ASEAN: Economic Snapshot for ASEAN
April 23, 2018
ASEAN: Fair winds sustain economic momentum in Q1
A preliminary estimate of GDP growth in the Association of Southeast Asian Nations (ASEAN) shows the regional economy sailed smoothly in the first quarter, benefiting from tight labor markets, relatively accommodative monetary conditions and resilient global trade flows. The region’s economy is expected to have expanded 5.3% on an annual basis in the first quarter, matching the increase recorded in the previous quarter and slightly above the 5.2% rise previously projected.
The small upward revision reflects stronger-than-expected Q1 growth in Singapore, where export-oriented sectors performed well on the back of solid regional trade flows. A partial recovery in the housing market also supported the economy, with activity in the construction sector swinging from contraction to expansion in the first quarter, and home sales increasing for the first time in four months in March. Available GDP data for Vietnam also shows the economy expanded at a robust pace in Q1. GDP growth was buttressed by a double-digit expansion in the manufacturing sector, which in turn benefited from upbeat foreign demand for electronics, computers and steel.
Although growth figures remain outstanding elsewhere in the region, FocusEconomics panelists project an all-around solid performance in the first quarter. In Indonesia, exports regained some momentum after sequential weakness in the previous quarter, while soaring imports reflected firmer domestic demand. Improving domestic fundamentals largely reflect the government’s commitment to increasing public infrastructure investment, which has caused a spike in capital goods imports in recent months. Economic growth in Thailand is expected to have remained similarly positive in the first quarter, supported by healthy dynamics in the trade-sensitive manufacturing sector.
In the Philippines, economic activity appears to have mostly weathered the effects of sales tax hikes from the Tax Reform for Acceleration and Inclusion (TRAIN). Although survey-based manufacturing data shows activity took a hit from higher taxes, robust consumer-related spending data and soaring credit growth points to a resilient GDP outturn in the first quarter. The Malaysian economy is also expected to have logged a solid Q1 expansion, benefiting from healthy labor conditions and front-loaded fiscal spending ahead of the 9 May general election.
Malaysians will head to the polls in what is regarded as the most unpredictable election yet. Although surveys still show Prime Minister Najib Razak and his incumbent Barisan Nasional (BN) coalition retaining a majority in the 222-seat parliament, disaffection among Malaysians due to rising living costs and financial scandals surrounding prominent members of the government have increased the possibility of an electoral upset. That said, the opposition remains split, and contentious lawmaking in the weeks leading to the dissolution of the parliament have greatly enhanced the incumbent coalition’s chances.
Trade threats loom over an otherwise solid outlook
Relatively favorable financing conditions, resilient foreign demand and healthy labor markets across most of the economies surveyed in ASEAN continue to buttress the region’s outlook for this year. Increased public infrastructure spending in some of the area’s largest economies, including Indonesia and the Philippines, also reinforce the economic panorama. GDP growth for the region is expected to come in at 5.1% this year, which is unchanged from last month’s estimate and only a tad below the 5.2% expansion recorded last year.
Nonetheless, a wind of protectionism is blowing across the global economy, which risks derailing the current economic performance observed in many ASEAN countries. Several of these economies are highly reliant on trade with the U.S. and China, which have been embroiled in a quickly escalating trade conflict in recent weeks. The worst-case scenario of a trade war would cause disruptions to global trade and heighten global risk aversion, which would leave many ASEAN economies caught in the crossfire.
Although a more favorable solution to the aforementioned threat would greatly reduce the associated risks and help the region’s currencies appreciate further this year, growth is still expected to moderate marginally in 2018 on the back of a gradual tightening of monetary conditions by the U.S. Federal Reserve and a mild slowdown in growth in China. For 2019, our panel sees growth stable at 5.1%.
The stable 2018 GDP estimate for this month reflects steady growth projections for most of the economies surveyed in the ASEAN region, including Indonesia, Malaysia, Philippines, Thailand and Vietnam. Following a strong Q1 outturn, growth was revised upwards for Singapore, while Laos’ economy is also expected to grow at a faster clip than previously foreseen. Conversely, the economies of Brunei and Myanmar are projected to expand less than estimated last month.
Despite this month’s downgrade, our panel still projects Myanmar will be the fastest-growing economy in the region, with a 7.2% increase expected in 2018. Conversely, Brunei is foreseen logging the weakest expansion this year, at 2.5%. Among the major economies in the region, the Philippines will record the fastest increase, followed by Indonesia and Malaysia.
INDONESIA | Sovereign credit rating upgraded as economy continues to grow briskly
Economic activity continued to expand at a healthy pace in the first quarter, according to available data. The domestic economy is firming, as suggested by soaring imports. This is likely being supported by the ramp-up in infrastructure spending pursued by the government, mainly through the expansion of the balance sheets of state-owned enterprises (SOEs). Bank loans expanded robustly in the first quarter, a further sign of strengthening domestic demand. In addition, improvements in the manufacturing sector were registered by the PMI in February and March. On 11 April, Moody’s upgraded the country’s rating to Baa2 with stable outlook, citing the government’s prudent fiscal stance and the Central Bank’s focus on controlling inflation.
Growth is expected to accelerate somewhat this year, mainly supported by stronger domestic demand. Favorable financing conditions, rising inflows of FDI and higher commodity prices should spur private investment, while public investment will be scaled up through higher public infrastructure spending. Moreover, public finances will be kept in check, although the rising indebtment level of SOEs may push the government to spend public resources to ensure their financial viability. Cooling demand from China and rising global interest rates pose the main downside risks to the outlook. FocusEconomics panelists see GDP expanding 5.3% in 2018, unchanged from last month’s forecast. In 2019, the economy is seen growing 5.4%.
THAILAND | Authorities move to strengthen the domestic banking sector
Data for the first quarter suggests that the economy continues to perform well, following last year’s pick-up in pace. Private consumption grew solidly in January and February accordingly to the Bank of Thailand, while business confidence jumped in the first quarter. High business sentiment was underpinned by momentum in the external sector and manufacturing, according to available data: Exports grew strongly in the first three months of the year, while manufacturing production remained resilient in January and February. On 17 April, the government approved plans to offer tax incentives to commercial banks in Thailand. Work had begun in December on measures to strengthen the fragile banking sector. The plans include tax incentives to facilitate mergers, which should enable Thai commercial banks to better compete with large commercial banks in the region.
Strong domestic demand should fuel the economy this year and next. Government expenditure is expected to accelerate on the back of planned infrastructure expenditure, which ought to spill over to private fixed investment. However, export growth should moderate due to a large base effect, and escalating trade tensions between the U.S. and China pose a significant risk. Moreover, high household indebtedness remains a threat to private consumption growth. Political turmoil at home in the build up to general elections by February 2019 could dent investor confidence, dragging on growth. FocusEconomics panelists expect the economy to grow 3.9% in 2018, unchanged from last month’s forecast. The panel projects growth of 3.7% in 2019.
MALAYSIA | Citizens prepare for electoral showdown on 9 May
The incumbent Barisan Nasional coalition will face an unprecedented challenge in the 9 May national election. The main opposition group, Pakatan Harapan, has found in former prime minister Mohamad Mahathir a solid candidate to win over Malay voters unhappy with rising living costs and financial scandals surrounding the current government. That said, the opposition remains split, while contentious lawmaking in recent weeks has improved the incumbent coalition’s chances. The election will take place against a backdrop of solid economic momentum. Industrial production is holding up, while tight labor conditions and healthy manufacturing wage gains are supporting private spending. In the months to February, exports proved resilient against a strong ringgit, while fiscal spending ahead of election day and softening inflation are expected to have supported households in the first quarter.
A broad-based, if moderate, slowdown is expected this year, the result of waning Chinese demand and rising household debt servicing costs. The government’s commitment to its fiscal deficit target of 2.8% of GDP this year also implies a severe consolidation effort in H2 after front-loading expenditures in H1. That said, underlying fundamentals remain upbeat, and our panel expects the economy to expand a strong 5.3% this year, unchanged from last month’s estimate. For 2019, panelists see growth at 5.0%.
MONETARY SECTOR | Inflation picks up marginally in March
An estimate by FocusEconomics shows regional inflation accelerated marginally to 2.4% in March from a year-and-a-half low of 2.3% in February. Stronger inflation was recorded in Indonesia, the Philippines—where it breached the Central Bank’s target range—and Thailand, which more than offset softer price pressures in Malaysia, Singapore and Vietnam. Inflation figures are outstanding for the remaining countries in the region.
Monetary conditions in ASEAN are expected to gradually tighten this year amid more restrictive financing conditions in the U.S. and despite relatively soft regional inflation. The pace at which monetary stimulus is removed, however, remains heavily influenced by developments at the U.S. Federal Reserve. Bank Indonesia held rates steady in April, while the central banks in the Philippines and Thailand did the same in March. The Monetary Authority of Singapore (MAS), however, opted in mid-April to slightly increase the slope of the rate of appreciation of the SGD nominal effective exchange rate policy band, which had been held at zero for two years. Singapore fine-tunes monetary policy through exchange rate settings rather than interest rates, and this represents the first tightening since April 2016.
The Consensus Forecast for this year suggests inflationary pressures will remain relatively muted in 2018. Inflation is expected to average 3.0% this year, which is unchanged from last month’s estimate and is marginally above the 2.9% inflation figure recorded for 2017. Our panel foresees inflation ticking up and averaging 3.1% in 2019.
Written by: David Ampudia, Senior Economist