Saturday August 18, 2012
Pressure on Asean economies
By FINTAN NG
REMEMBER the television advertisement some months back by an investment bank touting Asean as the third leg in the Asian growth story? Well, that resilience will be tested in the coming months, if it has not already, because growth in the other two legs, China and India, have slowed down.
Compared to the economic turmoil and growth uncertainties in the rest of the world, the first half of this year has actually been pretty good for Asean, albeit with some bumps along the way mostly due to external headwinds buffeting the region's export-reliant economies.
Furthermore, the region's stock markets have been doing reasonably well in the first half despite risk-off trades primarily because investors, already well exposed to safer assets such as US Treasuries and German bunds, continue to chase better returns elsewhere.
But there are concerns the second half will be more challenging following the release of second-quarter gross domestic product (GDP) figures in recent weeks from the United States and Europe, suggesting that external demand may be choppy.
What makes the outlook even gloomier is the slower growth in China, where Asean has forged ever closer trade links in the past decade. China's growth slowed to 7.6% year-on-year, marginally lower than expected but still down from the first quarter's 8.1%.
“In general, the electrical and electronics industries are going through challenging times except for those related to mobile phones where the outlook for the second half is still looking fairly good,” he says.
Chuah's Penang-based company exports automated semiconductor equipment, with some 80% of production going to China, the United States and Europe. “The major part of our exports go to China, which then uses our machinery to make the finished products to be shipped out,” he says.
Recent leading indicators, especially for manufacturing, have pointed to a weakening demand from Asean's and developing Asia's end-markets.
Reports from multilateral institutions such as the Asian Development Bank (ADB), the World Bank and the International Monetary Fund (IMF), which were released in the June-July period, continue to paint a picture of resilience for the region. But who is to say that the outlook cannot change?
To be fair, all the multilateral institutions have warned of further slowdown in China, which started putting in place measures to cool the economy early last year. This will put Asean's growth projections for the year at higher risk of being revised lower.
The World Bank says an overshooting to the downside cannot be ruled out although Beijing is targeting a soft landing for the economy.
“Global economic growth remains sluggish, with rising concern that emerging economies are increasingly vulnerable to weak economic prospects in the US and euro-area,” the ADB says in the July supplement to the Asian Development Outlook released in April.
It says GDP growth for the Asean-5 (Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) and for South-East Asia as a whole to be maintained at 5.2% and 5.6% respectively for the year.
“Despite the weaker external environment, growth in South-East Asia is expected to remain robust, supported by strong domestic demand and reconstruction in flood-affected areas. Vibrant domestic demand and private investment appeared to drive South-East Asian growth in the first half,” it says.
It notes that open economies such as Singapore and Malaysia posted slower growth in the first quarter of the year (compared to the fourth quarter of 2011) as a result of weaker external demand.
Similarly, the World Bank projects buoyant growth for the Asean-4 (Indonesia, Malaysia, the Philippines and Thailand) to step up to 5% for the year with solid activity in Indonesia and post-flood recovery in Thailand.
It says in the June update to the bi-annual Global Economic Prospects report that carryover (that is, delayed response effect from fiscal and other policy measures) should sustain domestic demand until impetus from a revival in global trade comes to the fore in the second half of the year.
The IMF, in the July update to the World Economic Outlook report, says downside risk to the global outlook continues to loom large.
“The most immediate risk is still that delayed or insufficient policy action will further escalate the euro-area crisis,” it says, adding that the near-term downside risk in emerging market and developing economies seem primarily related to external factors.
It points out that the main short-term risk is excessive fiscal tightening in the United States (the fiscal cliff issue tax increases and spending cuts which may weigh heavily on growth if these come into effect next year).
Betting on domestic demand, China trade links
In recent years, domestic demand and intra-Asian trade (especially between Asean and China) has given some support to the region's economies. This was evident during the global financial crisis of 2007/2008 when pump-priming not only led to a higher reliance on domestic demand after demand from developed markets collapsed but China's pump-priming led to higher imports from the region.
The question is whether domestic demand and the Asean-China trade links can withstand the headwinds and prolonged uncertainties. Another question that comes up is what sort of impact this will have on long-term growth prospects.
Economists point to there being no double-dip recession for the US and that there are signs of stabilisation where China is concerned.
Even so, Citigroup Inc's Asia-Pacific chief economist Johanna Chua says that Asean still needs to be watchful of weakness in external demand impacting industrial production and exports. She says this could soften labour markets and weaken domestic demand.
“We don't think Asean will slow down that much, and some of the domestic-driven growth drivers are structural rather than cyclical,” she says.
However, Chua says growth will be rather mixed in the second-half with some economies remaining under pressure although there will be no sharp and protracted slowdown.
She adds that countries such as Vietnam which have implemented aggressive policy easing could see economic momentum pick up a bit in the second-half due to the lagged impact of easing while countries with strong growth momentum such as Thailand through post-flood reconstruction/investment could see growth momentum wane although on a year-on-year basis, growth will rise sharply due to the base effect.
Chua is optimistic on intra-Asian trade, seeing the links between Asean and China strengthened as manufacturing production chains relocate to Asean from China due to higher costs brought about by much-needed rebalancing and structural reforms in future years.
“When external demand growth remains subdued, putting pressure on top-line revenue growth, the need to find efficiency gains through cost reduction will be particularly important,” she says.
Chua says this could potentially benefit countries that can take advantage of competitive labour costs and decent logistic costs which can be helped by further infrastructure upgrading.
“We think Malaysia, Thailand, Indonesia and Vietnam and rest of Indochina (Laos, Cambodia) could be potential beneficiaries,” she adds.
Meanwhile, Hongkong and Shanghai Banking Corp Ltd Asean economist Lim Su Sian says that on an individual basis, most of the Asean countries within the house's coverage are likely to see a slowdown although the region's growth is expected to stay quite resilient this year with faster growth in Thailand and the Philippines pushing the overall average up.
She expects growth in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam to come to 5.1% this year (up from 4.7% last year) on a weighted average basis with growth accelerating to 5.5% next year.
Lim says the resilience comes on the back of buoyant consumption as wage growth has remained healthy amid ongoing tightness in Asean's labour markets.
“This is evidenced by record-low unemployment rates. Meanwhile, in anticipation of the external slowdown, governments have responded with generous fiscal stimulus. This year we are expecting government budget deficits in Asean to widen; only Singapore is likely to report a surplus, albeit a smaller one than last year,” she says.
Lim anticipates more private investment being drawn to the region as governments roll out plans to build highways, ports, railroads and other infrastructure.
She sees the ongoing euro-zone crisis posing the biggest risk to the region. “Trade is especially vulnerable. As it stands, Asean is already experiencing increasing drag on exports because of lower demand from Europe, and to an extent also the United States,” Lim points out.
Although central banks in the region have revised their growth forecasts for the year slightly lower due to the weaker-than-expected export performance, she says policymakers in general still seem quite confident on the outlook.
Lim says besides domestic demand continuing to provide a cushion against external headwinds, intra-Asia demand is also helping to offset weaker demand from Europe.
“Intra-Asia demand accounts for half of Asean's shipments and even more in some instances while Europe on average accounts for about a tenth,” she says.
Lim says there will be no hard landing for China although a sharper than expected slowdown will have significant implications for Asean with countries such as Malaysia being especially vulnerable since China has become the country's single largest export destination.
“This year we are expecting growth (in China) to slow to 8.4% from 9.2% in 2011. Although growth averaged below that in the first half, we expect an acceleration in the second half as the effects of monetary and fiscal policy easing start to kick in,” she says.
Watch out for financial linkages
Chua and Lim says another front where the region is vulnerable is through financial channels. They see the evolving eurozone crisis as a threat that could destabilise capital flows to the region.
Lim says there is a risk that European financial institutions may withdraw lending should banks come under greater stress in Europe. “This could in turn put a squeeze on liquidity conditions in the region,” she adds.
Lim says that within Asean, the degree of vulnerability varies quite widely from country to country. For instance, EU claims in Thailand account for less than 10% of domestic credit, but at the other end of the scale, in key financial centres like Singapore, such claims account for over 50% of domestic credit.
“Note that EU bank claims in Malaysia and Indonesia are also not insignificant, at over 15% of domestic credit,” she says.
Chua, on the other hand, says countries with rising current account deficits (a situation where imports is greater than exports) such as Indonesia is exposed to volatile portfolio flows.
Morgan Stanley Research analysts say more needs to be done even though policymakers in Indonesia, which released second-quarter balance-of-payments data a week ago, have announced an array of monetary and non-monetary measures to bring the current account deficit to a more sustainable level and to sustain growth.
“They represent small steps in the right direction to address these issues. However, we think more needs to be done to manage domestic demand via policy tightening to slow down credit growth and to reduce the risks to macro stability,” Tan Deyi and Chew Seen Meng say in a report dated Aug 13.
They say policy measures may take time to exert any impact while the current account deficit in Indonesia for the quarter has widened to 3.1% of GDP, which together with commodity and external funding linkages are pressure points to macro stability.
“When commodity prices soften and risk aversion takes hold amid a worsening currency account deficit, macro stability will be affected because balance-of-payment outflows will lead to currency depreciation, domestic liquidity tightening and an increase in market-oriented capital cost, which would in turn hurt domestic demand,” they say.
They point out that a widening current account deficit amid this global environment means that policymakers are effectively ceding control of macro stability over to global risk factors.