External headwinds continue to weigh on ASEAN growth
January 27, 2016
A preliminary set of data suggested that growth in the Association of Southeast Asian Nations (ASEAN) edged down in the final months of 2015. GDP expanded 4.4% in the final quarter of 2015, which was just a notch down from the 4.5% expansion tallied in Q3. Results of note include pick-ups in growth in the economies of both Singapore and Vietnam. Vietnam managed to weather external headwinds particularly well in 2015, as strong infrastructure spending and a healthy manufacturing sector propelled the GDP to record the fastest expansion since 2007.
While official Q4 GDP data is not yet available for the rest of the countries in the region, recent indicators signal that growth remained tepid in those economies. Economic dynamics in ASEAN, with the notable exception of Vietnam, have been adversely affected by external headwinds, particularly soft demand from China. Economic data for the all-important export sector remains weak and volatile financial markets combined with external risks have increased pressure on a number of currencies in the region.
Against the backdrop of depressed trade volumes, the new ASEAN Economic Community (AEC) was born on 31 December. The AEC aims to establish a more globally-competitive single market and boost economic ties between the countries through reducing tariffs and allowing a freer flow of labor and capital across nations. While the AEC is the potential first step toward integrating the ASEAN economies—which would be equivalent to the world’s seventh-largest economy—a number of hurdles exist. Specifically, slow implementation of the agreement, competition from other projects to integrate the region and a small operating budget could all limit the realization of the AEC’s goals.
Going forward, the prospects for the ASEAN economies will be heavily influenced by the evolution of external headwinds. Softer demand from China and higher financing costs due to the end of a very accommodative global monetary policy may hinder growth. However, renewed hopes of economic reform implementation and greater public spending in Indonesia along rising public spending in the Philippines and Thailand should boost the domestic economies. Against this backdrop, FocusEconomics Consensus Forecast panelists project a 4.5% expansion for the ASEAN region in Q1 2016.
Check out our ASEAN regional economic summary page for our most recent news on the region.
ASEAN’s growth outlook deteriorates
The outlook for ASEAN deteriorated this month, after having been stable in January. Analysts polled by FocusEconomics cut their growth projections for 2016 by 0.1 percentage points to 4.7%. This month’s projection reflected downward revisions to the outlooks for Malaysia and Singapore. Conversely, the panel made no change to the forecasts for 7 of the 10 countries surveyed, including Indonesia, the Philippines and Vietnam. Myanmar was the only country for which panelists raised their forecasts. Next year, our panel of analysts expect the ASEAN economy to expand 4.9%.
Myanmar, Laos and Cambodia, in that order, are expected to be the best performers in 2016, with expansion rates of over 7.0%. At the other end of the spectrum, Brunei and Singapore are likely to be the worst performers, followed by Thailand. Among the rest of the region’s major economies, Vietnam and the Philippines will grow the fastest, with a projected expansion of 6.6% and 5.9%, respectively. Regarding Indonesia—the largest economy in the region—our panel of economists sees GDP expanding 5.1%.
INDONESIA | Government focuses on jump-starting economy with public spending
The Indonesian economy underperformed in 2015 due to prolonged delays in government spending, sluggish private investment and the impact of weak global markets on external sector growth. Latest data confirm the unfavorable scenario at the close of last year: the manufacturing PMI remained in contractionary territory and exports contracted at a double-digit pace for the eighth consecutive month in December. While many economic challenges will continue this year, there is renewed hope that public investment and infrastructure spending will finally kick into higher gear and boost the economy. The government continues in its push to remove bottlenecks and several large projects are set to begin. In fact, on 21 January, President Joko Widodo inaugurated construction on the country’s first bullet train line, a key project in the government’s broader plan to overhaul infrastructure and build up investor confidence.
Growth should improve going forward as capital expenditure increases and additional large infrastructure projects are started. However, low prices for top commodity exports and weak global demand, particularly from China, will limit momentum. While the economy is expected to have grown at the weakest pace since 2009 in 2015, FocusEconomics panelists see it accelerating to a 5.1% expansion in 2016, which is unchanged from last month’s forecast. For 2017, the panel sees GDP expanding 5.3%.
THAILAND | Recent indicators suggest softer growth in Q4
Thailand’s economy grew steadily throughout the first three quarters of 2015 mainly supported by robust government spending and healthy growth in private consumption, which more than offset faltering external demand. More recent indicators point to a slight deceleration of the economy in the final quarter of 2015. Indeed, manufacturing barely grew in November and consumer confidence remained in pessimistic territory in December. Earlier this month, the Thai military junta approved reforms under which hundreds of thousands metric tons of rubber will be purchased by the government at a price much higher than what is quoted on international markets. With the purchased rubber, the government intends to cover demand on the domestic market and also to sell it overseas later on when prices recover. However, in the short term, the move will push prices up amid a supply shortage.
While the fiscal stimulus measures the government announced last year were welcomed by businesses, there is uncertainty regarding whether this will be enough to compensate for a weak external sector. FocusEconomics panelists expect the economy to grow 3.2% in 2016, which is unchanged from last month’s estimate. The panel projects growth of 3.5% in 2017.
MALAYSIA | Low energy price environment likely to squeeze government revenues
An internal memo made public on 20 January announced that the state-run oil and gas company, Petronas, would cut USD 11.4 billion from its capital and operating expenditure budgets. The challenges the firm is facing have become more pronounced as recent developments in the global energy markets have lead many industry experts to revise their outlook in favor of a slower recovery in energy prices. Dividends from Petronas represented the government’s largest source of non-tax revenue in 2015 and, although these dividends are expected to contract 38.5% this year, they will likely continue to be the most significant source of non-tax revenue. Such developments are indicative of a shift in Malaysia’s trade dynamics as the contribution of hydrocarbons and palm oil to the country’s export profile is diminishing in favor of a larger role for burgeoning manufactured exports.
The government based its 2016 budget on average crude prices of USD 48 per barrel. Although this is a substantial decrease from 2014, it may still be optimistic. Prices lower than that would put a squeeze on public finances in 2016, which could drag on growth. FocusEconomics panelists expect GDP to expand 4.5% in 2016, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel sees GDP growing 4.7%.
INFLATION | Regional inflation plunges to over six-year low in December
Preliminary data show that inflation in ASEAN fell from 2.0% in November to 1.6% in December, which marked the lowest reading in over six-years. The print largely reflected a notable easing of inflationary pressures in Indonesia, which saw inflation fall to a six-year low as the impact of November 2014’s subsidized fuel price hike fades. Overall, subdued commodity prices and tepid economic growth brought inflation in the region to historic lows in 2015.
Inflationary pressures are likely to increase in the coming months, albeit mildly, amid the weakening in regional currencies, increased public spending and changes in administrated prices. That said, inflation is expected to remain at moderate levels this year, thereby giving some flexibility to Central Banks.
Our panelists project regional inflation to average 3.1% in 2016, which is down 0.2 percentage points from last month’s estimate and would mark a slight acceleration from 2015’s 2.8% figure. This month’s ASEAN forecast reflects downward revisions to the inflation outlook for 7 of the 10 economies surveyed, while 2 were left unchanged and only the outlook for Brunei was raised up. Next year, inflation is expected to pick up to 3.6%.
Written by: Angela Bouzanis, Senior Economist
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