ASEAN Economic Forecast

Economic Snapshot for ASEAN

November 16, 2016

Growth stumbles in Q3, uncertainty hits ASEAN currencies

Economic dynamics in the Association of Southeast Asian Nations (ASEAN) softened in the third quarter. Data accounting for over 60% of the region’s nominal GDP show that the economy expanded 4.5% annually in Q3, a slowdown from Q2’s 4.7% increase. If confirmed, the result will mark the slowest growth rate seen since Q3 2015. The region’s economy suffered from weak external demand and lackluster investment, while public spending failed to pick up the slack.

Looking at the individual countries, growth eased in the region’s largest economy Indonesia due to a broad-based slowdown across the economy. Low commodity prices hampered export revenues and investment was constrained in spite of a low interest rate environment. Despite President Joko Widodo’s planned bold stimulus measures, government consumption contracted amid weak tax revenues. Singapore’s economy also deteriorated and growth slowed to a multi-year low, hit by a poor performance in the manufacturing sector. In contrast, Malaysia’s economy surprised on the upside and picked up pace. The improvement, however, was driven by weaker imports and a reduced drag from inventories, while the economy’s fundamentals remain weak.  


 
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Trade-exposed ASEAN currencies and financials were rocked by a sell-off following the 8 November U.S. election, after the unexpected victory of Donald Trump. The Indonesian rupiah fell to a five-month low, inciting the Central Bank to intervene in the foreign exchange market. The Malaysian ringgit also fell to the lowest level seen since January, the Philippine peso hit an over seven-year low and the Singapore dollar hit the weakest level since February. Spikes in bond yields and drops across stock markets were also recorded. The heightened volatility was a result of a sell-off of riskier assets in the wake of controversial candidate Trump’s election.

For ASEAN, the implications of a Trump presidency in the world’s largest economy are complex. Trump advocated increased U.S. trade protectionism and the importance of the external sector for many of the ASEAN economies leaves them vulnerable to any reduction in export demand—over 10% of the region’s exports are designated for the U.S. In addition, Trump has been highly critical of China and threatened to impose large tariffs on the country, which could hit the country’s growth. China is a major trading partner with ASEAN and the region could suffer from spillover effects.

On top of trade, ASEAN could feel the effects of the regime change in the U.S. through capital outflows. Trump has criticized the U.S. Federal Reserve’s decision to keep interest rates low and there is a chance that the Federal Reserve will embark on a more aggressive hiking cycle. This would put pressure on ASEAN currencies and it could spark capital outflows and tighten financial conditions. While the downside implications of Trump’s election are pronounced for the region, there is a silver lining. Trump campaigned for higher military and infrastructure spending, which could spur commodity prices and provide some respite for the region’s commodity exporters.

The next few months will be key for evaluating how the Trump presidency will affect the ASEAN economy. Trump made a lot of highly controversial statements and took rapidly changing positions on a few key issues, which makes it hard to separate the policies that he will pursue in office from election rhetoric. The key players appointed in his administration and his policy priorities will be critical to the outlook for ASEAN going forward. In the meantime, heightened uncertainty will likely continue to impact the region’s currencies and financials.       

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Economic conditions to improve modestly in 2017

The FocusEconomics panel sees growth in the ASEAN region picking up to 4.8% next year, after a 4.6% expansion in 2016. The analysts polled by FocusEconomics took a wait-and-see approach and left their forecasts for 2017 unchanged despite a gloomier backdrop since the U.S. election. Next year, an improvement in the region’s external sector should support quicker growth along with resilient household spending. 

This month’s forecast reflects unchanged outlooks for 5 of the 10 economies in the region, including Indonesia, the largest economy. Meanwhile, prospects were downgraded for Cambodia, Singapore and Vietnam, while the forecasts for Brunei and the Philippines were upgraded.

Myanmar and Laos, in that order, are expected to be the top performers in 2017, with expansion rates of over 7.0%. At the other end of the spectrum, Brunei and Singapore are likely to be the worst performers, growing 2.4% and 1.6%, respectively. Among the region’s major economies, Vietnam and the Philippines will grow the fastest, with projected expansions of 6.4% and 6.3%, respectively. Our panel of economists sees regional giant Indonesia expanding 5.3%.

INDONESIA | Growth loses steam in Q3

Indonesia’s economy slowed slightly in the third quarter, weighed down by tepid demand for exports and deteriorating investment. Despite the moderation, private consumption was robust, suggesting that the engine of the economy is on a firm footing. Initial indicators for Q4 point in different directions: the manufacturing PMI fell into contractionary territory in October but consumer confidence hit an over one-year high. Meanwhile, the government announced in November it would sell minority stakes in some ports and airports next year to boost public finances. Low tax revenues have interfered with President Joko Widodo’s ambitious spending plans to boost growth. In October, the government passed the 2017 budget which targets a smaller deficit and contains some tax increases and subsidy cuts.   

The economy is expected to pick up pace next year after projected GDP growth of 5.0% in 2016. An uptick in commodity prices, a revival of private investment and the government’s ambitious spending plan should fuel quicker growth. Our panel sees growth of 5.3% in 2017, which is unchanged from last month’s forecast. 

THAILAND | King’s death hits sentiment

The latest economic indicators reflect the downbeat atmosphere in Thailand following the first month of mourning after King Bhumibol’s death. In October, business and consumer sentiment deteriorated as “joyous activities” were forbidden and consumers across the country refrained from acquiring luxurious goods. Business owners, for their part, were constrained by heightened insecurity about the future reign, which threatens stability. Foreign investors have already acted on this uncertainty by selling significant amounts of their equity holdings listed on the SET. Compounding the bleak environment, the price for Thai jasmine rice reached an almost nine-year low in early November, which prompted the government to earmark a combined USD 3.6 billion in loans and subsidies to support rice farmers.

This year, tourist arrivals in Q4 are expected to be lower given the depressed climate following the King’s death. FocusEconomics panelists expect GDP growth of 3.1% this year. Political tensions domestically and internationally are foreseen rising next year, thereby dampening the outlook, yet the military government is expected to continue supporting the economy with fiscal stimulus. Our panel projects that the economy will expand 3.2%, which is unchanged from last month’s estimate.

MALAYSIA | Activity picks up in Q3

In Q3, GDP growth accelerated and came in at 4.3%—the fastest rate in three quarters. Q3’s expansion was driven by strong private consumption growth, which was fueled by higher wages and increased employment, as well as by a positive contribution from net exports, resulting from a faster contraction in imports. Meanwhile, growth in fixed investment and government consumption decelerated sharply in Q3, partly due to dwindling oil-related government revenues. In terms of monthly indicators, growth in industrial production and exports moderated in September. Despite Q3’s rebound, on 11 November, the ringgit plunged to a multi-year low in the offshore market as a reaction to Donald Trump’s unexpected victory in the U.S. elections. However, Bank Negara kept a tight grip on the onshore market and maintained the spot rate essentially unchanged.

Domestic demand, particularly private sector activity, will continue to support growth in 2017. However, Trump’s victory in the U.S. elections poses a risk to Malaysia’s export-dependent economy, if he follows through with introducing barriers to trade. FocusEconomics panelists expect GDP to expand 4.1% in 2016. For 2017, the panel sees GDP accelerating to 4.4%, which is unchanged from last month’s forecast. 

INFLATION | Inflation inches up in October

Preliminary data show that inflation in ASEAN rose slightly from 1.9% in September to 2.0% in October. The result was driven by higher price pressures in Indonesia and Vietnam. Despite the slight rise, inflation remains at historic lows, which has opened the door for many central banks in the region to ease monetary policy rates and in October, Bank Indonesia cut its policy rate by 25 basis points.

Our panelists see price pressures remaining meek in the coming months and inflation averaging 2.3% in 2016. Upside risks to the inflation forecast have increased in recent weeks due to the currency depreciation following the U.S. elections. Next year, price pressures are expected to pick up as the deflationary effect from low commodity prices fades out and some scheduled subsidy cuts and tax hikes take place in key economies. Our panel sees inflation averaging 3.2% in 2017, which is unchanged from last month’s forecast. The stable outlook reflects unchanged projections for 7 of the economies surveyed, including major players Indonesia and Malaysia.

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Written by: Angela Bouzanis, Senior Economist

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