Economic Preview: South East Asia

What economic initiatives did key South East Asian nations— Singapore, Malaysia, Thailand and the Philippines—implement in 2013, and how will that affect their prospects for 2014?

By Wai Ho Leong, Barclays


As we move swiftly towards the close of a year characterised by a turbulent but improving global economy, North Asia is now enjoying a lift from the nascent recovery in the G3 economies (US, Europe and Japan),
while low inflation and stronger credit fundamentals are encouraging domestic demand. But across South East Asia, the picture is more mixed. Negative sentiment is, in some cases, sapping domestic demand.
However, the stronger global lift should eventually be felt through higher external demand, but this momentum may take time to pick up.
While growth in Asia in the second part of 2013 has picked up gradually, the missing ingredient continues to be confidence. Among exporters in Asia, there is still a sense of relative caution, meaning that even as we see a gradual recovery in the US, they are delaying the ramp-up in production for the year-end festive season. As a result, excess inventories are being run down. This could point to a later-than-usual rush to fill orders
for Christmas by manufacturers.
Furthermore, the balance of risks has tilted against South East Asia somewhat, as the market places more emphasis on relative credit fundamentals. Investors sold assets of those countries with large current account
deficits (Indonesia) or where current account surpluses are falling (Malaysia and Thailand). In contrast, the economies of North Asia, where external balances have improved on stronger global demand, have become
perceived safe havens. For example, Korea, whose current account surplus we expect to rise to 5.2% of GDP in 2013 (anything above 2% is large by OECD standards), has actually seen its currency appreciate 3.8% against the US dollar in the last six months. Even during the aggressive sell-off of emerging market assets in Q3, we still saw foreign inflows into Korean bonds. North Asian equities have also outperformed markets in the south, and flow data suggests an acceleration in inflows by overseas investors in recent weeks, while inflows into
South East Asia equities remain subdued.
To counter these trends, we have seen some strong policy reactions by governments across South East Asia. In response to depreciating pressures on their currencies, Indonesia has hiked short-term interest rates, while Malaysia and Thailand have also outlined pre-emptive steps for fiscal consolidation and to rein in household debt by cutting expenditure and introducing macro-prudential measures on the property sector. Policymakers in Indonesia and the Philippines have also undertaken macroprudential measures to manage mortgagerelated
Looking ahead, we expect the perception of risk associated with South East Asia to ease gradually, particularly for those economies that are likely to see an improvement in their external balances. Malaysia, whose economy is closely correlated with global growth, is likely to see stronger exports. Indonesia will also see some improvement in its current account deficit in 2014 on an import slowdown driven by softening growth.
Amid market volatility, the silver lining for Asia as a whole has been the lack of inflation. Price pressures across the region remain benign, except in a few outliers. We expect food prices to be well behaved, as favourable weather is expected over the rest of 2013 while key indicators generally bode well for agricultural production. If these conditions persist, food price volatility should pose less of a problem in the coming year for policymakers.
Across South East Asia, governments are looking to rein in spending and increase income. In Malaysia, fuel prices have been raised and the government is cutting operational expenditure. In a bold attempt at rebalancing the tax structure, it announced plans for a 6% goods and services tax, while lowering corporate tax to 24%. In Indonesia, the government raised fuel prices, but the risk of some fiscal support ahead of elections next year amid slowing growth is still present. Thailand has also pulled back on populist policies, such as the first-car buyer scheme, but maintains the rice pledging scheme. In Malaysia and the Philippines, governments are pushing infrastructure spending while keeping other expenditure in check.
Monetary policy may also tighten further in the region towards the end of this year and next. Our view is that Malaysia is starting to move towards a tighter monetary stance, as domestic demand is still strong and as inflation edges above 3%. Singapore may also tighten monetary policy in H1. Both will lead the North Asian economies such as Korea and Taiwan into rate hikes, which we expect to start in Q3 2014. On housing, policymakers remain vigilant. Thailand and Malaysia have announced more measures to curb property prices, and we expect more macro prudential measures in Indonesia and the Philippines.
Closer to home, we remain reasonably positive on the outlook for the Singapore economy at the tail end of the year and into the next. Barclays’ forecast is for growth to resume in Q4 and average 3.3% in 2014. Singapore’s small and very open economy will benefit from a gradual improvement in the global economy. The economic recovery in the US, which has been led by the housing sector, is expected to broaden to household consumption and corporate investment. The European economy only emerged from a recession in Q2 and is likely to gain more traction in 2014. Global business confidence has already improved to its strongest since
May 2011, paving the way for an improving picture to follow.
*All figures correct at time of writing.