ASEAN Growth steady in Q1; external headwinds likely to persist going forward
Growth in the Association of Southeast Asian Nations (ASEAN) held up in the first quarter of 2016, a more complete set of data confirm. GDP expanded 4.6% annually in Q1, which matched Q4 2015’s result. Results of note include accelerations in both Thailand’s and the Philippines’ economies, which expanded at multi-year highs. On the flip side, Malaysia’s economy grew at the slowest pace since the financial crisis and Indonesia’s GDP growth rate decelerated.
The FocusEconomics panel foresees growth remaining steady in Q2 and GDP recording a third consecutive 4.6% expansion. External headwinds—chiefly in the form of tepid external demand and still-low commodity prices—should continue to plague the region and will likely weigh on growth prospects this year. In addition, a significant drought has hit agricultural production and hurt rural incomes in Thailand and Vietnam. On the other hand, public investment spending should support growth in many economies, although implementation and financing risks persist. In Indonesia, weak tax revenues led Finance Minister Bambang Brodjonegoro to propose spending cuts and a wider fiscal deficit in June. Meanwhile, in the Philippines, President-elect Rodrigo Duterte’s economic team has stated that they will focus on boosting infrastructure and improving the business climate when they assume office on 30 June.
ASEAN’s prospects remain stable
The outlook for ASEAN was unchanged this month for the second consecutive period. Analysts polled by FocusEconomics see growth inching up from 2015’s 4.5% to 4.6% in 2016. This month’s forecast reflected stable forecasts for seven of the ten countries surveyed, including major players Indonesia and Malaysia. Following strong GDP readings for the first quarter, the forecasts for the Philippines and Thailand were revised up. Vietnam was the only country for which the outlook was revised down as it is struggling against a backdrop of adverse weather conditions. Next year, our panel of analysts expects 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 7.0% and higher. At the other end of the spectrum, Brunei and Singaporeare 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 6.4% and 6.2%, respectively. Regarding Indonesia—the largest economy in the region—our panel of economists sees GDP expanding 5.1%.
INDONESIA | Government revises fiscal deficit target amid low revenues
Indonesia’s economy slowed in Q1 due to weaker public spending and subdued fixed investment, which increased the pressure on the government to accelerate envisaged reforms and spending. That said, low fiscal revenues pose a risk to the government’s plans. In June, the government lowered this year’s growth target and lifted the fiscal deficit target. In addition, a tax amnesty bill aimed at boosting state revenues this year is still under discussion in Parliament. Against this backdrop, the USD 400 million loan Indonesia recently secured from the World Bank comes as positive news, as it aims to help improve tax collection and finance the deficit. Meanwhile, S&P Global Ratings affirmed Indonesia’s BB+ rating in June. S&P is the only major ratings agency that still classifies Indonesia as under investment grade and cites an expected widening of the fiscal deficit as one of the reasons.
Indonesia’s economy is set to pick up this year, boosted by the government’s reform efforts. However, slow implementation of reforms and underspending in the public sector are downside risks. FocusEconomics panelists see GDP accelerating to 5.1% in 2016 before speeding up slightly to 5.4% in 2017.
THAILAND | Government continues with fiscal stimulus, doubles tax breaks for investors
In Q1, the Thai economy accelerated over the previous quarter amid robust government spending and an improvement in the external sector’s contribution to overall growth. However, more recent data show that economic activity remains fragile. In April, manufacturing production decelerated and exports swung to contraction. Since seizing power two years ago, the military government has undertaken measures to support investment and the junta announced in late May that it plans to double tax breaks for private investors with the aim of giving a boost to the sluggish economy. In other news, the country is currently experiencing one of its worst droughts in decades due to the El Niño weather pattern. As a result, rice production has dropped significantly, which has in turn pushed up the price of Thai rice.
Businesses welcome the fiscal stimulus measures the government has undertaken, however, there is uncertainty regarding whether this will be enough to shore up a recovery amidst a weak external sector. On the other hand, the acceleration of the Thai economy in the first quarter drove an upward revision to the GDP forecast this month. FocusEconomics panelists expect the economy to grow 3.1% in 2016, which is up 0.1 percentage points from last month’s estimate. For 2017, the panel projects the economy to expand 3.2%.
MALAYSIA | Economic data stabilizes as political uncertainties subside
Malaysia emerged from a period of financial and political instability earlier this year and now appears to be relatively stable. The 1MDB fiasco, which involves allegations of corruption against the prime minister and a string of defaults that threatened the country’s financial stability, is no longer dominating the headlines and the fractured political opposition has so far failed to capitalize on the situation. The PM’s positon was further bolstered by the outcome of two state by-elections held on 18 June in which the incumbent United Malays National Organization (UMNO) party retained its seats. Meanwhile, the economy is benefiting from the stability: volatility in the exchange rate has subsided, exports contracted at the slowest rate in over a year in April and industrial production expanded steadily.
As risks to growth stemming from political uncertainty wane, businesses will feel more confident investing knowing that the economic reforms passed by the UMNO are not likely to be reversed. This will support growth this year and be complimented by a strengthening of exports, supported by a competitive currency and an expected increase in commodity prices. FocusEconomics panelists expect GDP to expand 4.3% in 2016, which is unchanged from last month’s forecast. For 2017, the panel sees GDP growing 4.6%.
INFLATION | Inflation inches up in May
Preliminary data show that inflation in ASEAN rose slightly from 1.8% in April to 1.9% in May. April’s result had marked the lowest reading so far this year. May’s rise largely reflected slightly higher price pressures in Thailand, the Philippines and Vietnam, which more than offset lower inflation in Indonesia. Inflationary pressures are expected to remain limited this year and the low inflation environment has given some central banks the flexibility to ease monetary policies. On top of this, some central banks have been tweaking with their monetary policy framework in order to improve the policies’ effectiveness.
Our panelists see inflation rising moderately in the coming months and averaging 2.6% in 2016, which is down 0.1 percentage points from last month’s forecast. This month’s ASEAN forecast reflects downward revisions to the inflation outlooks for four of the ten economies surveyed, including the region’s largest economy, Indonesia. In contrast, the inflation outlook was raised for three of the countries surveyed, including Cambodia and Vietnam. No change was made to the inflation forecasts for three of the countries surveyed. Next year, inflation is expected to pick up to 3.4%.
Written by: Angela Bouzanis, Senior Economist
June 22, 2016
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