Entering ASEAN Economic Community (AEC) 2015, regional economy has yet to register stable growth. In fact, some economies in the region are showing signs of increasing vulnerability arising from weak economic structure. The economic situation in ASEAN region in the quarter II-2014 is a portrayal of an economic that has mixed bag of optimism interspersed with some dose of pessimism. Some key countries in the region such as Malaysia, Philippines, Thailand, Singapore and Vietnam, despite continuing to fluctuate over time, have succeeded in registering economic growth that exceeds the expectations. Meanwhile, Indonesia as the major engine of regional economy shows signs of weakening growth as are Brunei Darussalam, Laos, Cambodia and Myanmar. They are still bedeviled by issues that relate to economic fundamentals such as the structure of the economy that suffers from sufficient diversification and rising disequilibrium that characterizes government revenue and expenditure. Consequently, economic growth which has been achieved has been short on quality which has contributed to economic contraction. Such a situation is reflected in the continuing economic vulnerability of the regional economy in the lead up to AEC 2015 amidst conditions in the world economy that has yet to achieve strong and sustainable economic growth.
Various challenges continue to bedevil regional economy in the lead up to AEC 2015. The challenges are attributable to among other factors international phenomena as well as regional factors such as the impending plan by United States Central Bank to raise interest rate by about 100-115 basis points which poses the danger to reverse the flow of capital which had flooded emerging markets back to United States in 2015, global economic situation which continues to be anaemic as reflected in the current account positions of many countries that are still in deficit, and deficit on government revenues and expenditures (budget) that exceeds 3 % in some countries in the region. Besides, a number of challenges that relate to domestic policy such as impeding plan by the government to rationalize prices of subsidized fuels in Indonesia and Malaysia, the impending plan by Malaysia to implement a new Goods and Service Tax (GST) policy in 2015, proposal of raising Value Added Tax (VAT) by 10% and salaries of civil servants by 8% in Thailand in 2015, and domestic political instability that continues to afflict Cambodia and Thailand. The above issues have the potential to derail efforts of countries in the region to achieve economic growth targets in the lead up to AEC 2015 which will come into force late 2015.
Table 13: GDP Growth in Constant 2000 Prices in ASEAN Nations, 1998-Q1 2014
(y-o-y, %)
Contribution of private sector continue to be key in maintaining economic momentum in the regional economy
Note: average economic growth for 1998-1999, 2000-20007, and 2008-2009
Data on economic growth for Q2/2014: Cambodia, Laos and Myanmar was not available by the time this piece was written
Source: IMF, CEIC (2014)
Major economies in ASEAN region registered high growth in Quarter II-2014 that exceeded expectations. ASEAN-5 nations with the exception of Indonesia have been able to register economic growth that exceeded expectations. Malaysia which Bank Negara Malaysia was projected to register just 5.8% and Philippines that Bangko Sentral projected to grow by 5.7%, both have been able to achieve growth of 6.4%. The two economies derived benefits from economic momentum in Quarter II-2104 that arose from growth in service and construction sectors while Singapore also achieve a suitable amount of growth which was largely derived from their insurance sector. Meanwhile, with time as the fallout from the coup de etat that rocked Thailand -as the second largest economy in the region- is gradually setting its foothold on achieving economic growth in Quarter II-2104, shedding off the effects of the protracted public demonstrations that saw economic contraction to the tune of -2.1%. Economic growth that was achieved in Thailand was as a result of improvement in international trade for Thailand as well as increasing confident of investor sentiments that was reflected the return of foreign investors to capital market encouraged by various financial instruments that were issued by the government and the private sector. Meanwhile, in Quarter II-2014, economic growth in Indonesia slowed compared with the performance in the previous quarter. This was in part attributable to continuing fluidity in investor confidence in Indonesian economy which was compounded by dynamics in Indonesian politics in the wake of electing the new President. Besides, the combination of restrictive monetary policy and fiscal policy which among other indicators was reflected in the decision by the government to postpone the payment of ‘13th-month bonus salary’ for the public servants at the beginning of Quarter II-2014 to Quarter III-2014 which adversely affected public consumption in Indonesia contributed as much to weakening economic growth in Indonesia.
Private sector plays a leading role in supporting economic growth in the region. The economic growth momentum in Quarter II-2014 which Malaysia, the Philippines, Singapore and Thailand experienced is by and large underpinned by the growth in performance of the private sector investment in services in such sectors that are related to trade and construction, which in turn were supported by improvement in global economy. This is shown by achievement registered by Malaysia and the Philippines, which posted double digit growth of 12.1% and 12.7%, respectively. The rise in the contribution of the private sector is also attributable to weakening government expenditure that is related to bottlenecks that bedevil bureaucracy.
There is need for some other countries in ASEAN region to accelerate restructuring of economic fundamentals to if optimal economic growth is to be achieved. Brunei as one of the countries in the region that recorded economic contraction (-3.3%) should undertake fundamental economic restructuring by accelerating efforts to diversify the economy which today depends heavily on the oil and gas industry. According to the official responsible for economic development planning in Brunei (JPKE), oil and gas industry contributes more than 70% of GDP and 90% of total exports. However, the dependency on the sector in this quarter registered contraction of -0.6% attributable to efforts by the government to promote the development of other sectors such as agriculture, fisheries, and forestry which registered growth rate of 4.1% year-on-year. Other fundamentals problems of the economy such as budget deficit which is still high as in the case of Laos (5.8% of GDP) and Myanmar (3.7% of GDP) which came as a consequence of implementing expansionary social security and defense spending which reduced fiscal space for the government to undertake economic stimulus to support economic growth. Meanwhile, the border conflict between Vietnam and its key economic partner, China, weakened the economy of Vietnam. To that end, the government of Vietnam is today taking measures that entail the involvement of foreign investors in the economy which policy is expected to reduce the dependency of Vietnam economy on Chinese government.
Table 14: Inflation in ASEAN Countries, 2011-2014* (y-o-y, %)
The rise in prices of goods is attributable to the high proportion of import products for consumption
Note: Data for Brunei Darussalam, Cambodia, Laos, Malaysia, Myanmar, and Singapore is as per July 2014 (y-o-y). Data for Indonesia, Philippines, Thailand, and Vietnam is as in August 2014 (y-o-y)
Source: Bloomberg (2014)
Policy measures taken by countries to deal with imported Inflation have varied. In general, countries in ASEAN region registered high inflation that was largely associated with soaring prices of foodstuffs and non-alcoholic beverages and some other components that are used for consumption such as garments and electronics, most of which are imported by taking advantage of the establishment of various facilities such as Special Economic Zone especially those that are located in countries that lie in the Mekong River delta (Cambodia, Laos and Myanmar). High inflation in the sub-region was aggravated by annual natural disasters and bouts of political instability that rocked Thailand that constitute one of the major economies in the sub-region. Doubtless, such problems hampered interregional trade. Inflation in several countries was aggravated more by rising prices of electricity which reached 43% in Myanmar in April 2014 and the hiking of fuel prices in Vietnam, which was done twice that is on June 26th, 2014 and July 7th, 2014. Efforts to control inflation in countries in the region have been done by controlling prices such as the policy adopted in Thailand by Thailand Military Government and in Vietnam. Such policies can be deemed effective in that they succeeded in stemming even higher inflation. On the contrary, Laos’s government took the measure of abolishing Value Added Tax (VAT) on some imported commodities with the hope that such a policy would stimulate commercial production in the domestic economy. Brunei Darussalam also implemented policy that was different from those that were adopted by other countries in the region. Brunei was able to register the lowest inflation in the current quarter by pegging its currency, Brunei Dollar to Singapore Dollar.
Table 15: Capital Market Share Index in ASEAN Nations, 2009-2014 (y-o-y, %)
Capital flow is poised to face uncertainty attributable to plans by the Fed to raise interest Rate
Note: Data for 2 January and 29 August 2014 is for year-to-date based growth
Source: Bloomberg (2014)
A shadow is handing over capital markets in the region due the plan of the Fed to raise interest, which is likely to trigger reversal of capital flow. In Quarter II-2014, in general capital markets in ASEAN region show strong growth as reflected in double digit growth that was registered with the exception of Cambodia (-15.96%), Malaysia (0.71%) and Singapore (4.80%). Weakening growth of capital markets in Singapore and Malaysia which represent countries that are highly integrated in international economy, signals slowing on capital inflow into ASEAN region. The situation, according to some sources, is attributable to precaution of investors in anticipation of plans by the Fed to raise interest rate, which Bank Indonesia projects will be implemented in the first half of 2015 by around 100 to 115 basis points. Doubtless, the implementation of the policy is expected to trigger a reversal of capital flows, which had flowed to emerging economies. The Ministry of Finance, Republic of Indonesia, continues to indicate that the potential for a reversal of capital flow will impact equilibrium on the capital market which in turn will lead to a deficit on the current account. Cambodia and Laos are concerned about the potential danger of capital flow reversal as they are currently implementing policies that are tailored toward relaxing capital market regulations with the hope of attracting foreign companies to list their shares on their domestic capital markets which heretofore, have been dominated by state owned companies.
Table 16: Developments in Exchange Rate of Local Currencies Against USD, in ASEAN Nations, 2009-2014 (y-o-y, %)
Positive market sentiments have underpinned appreciation of exchange rates
Note:
*= In 2012 Myanmar revalued its currency
Data for 29 August 2014 is year-to-date based economic growth
Value with symbol (+) indicates currency appreciation (-) indicates currency depreciation.
Source: Bloomberg (2014)
Currency exchange rates in the region are strongly influenced by equilibrium or the lack thereof, on international trade and sentiments of business practitioners. In general appreciation or depreciation of currency exchange rate in the region is very much influenced by a country’s performance in international trade. This is evident in the case of Thailand Baht, Indonesia Rupiah and Malaysia Ringgit. On the other hand, depreciation of exchange rate for currency of Cambodia is a reflection of the effect of garment factory workers’ demonstrations that have rocked the country for several months. It is not surprising that such condition undermined positive sentiments that business men had about prospects of the economy of Cambodia. Specifically for Vietnam, depreciation of its currency exchange rate was as a result of devaluation policy implemented by the government on June 19th, 2014 which saw the Vietnam Dong fall by 1% against the US Dollar. Devaluation was implemented with the objective of improving the competitiveness of Vietnam’s exports to its new trading partners amidst an economy that was rocked by border conflicts with China which is the main trading partner. Meanwhile the factor of positive business sentiments was also at play in influencing the exchange rate of the Philippine Peso which registered an improvement in rating by Standard’s & Poor in May 2014.