards global trade. The spread of supply chains across
countries led to a boom in trade during the 1990s and
2000s, also years when ASEAN economies grew rapidly.
The acceleration of trade took off when China integrated
itself into global supply chains and the World Trade
Organization (WTO) was formed in 1995. Between 1994
and 2006, world trade increased at more than double the
speed of GDP.
Now China is undertaking more activity domestically,
replacing many inputs that other economies would
have produced and bringing the supply chain into a
single country. Instead of multilateral trade agreements,
negotiations have fragmented into regional arrangements,
which tend to be ad hoc, fairly politicised and less
ambitious than the policies that the WTO pursued. As a
result of these changes, annual growth in trade between
2012 and June 2015 has been 25% slower than growth in
the world economy.
On the other hand, trade grew significantly faster than
GDP throughout the 1990s and early 2000s. This opens
two potential scenarios for the coming five years, given
the projection for world growth.
• Optimistic scenario: if world trade returns to the
previous rate of increase of around double GDP, it
would be 14% higher than under the pessimistic
scenario and ASEAN need not adjust its export-led
development model in order to maintain growth.
• Pessimistic scenario: if world trade does not pick up
from its current path of growth which is slower than
that of GDP, South East Asian economies need to find
new sources of demand to sustain rapid economic
expansion.
This introduces a range of possibilities for trade, with
ramifications for ASEAN in terms of policy choices. An
estimate of ASEAN’s band of likely performance is shown
in Figure 3. The pessimistic scenario would require it to
find new sources of growth.
One source of demand that is yet to be fully tapped
is domestic consumption. Rates of saving in ASEAN
are higher than those elsewhere, with spending
correspondingly lower – for example, Singaporeans save
around 45% of GDP. Improving social security coverage
for citizens may encourage consumer spending, by
reducing the need to save for old age.
If households spent more, the region would be less reliant
on exports. But policymakers in ASEAN must be careful to
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avoid the other extreme; in the US and UK, policymakers
encouraged debt-fuelled consumption which contributed
to the global financial crisis.
Another option is to diversify exports into sectors such
as services, trade in which is not so subdued. In services,
growth opportunities are abundant and potential gains
from liberalisation are also higher since less progress
has been made to date. The trend complements China’s
own rebalancing, which otherwise threatens to damage
economies that have evolved to feed its industrial
sector. Refocusing will help to cushion ASEAN against
the slowdown in world trade. For example, China Daily
reported that ASEAN–China e-commerce was $480bn in
2014 and should rise to $1 trillion by 2020.9
The illustrative trajectories for ASEAN shown in Figure 3
are not far apart – the optimistic scenario for GDP being
only about 4.5% higher than the pessimistic scenario by
2020. This is because South East Asian nations appear to
be adapting to this new reality already. They have
redirected trade post-crisis to China from Europe, Japan
and the US, as Figure 1b shows. A further redirection
towards services will help. The ASEAN Economic Community
contains measures to expedite this: for example, mutual
recognition arrangements (MRAs) make certain
qualifications better recognised across borders.
Companies will find it easier to spread across ASEAN and
professionals will face fewer barriers to practicing in
different economies in the region.
As Figure 4 shows, ASEAN’s share of services in exports
rose from 14.2% in 1999 to 22.3% in 2015. The
Philippines’ service exports have risen by 380% in cash
terms between 1999 and 2014, with increasing business
process outsourcing from China. The balance of trade
shifted by 12 percentage points from manufacturing
towards services.10
Figure 4: Services as % of all exports, total ASEAN,
1999–2014
%
24
22
20
18
16
14
12
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: IMF, Cebr analysis11
This demonstrates that the trade slowdown is not the
greatest danger faced by ASEAN at present. As long
as ASEAN can keep adapting its trade patterns to the
relatively fast-growing sectors and parts of the world
– such as India, or intra-regional trade within ASEAN
itself – it stands in good stead to cope with this potential
problem. In the long term, the goal of the ASEAN
Economic Community is to see members invest and
build productive capacity within the area themselves,
rather than Japanese and Chinese firms dominating
investment in the region. With some powers in the region
well-endowed with capital, and others with labour,
cooperation could turn the area into a true single market
with firms spread across ASEAN economies.
ECONOMIC INSIGHT – SOUTH E A ST A SIA
Q 4 2 015
The US Federal Reserve – will they, won’t they?
Question marks over the timing of an interest rate rise
in the US have been a huge source of global economic
uncertainty.
The US Federal Reserve held back on raising its
benchmark rate (currently set at between 0% and 0.25%)
in September, but is likely to raise it within the next few
months. Last time a similar move happened in the mid1990s, South East Asian markets were the epicentre of a
financial crisis from which some countries took the better
part of a decade to recover. A repeat is unlikely as ASEAN
is now much more resilient. In late 2013, the US Federal
Reserve moved towards tighter monetary policy, sparking
a chaotic reaction – the so-called ‘taper tantrum’ – in
emerging markets. However, this did not turn into a crisis.
Countries with budget or current trade deficits at that
time have worked hard to reduce them. Nevertheless, a
rate hike will still precipitate capital flows from emerging
economies towards the US and these will depress
emerging-market currencies.
The currency set to suffer the most turbulence may well
be the Malaysian ringgit. Several factors have led to the
ringgit falling to levels last reached during the 1997 Asian
financial crisis. First, Malaysia has a relatively large share
of oil and gas exports and has been negatively impacted
by recent price developments. Second, it has increased
considerably its dependence on trade with China.
Third, the political establishment is in difficulty due to
allegations of impropriety concerning the Prime Minister.
But the government is aware of potential dangers and
recently pointed out two offsetting factors: public debt
is below its self-imposed limit of 55% of GDP, and the
recently introduced Goods and Services Tax broadened
the tax base away from oil and gas revenues.
Of course, the dangers of increased interest rates and
hence borrowing costs, do not apply just to publicsector debt. Corporate debt has risen to high levels in
both Malaysia and Thailand. Much of this, especially
in Malaysia, is externally held – meaning that it is likely
to have been drawn in by higher yields. This increases
the risk of an outflow if the Fed raises rates and there is
a return of capital to the US. Another issue is indebted
firms: currency mismatches, where debts are in dollars
and revenues in local currency, make rises in the dollar
potentially damaging. This is a particular issue for
sectors that trade mainly locally such as utilities and
construction.12 On the other hand, commodities and
manufacturing firms tend to earn revenues in dollars,
making mismatches less likely. Malaysian debts are held
across the whole economy and so some mismatches are
inevitable.
The ASEAN region will not suffer from secular stagnation,
and should be able to withstand the US interest rate rise,
though this will present some problems. The region’s
challenge will be to adapt to slower growth in its main
export destinations through increasing domestic demand
and moving towards higher value products. Historically,
ASEAN has been very adept at the latter. It has had less
success in encouraging households to spend more. This
is essential to make South East Asia’s growth sustainable,
rather than reliant on foreign economies.
Partnership at the beginning of October. This has an
impact further out in the forecasts – from 2017 – as it
will now take participating countries some time to ratify
the deal. Although internal opposition in South East
Asia is generally weaker than that in the US, there are
high-profile detractors in Malaysia, including former
Prime Minister Mahathir, and polling found the rate of
scepticism was highest there.
Indonesian growth has faltered as commodities exports
dropped, though it stands at a respectable 4.7% for
the first half of 2015. To maintain momentum, the
government has announced a cut in corporation taxes
from 25% to 18% by 2016, with more investor-attracting
policies planned soon. Cebr expects an interest-rate cut in
2016 as inflation eases further.
The Malaysian ringgit is approaching levels last seen
during the 1997 Asian financial crisis as Prime Minister
Najib Razak faces corruption allegations, which he
denies, over the country’s investment fund 1Malaysia
Development Berhad (1MDB). We expect monetary policy
to stay unchanged over the short term. The central bank is
treading a fine line between supporting the currency and
keeping borrowing cheap to stimulate activity.
The Philippines experiences continuing strong growth
held up by domestic demand while exports slow. Still,
prospects to 2020 are among the best in ASEAN as ratings
agency Fitch has improved its outlook for government
debt.
Singapore re-elected the People’s Action Party on
11 September with an increased vote compared to
recent polls. But challenges remain: industrial output, for
example, has contracted year on year since February. The
Monetary Authority of Singapore is likely to ease monetary
policy soon, as the Singapore dollar is appreciating.
In August, Thailand suffered its eighth consecutive
month of year-on-year export contraction, led by falling
exports to developed markets. Though related to global
slowdown, this owes more to Thailand’s own problems
following 2014’s military coup. For example, overseas
investment approvals have slowed down while talks with
the EU regarding a free-trade area have stalled.
Vietnam is maintaining stronger performance than its
neighbours, as well as the highest growth forecasts of
the major ASEAN economies. Reforms allowing greater
foreign ownership of companies will spark inward foreign
direct investment.
Figure 5: GDP growth projections for ASEAN-6 and
whole region, 2015–2020
%
7
6
5
4
3
2
Recent economic news
1
Most countries’ growth projections have been reduced
modestly due to the Chinese slowdown. The regional
economic growth forecast stands at a fairly slow 4.6%
for this year. Nevertheless, many ASEAN economies
look relatively healthy domestically. As mentioned
earlier, 12 Pacific Rim economies signed the Trans-Pacific
0
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Indonesia
2015
Malaysia Philippines Singapore Thailand
2016
2017
2018
Vietnam Total ASEAN*
2019
2020
* (ASEAN-6 plus Brunei, Cambodia, Laos and Myanmar)
ECONOMIC INSIGHT – SOUTH E A ST A SIA
Q 4 2 015
ENDNOTES
1
Bloomberg, August 2015 (http://www.bloomberg.com/news/articles/2015-08-30/indian-oil-said-to-plan-3-billionpetrochemicals-unit-in-iran)
2
World Economic Forum, Global Competitiveness Report, 2015 (http://www3.weforum.org/docs/WEF_
GlobalCompetitivenessReport_2014-15.pdf)
3
Towers Watson survey, October 2015, reported by MSN Money (http://www.msn.com/en-sg/money/technology/
workers-in-singapore%E2%80%99s-high-tech-sector-enjoy-fastest-rising-paydays/ar-AAfoHjV)
4
Note: any ‘world’ exports that could not be apportioned to any destination country are excluded.
5
Poll by Edelman, reported by PRWeek, October 2015 (http://www.prweek.com/article/1368049/public-opinion-tppodds-global-press-backlash-edelman-finds)
6
Note: Japan excluded from chart, as it experienced a slowdown in growth far before 2007.
7
The reason for this is a source of debate – rival explanations emphasise structural changes in the economy.
8
Note: ‘trade’ refers to goods only here.
9
China Daily, September 2015 (http://www.chinadaily.com.cn/business/tech/2015-09/22/content_21948860.htm)
10
Statistic refers to 2014; 2015 shows 19-point rise but only Q1 available so far, which may be anomalous.
11
Malaysian statistics for this series are unavailable for 2014 and 2015.
12
Chui et al., ‘Risks related to EME corporate balance sheets: the role of leverage and currency mismatch’, September
2014 (http://www.bis.org/publ/qtrpdf/r_qt1409f.pdf)
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