May Persist into 2018
Tamara Mast Henderson
Bloomberg Intelligence economist
Growth picked up for most of the Asean-5 in 2017, thanks to stronger global
demand. The outlook for 2018 appears more challenging. Exports face
headwinds from stepped up U.S. protectionism and efforts to weaken the
greenback. Investment will be buffeted by higher global yields. This means
fiscal policy will remain an important driver of growth. In turn, most monetary
authorities will be reluctant to tighten.
The Association of Southeast Asian Nations’ five largest members – Indonesia,
Malaysia, the Philippines, Singapore and Thailand – have different sensitivities
to oil prices, Federal Reserve rate hikes, China’s slowdown, and uncertainty over
President Donald Trump – the main external challenges.
Growth dynamics in Asean-5 may shift in 2017
Southeast Asia’s major economies may see changing growth dynamics this
year. Higher inflation in the Philippines has tempered consumption, which is by
far the most important driver of activity there. In 2016, Philippines experienced
the sharpest acceleration and fastest pace of growth in Asean-5. Low oil
prices boosted the spending power of its large consumer base and reduced
headwinds from oil imports.
Indonesia may get more of a boost from external demand and investment.
Indonesia’s more balanced exports mean it benefits more from recoveries in the
U.S. and Europe. Pickups in Malaysia, Singapore and Thailand in 1H may not be
sustained in 2H.
Forecasts suggest stronger growth in 2017 for most of Asean-5
Bloomberg median forecasts of private-sector economists point to stronger
growth for most of the Asean-5 in 2017. The exception – the Philippines,
where annual growth after inflation is forecast to slow by 0.4 ppt to 6.5%.
Reduced spending power due to higher inflation may damp consumption.
The Philippines is more vulnerable to higher living costs because of its lower
incomes and larger consumer base. In Malaysia and Thailand, better weather is
boosting farm incomes and consumer spending.
For Indonesia, growth is projected to rise 0.2 ppt to 5.2% compared with 5% in
1H. Indonesia may excel in 2H and 2018 as it has more monetary stimulus in the
pipeline and is less sensitive to a slowdown in China. Positive outlooks by rating
agencies and tax amnesty revenues may spur investment.
Household spending growth in Asean may falter into 2018
Consumption in the Asean-5 may be hampered in 2017 by weaker hiring
momentum and higher inflation. Household spending was strongest in the
Philippines and Malaysia last year, rising 6.9% and 6.1%, respectively. Domestic
confidence has remained robust since last year’s presidential election in the
Philippines, which may contain damage there. In Malaysia, the impact of
government measures to support disposable incomes will fade without new
In Singapore, positive spillover to spending from efforts in March to stabilize
house prices – lower stamp duties on home sales and easier lending standards
– may be limited by higher borrowing costs and ongoing external risks.
Stable oil prices support discretionary spending in Asean-5
Low fuel prices support household spending power and contain the cost of
operating a vehicle. This has boosted auto sales in Asean, especially in the
Philippines and Vietnam, where growth has been particularly strong since
2014. Car sales have been less responsive in Indonesia and Malaysia, where
commodities are more important for incomes. Also, both governments took
advantage of lower oil prices to cut politically sensitive subsidies, thereby
improving government finances.
Asean car sales send mixed consumption signals
Weaker job prospects temper Asean-5 consumption potential
Weaker spending power may be a headwind for Asean-5 growth this year.
Higher inflation in 1H will damp real wage growth, especially in the Philippines.
Also, unemployment rates have inched higher and trends in the region’s
purchasing manager surveys for manufacturing suggest a preference for job
shedding, rather than hiring, in 2H 2017. Singapore though, has defied the
regional trend toward weaker PMI readings in the last six months - with stable
results on average that still signal expansion.
Wages are not keeping up with inflation in Indonesia and Thailand. The
recovery in agricultural production after last year’s drought has boosted farm
incomes in Malaysia, Thailand and Vietnam – but this will fade. Government
measures to lift incomes in Malaysia will also diminish without new schemes.
Rising Asean incomes provide structural support for consumption
The Asean-5 is becoming a more important source of global demand, partly
due to the region’s wider economic base and large populations. Between 2008
and 2013, per-capita income after inflation rose 24% in Indonesia and 19% in the
Philippines. This compares with 1% for the U.S. and 8% for the world as a whole
during the same period. The number of Indonesian households with disposable
income over $15,000 nearly doubled between 2010 and 2016, yet remains a
small share of the total.
Income growth since 2013 has slowed sharply for most of the Asean-5,
mirroring the global trend. The exceptions are Malaysia and the Philippines.
For the Philippines, incomes are rising at a pace faster than in the five years
preceding the global financial crisis.
Cautious Asean-5 investment defies low interest rates
Investment in Asean-5 economies is likely to remain subdued in 2017 despite
supportive fiscal and monetary policies. Significant uncertainty remains on
the course of U.S. economic policy under President Donald Trump, potentially
sidelining longer-term investors. Volatile commodity prices also hamper
demand for credit. Domestic demand appears fragile or prone to slippage,
except in the Philippines where sentiment remains relatively strong.
Asean central banks maintained support for investment in 2016, and even
stepped up support in the cases of Indonesia, Malaysia and Singapore. But
investment remains tepid across the region due to weak demand. An increase
in non-performing loans also constrains the ability of banks to extend loans.
Hurdles for Asean banks damp supply of credit
Non-performing loans are increasing in most of the Asean-5. Monetary
tightening by a rising number of major central banks may put more pressure
on asset quality, reducing banks’ ability to supply credit. Indonesia had the
largest increase in NPLs in 2016. Fitch Ratings, which has a negative outlook
on Indonesia’s banks, expects asset quality and profitability to remain under
pressure in 2017 – even if growth picks up to 5.3% from 5% last year. Lingering
effects from the commodity downturn could nudge NPLs higher.
High leverage is another constraint for lending in Singapore and Thailand,
where loan values exceed deposits and the loan-to-deposit ratio is above the
10-year average. Asset quality for Philippine banks improved last year.
Increase in non-performing loans has yet to peak
Foreign hot money flows swamp FDI in parts of Asean
Risk appetite has remained tentative and short-lived since the global financial
crisis erupted in 2008. Frequent market shocks since then have produced
abrupt shifts in foreign portfolio flows, which at times have dwarfed adjustments
in foreign direct investment. Portfolio inflows have picked up since 1H 2016
in Indonesia and the Philippines, but have been weaker in Thailand. FDI has
softened in Indonesia and Thailand, but picked up in the Philippines.
Indonesia’s net FDI inflows have been slowing since 2015, while Thailand’s have
been weakening since 2013.
Recovery in Asean-5 exports mirrored stabilization in China
Exports are expected to drive growth in the Asean-5 this year, though the
strong momentum seen in 1Q faded by 2Q. Base effects will be a headwind
in 2H. Export growth picked up in 2016, mirroring the stabilization in Chinese
demand. By 4Q, exports were stronger compared with a year earlier for most
in the region. Still, merchandise export growth continued to lag in Malaysia
despite the country’s stronger reliance on China, higher prices for its oil exports
and a more competitive currency.
Services exports provided an added boost for most of the Asean-5, especially
tourism in Thailand. Demand for business processing outsourcing in the
Philippines has slowed since 4Q.
Asean-5 merchandise exports versus China’s imports
Assessing China risk to Asean-5 requires digging into growth
As China’s economic rebalancing progresses, Asean-5 suppliers of consumer
goods and services are better placed relative to those more reliant on
infrastructure-related exports. This means the losers from China’s slowdown may
not necessarily be the winners from China’s recovery. China’s growth in 2016
was the weakest since 1990, but significant structural change since then means
this is not purely an indication of vulnerability.
Importantly, the widening of China’s economic base provides structural demand
for Asean-5 exports. Even so, Asean-5 net exports to China as a share of GDP
fell 2.8 ppts in the last five years, with Malaysia and the Philippines hit the
U.S. President Trump may test Asean-5 loyalties
U.S. President Donald Trump’s threats of punitive tariffs against China have
faded, but Asean may still need to take sides. Aggression by North Korea
appears to be more of a priority for the new U.S. administration’s Asia policy.
Still, Trump’s track record for quick reversals means a more antagonistic
relationship between the world’s two largest economies cannot be ruled out.
Philippine President Rodrigo Duterte has already pivoted toward China, despite
Beijing’s island building in its territory.
The U.S. has an edge when it comes to investment in Asean-5, though China
is working to narrow the gap. China’s shortfall is relatively small if flows from
tax havens are ignored. Based on trade and investment links, Singapore’s
commitment to the U.S. appears strongest.
Top export markets and FDI sources for the Asean-5
Fed rate hikes need not derail Asean-5 investment
Angst about Federal Reserve tightening resurfaces from time to time. Past
experience shows that risk appetite has been able to track the Fed’s policy
rate higher. The key for Asean in 2017 is whether Fed rate hikes can take place
while leaving risk appetite intact. The Fed under Janet Yellen has shown greater
sensitivity to external dynamics, a reflection of structural change in the global
economy. But shifts in U.S.-China tensions will also impact correlations between
U.S. and Asean-5 government bond yields. Bouts of heightened risk aversion
push correlations toward unity. If the Fed tightens when sentiment is soft,
growth in the Asean-5 would be hurt by a combination of capital outflows and
higher domestic yields.
Rolling 3M correlation with 5Y U.S. Treasury yield
For Asean-5 currency moves, tends in current accounts matter
Current-account trends seem to matter more than interest rate differentials in
explaining Asean-5 currency movements. With the Federal Reserve poised to
tighten monetary policy more aggressively this year and most Asean central
banks likely on hold or easing further, the yield differential will be less favorable
for the region’s currencies. Yet most of the region’s exchange rates have risen
against the U.S. dollar. The peso has weakened, even though the central bank is
more likely to raise rates.
Indonesia’s yield differential with the U.S. has narrowed roughly 200 bps since
the end of 2015 – sharply diminishing (in theory) the appeal of Indonesian
bonds. Yet the rupiah has gained more than 3% against the dollar. Singapore’s
differential became negative, but its currency is also stronger.
Current-account trends tell better Asean FX story
Ringgit, peso may remain under pressure as China slows
Slowing growth in China next year may keep downward pressure on the
ringgit and peso. China is the most important export market for Malaysia and
the Philippines, and these economies have been hurt most from Beijing’s
rebalancing. Current account surpluses in Malaysia and the Philippines have
been falling since 2013 – and the ringgit and peso have weakened against
currencies of trading partners. In contrast, Singapore’s surplus has been broadly
stable – as has the Singapore dollar.
Thailand’s current account surplus has expanded sharply, to more than 10%
of GDP in 1Q from a deficit of as much as 2% in 2013 – and the baht has
strengthened. Indonesia’s deficit has gradually narrowed – and the rupiah has
Currency movements may drive Asean-5 inflation in 2H
Domestic demand in the Asean-5 is fragile or faltering, which damps inflation
from the tradables sector. Inflation in Southeast Asia’s major economies peaked
in 1H – even in the Philippines where consumption and investment remain
relatively strong – as the base effect from higher oil prices faded. Currency
weakness has been an additional factor for the Philippines and Malaysia, where
inflation is the highest in the Asean-5.
The Philippine peso fell 6.4% against trading partners in the 12 months to July,
while the Malaysian ringgit declined 6.2%. The weaker peso amplifies the value
of remittances transmitted from overseas, supporting domestic demand.
Inflation in most of Asean may stay subdued in 2H
Asean-5 monetary policies to support growth through 2018
Most monetary authorities in Asean-5 are likely to continue supporting growth
with accommodative stances in 2018. A pickup in global demand is lifting
exports, but domestic demand, especially investment, remains vulnerable –
even more so with global yields on the rise. Malaysia and the Philippines could
be exceptions: growth is above trend and inflation may be less cooperative.
Malaysia’s central bank already hiked in January and signaled more may be in
Asean-5 fiscal discipline provides scope to support growth
Most Asean-5 governments have fiscal space to support growth if needed in
2017. The Philippine government plans to increase the budget deficit to 3%
of GDP in 2017 and 2018. Others may follow should global demand falter.
Asean-5 fiscal policy has been prudent in spite of material subsidy obligations,
infrastructure needs and soft growth. Malaysia could have used low oil revenues
as an excuse to delay fiscal consolidation, but largely stayed on course.
Indonesia’s tax amnesty has boosted revenue.
Public debt as a share of GDP remains within the international standard of
60% for manageability in all Asean-5 countries but Singapore. The financial
center issues government securities to support the bond market. Singapore’s
government tends to run budget surpluses.
Asean economic integration provides catalyst for reform
Asean is building a single market and production base with the free movement
of goods, services, investment, skilled labor and the freer flow of capital. More
harmonized procedures and regulations will cut costs, attract investment and lift
the living standards of 630 million inhabitants. Integration reforms, accelerated
after the 1997-98 Asian crisis, proved their worth during the 2008-09 financial
crisis. The EU’s dis-integration with Brexit vindicates Asean’s more selective
U.S.-China tensions could increase the impetus for reform. The business climate
in the Philippines and Indonesia has improved the most since 2013.
Strong reform commitment boosts business climate
Asean frontier needs FDI to reduce external vulnerabilities
Asean’s lower-income economies – Cambodia, Laos, Myanmar and Vietnam
– are among the world’s fastest growing. But their export-led growth strategy
makes them sensitive to external shocks - a vulnerability heightened as exports
and imports tend to be concentrated in a small number of products and
markets. A slowdown in China from deleveraging would weigh on the frontier’s
growth, though Cambodia would be more resilient as most of its goods are
shipped to the U.S. and Europe.
The U.S. exit from the Trans-Pacific Partnership may damp investment in
the region. Yet, China’s response may be to deepen links - especially with
Myanmar, which is in two of the six Belt and Road corridors. FDI is key for export
diversification and integration with global supply chains.
China carrots may shift South China Sea alignment
China’s greater economic heft has given Beijing confidence to stake claims in
the South China Sea. That’s included an oil rig in waters claimed by Vietnam
and island building in areas claimed by the Philippines. At stake is control of
the world’s busiest shipping lanes, as well as energy resources and fisheries.
Opposing China can hurt trade, investment and tourism. Policy uncertainty
from U.S. President Donald Trump raises the odds that states will accept China’s
carrots, rather than risk its sticks.
Manila’s decision not to follow through on a United Nations ruling in its favor
has meant markedly warmer relations with China. By comparison, the U.S. is not
putting much on the table. Indeed, the decision to withdraw from the Trans-
Pacific Partnership means it is taking something away.
GDP of economies with claims in South China Sea
Asean may lose out from diversification of China’s trade routes
As one of six corridors in China’s Belt and Road blueprint, Southeast Asia’s
economies will benefit from the associated boost in investment. That’s
especially so for its poorest members (Cambodia, Laos, Myanmar and Vietnam),
which have the largest infrastructure gaps. Still, activity in the opening years
of the initiative suggests Asean is a lower priority. Initial investments and
early steps in getting the Silk Road Fund up and running have been oriented
China’s new links across South, Central and West Asia will provide alternative
passageways to oil suppliers in the Middle East and final consumers in Europe,
diverting cargo away from the South China Sea. This may disrupt Asean supply
chains and increase competition across the export value chain.
Asean has potential to rival Japan in economic size
Asean’s 10-member nations have a combined population approaching 640
million, about half the size of China’s. The region is rich in natural resources
and is strategically placed along the South China Sea, where about half of the
volume of world trade passes each year. Incomes in Asean have risen by 24%
over the last five years, well above the 10% global average. GDP per capita
(PPP basis) in Singapore, Brunei, Malaysia and Thailand is higher than in China.
Indonesia is not far off the mark.
In terms of economic power, Asean is no challenge to China. Asean’s combined
GDP is less than 25% of China’s and about half of Japan’s. With some of the
fastest growth rates in the world and five times the population, Asean can more
readily catch up to Japan.
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