ASEAN Economic Outlook November 2016

Economic momentum falters in Q3

ASEAN: Economic momentum falters in Q3

October 19, 2016

Growth in the Association of Southeast Asian Nations (ASEAN) fell to an over one-year low in the third quarter, according to a preliminary set of data. The ASEAN economy expanded 4.4% over the same period of last year, just 0.1 percentage points below the result expected by FocusEconomics’ analysts (Q2: +4.7% year-on-year). The slowdown was driven largely by a sharp deceleration in Singapore’s economy, which recorded the smallest expansion since Q2 2009. Weak global demand and low commodity prices have weighed on the island’s exports in recent quarters and spillover effects have emerged in the domestic economy. Manufacturing activity plummeted in Q3 and the services sector recorded a mild contraction.   

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In contrast, Vietnam’s economy was a bright spot in the region in the third quarter and growth picked up to 6.4% annually (Q2: +5.8% yoy). The acceleration was chiefly due to an improvement in the agricultural sector, which had suffered from adverse weather conditions in H1. Official GDP data are not yet available for the remaining economies in the region, however, our analysts expect growth to have remained broadly steady in regional heavyweights Indonesia and Malaysia.

Recent developments have cast a spotlight on the already lackluster Thai economy. Beloved King Bhumibol Adulyadej passed away on 13 October after a 70-year reign. The news sparked volatility in Thai assets due to increased uncertainty and, following the announcement, the government announced a year of mourning and called for a 30-day halt to ‘joyous events’. The grieving period is expected to drag on already tepid economic activity as consumers curb their spending in the 30-day period. The Thai economy has suffered from years of political clashes, which have delayed necessary structural reforms, and subdued global demand. The King has been seen as a unifying political figure and his passing could increase political uncertainty in the country. Against this backdrop, our analysts see a persistent slowdown in GDP growth in Thailand in Q3 and Q4.      

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Growth prospects unchanged for second consecutive month

The outlook for ASEAN’s economic prospects remained stable for the second month in a row. Analysts polled by FocusEconomics see the region growing 4.6% in 2016, just above 2015’s reading. While fiscal stimulus policies and solid demand from within the region should support the uptick in growth, a weak external outlook is limiting the region’s growth dynamics. 

This month’s forecast reflects unchanged outlooks for 7 of the 10 economies in the region, including Indonesia, the largest economy. Meanwhile, prospects were upgraded for BruneiLaosand the Philippines this month. Next year, our panel of analysts expects the ASEAN economy to expand 4.8%.

Myanmar and Laos, in that order, are expected to be the top 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, the Philippines and Vietnam will grow the fastest, with projected expansions of 6.5% and 6.0%, respectively. Our panel of economists sees regional giant Indonesia expanding 5.1%.

INDONESIA | Tax amnesty revenues pick up

Indonesia’s mild growth uptick likely continued in Q3, after GDP expanded at the fastest pace since Q4 2013 in the second quarter. Recent high frequency data have been positive: the manufacturing PMI rose in September and retail sales returned to double-digit growth in August. Moreover, signs of stabilization continue to emerge from the external sector and the trade surplus rose to a nearly two-year high in September. On the fiscal front, tax amnesty revenue collection has picked up in recent weeks and over USD 10 billion worth of assets had been repatriated by the end of September. The news is positive for the government’s efforts to widen the tax base. The budget committee approved a fiscal deficit target of 2.4% of GDP and a growth target of 5.1% for 2017 at the end of September. The government is expected to finalize the budget for 2017 in the coming weeks.   

Robust government spending on infrastructure projects should propel solid GDP growth this year. While the improved tax amnesty revenue collection has reduced some risks to our forecast, our panelists took a wait-and-see approach this month and held Indonesia’s GDP projection at a 5.1% expansion. Next year, our panel sees growth speeding up slightly to 5.3%.

THAILAND | Mourning period likely to curtail economic activity temporarily

On 13 October, Thailand’s King Bhumibol Adulyadej died at the age of 88, after a 70-year reign. The mourning ceremonies for the much-loved king will take one year and the coronation of his successor, Crown Prince Maha Vajiralongkorn, is not expected before the end of the mourning period. The popular monarch was seen as a provider of stability in the politically divided country and his death leaves a void. This increases the risk of turmoil at a time when the development of the balance of powers under military rule is already causing uncertainty, but so far there are no signs of a political crisis. Prior to the tragedy, economic activity in Thailand had continued to accelerate softly. Manufacturing and exports rebounded strongly in August but the current state of mourning and the downbeat atmosphere are likely to drag on growth.

Until clarity emerges on the transition, domestic sentiment is very likely to be subdued, but it is largely expected that the military junta will provide fiscal stimulus to avoid a serious downturn. Some analysts are still considering the impact of the king’s death on the economy and the current forecast is for GDP to grow 3.2% in 2016, which is unchanged from last month’s estimate. For 2017, the panel projects that the economy will also expand 3.2%.

MALAYSIA | Exports return to growth

While Q2’s GDP figure marked the worst economic performance since the height of the global financial crisis in 2009, recent high-frequency indicators paint a better picture for Q3. Going against market expectations, exports grew in August, after 22 consecutive months of contraction. The print was mainly driven by increases in exports of electronic products and of palm oil. Similarly, industrial production accelerated in August as a result of high growth in the manufacturing and electricity sectors. In other news, the 2017 budget is set to be submitted to Parliament on 21 October and is expected to be only marginally higher than that of 2016 due to tight government finances in a low commodity price environment.

Going forward, Malaysia’s oil sector and economy could be boosted by the potential OPEC output agreement. However, the country will remain vulnerable to external developments such as uncertainty over global economic growth and potential volatility in financial markets. FocusEconomics panelists expect GDP to expand 4.1% in 2016, which is unchanged from last month’s forecast. For 2017, the panel sees GDP growing 4.4%.  

INFLATION | Inflation edges up in September

Preliminary data show that inflation in ASEAN rose slightly from 1.7% in August to 1.9% in September. The result was driven by higher price pressures in Indonesia, the Philippines 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 September, 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, 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 five of the ten countries surveyed, including major player Indonesia. Next year, inflation is expected to pick up to 3.2%.

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Written by: Angela Bouzanis, Senior Economist

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