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Asean-5’s Challenges
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.
Table of contents
Growth
Domestic sector
External sector
Inflation
Monetary policy
Fiscal policy
Reform progress
Long-term trends
Table of contents
Growth
Domestic sector
External sector
Inflation
Monetary policy
Fiscal policy
Reform progress
Long-term trends
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.
GDP in 2016 versus 2015 and 10-year trend
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.
Median forecasts for Asean-5 GDP growth
Table of contents
Growth
Domestic sector
External sector
Inflation
Monetary policy
Fiscal policy
Reform progress
Long-term trends
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
initiatives.
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.
Private consumption component of GDP
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.
Unemployment and the hiring outlook
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.
Income growth has faltered for most
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.
Investment component of GDP
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
Table of contents
Growth
Domestic sector
External sector
Inflation
Monetary policy
Fiscal policy
Reform progress
Long-term trends
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.
Foreign portfolio and direct investment flows
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
hardest.
Malaysia has lost the most from China slump
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
gained.
Asean-5 real effective exchange rates
Table of contents
Growth
Domestic sector
External sector
Inflation
Monetary policy
Fiscal policy
Reform progress
Long-term trends
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
Table of contents
Growth
Domestic sector
External sector
Inflation
Monetary policy
Fiscal policy
Reform progress
Long-term trends
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
the pipeline.
Monetary policy stances in the Asean-5
Table of contents
Growth
Domestic sector
External sector
Inflation
Monetary policy
Fiscal policy
Reform progress
Long-term trends
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.
Indonesia has lowest debt burden in Asean-5
Table of contents
Growth
Domestic sector
External sector
Inflation
Monetary policy
Fiscal policy
Reform progress
Long-term trends
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
approach.
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
Table of contents
Growth
Domestic sector
External sector
Inflation
Monetary policy
Fiscal policy
Reform progress
Long-term trends
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.
Growth in Asean’s frontier is world class
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
westward.
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.
FDI by source in Asean: 2015 versus 2014
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.
Economic size, population and wealth
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Asean-5’s Challenges May Persist Into 2018

  • 1. Asean-5’s Challenges May Persist into 2018 Tamara Mast Henderson Bloomberg Intelligence economist
  • 2. 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.
  • 3. Table of contents Growth Domestic sector External sector Inflation Monetary policy Fiscal policy Reform progress Long-term trends
  • 4. Table of contents Growth Domestic sector External sector Inflation Monetary policy Fiscal policy Reform progress Long-term trends
  • 5. 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.
  • 6. GDP in 2016 versus 2015 and 10-year trend
  • 7. 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.
  • 8. Median forecasts for Asean-5 GDP growth
  • 9. Table of contents Growth Domestic sector External sector Inflation Monetary policy Fiscal policy Reform progress Long-term trends
  • 10. 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 initiatives. 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.
  • 12. 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.
  • 13. Asean car sales send mixed consumption signals
  • 14. 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.
  • 15. Unemployment and the hiring outlook
  • 16. 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.
  • 17. Income growth has faltered for most
  • 18. 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.
  • 20. 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.
  • 21. Increase in non-performing loans has yet to peak
  • 22. Table of contents Growth Domestic sector External sector Inflation Monetary policy Fiscal policy Reform progress Long-term trends
  • 23. 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.
  • 24. Foreign portfolio and direct investment flows
  • 25. 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.
  • 26. Asean-5 merchandise exports versus China’s imports
  • 27. 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 hardest.
  • 28. Malaysia has lost the most from China slump
  • 29. 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.
  • 30. Top export markets and FDI sources for the Asean-5
  • 31. 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.
  • 32. Rolling 3M correlation with 5Y U.S. Treasury yield
  • 33. 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.
  • 34. Current-account trends tell better Asean FX story
  • 35. 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 gained.
  • 36. Asean-5 real effective exchange rates
  • 37. Table of contents Growth Domestic sector External sector Inflation Monetary policy Fiscal policy Reform progress Long-term trends
  • 38. 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.
  • 39. Inflation in most of Asean may stay subdued in 2H
  • 40. Table of contents Growth Domestic sector External sector Inflation Monetary policy Fiscal policy Reform progress Long-term trends
  • 41. 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 the pipeline.
  • 42. Monetary policy stances in the Asean-5
  • 43. Table of contents Growth Domestic sector External sector Inflation Monetary policy Fiscal policy Reform progress Long-term trends
  • 44. 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.
  • 45. Indonesia has lowest debt burden in Asean-5
  • 46. Table of contents Growth Domestic sector External sector Inflation Monetary policy Fiscal policy Reform progress Long-term trends
  • 47. 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 approach. U.S.-China tensions could increase the impetus for reform. The business climate in the Philippines and Indonesia has improved the most since 2013.
  • 48. Strong reform commitment boosts business climate
  • 49. Table of contents Growth Domestic sector External sector Inflation Monetary policy Fiscal policy Reform progress Long-term trends
  • 50. 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.
  • 51. Growth in Asean’s frontier is world class
  • 52. 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.
  • 53. GDP of economies with claims in South China Sea
  • 54. 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 westward. 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.
  • 55. FDI by source in Asean: 2015 versus 2014
  • 56. 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.
  • 58. Bloomberg Intelligence offers valuable insight and company data, interactive charting and written analysis with government, credit insights from a team of independent experts, giving trading and investment professionals deep insight into where crucial industries start today and where they may be heading next.