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Economic Update: South East Asia

The ICAEW Economic Update: South East Asia, is a quarterly forecast for the region prepared directly for the finance profession.

Q4 2019 Summary

  • Despite some progress in the US-China trade talks, we remain cautious about the outlook for trade and manufacturing, and believe that the risk of a re-escalation in trade tensions remains high. Moreover, we do not expect the bulk of tariffs already imposed to be removed anytime soon. As such the outlook for exports and private investment will remain challenging and continue to dampen regional GDP growth.
  • Amid a deteriorating economic outlook, regional central banks have shifted to a more accommodative stance this year. However, while we expect further rate cuts will be limited, we look for fiscal stimulus to complement central bank efforts in cushioning the economic slowdown. We see Singapore as having the most fiscal space to pursue a fiscal expansion.
  • Indeed, more expansionary fiscal setting measures are expected to underpin a modest improvement in GDP growth in Singapore, the Philippines and Thailand. Nonetheless, for the region as whole, we expect GDP growth to slow from 5.1% in 2018 to 4.5% this year and next.

Trade conflict continues to weigh on activity

Regional growth has slowed since 2018 and remained sluggish in Q3, with GDP growth for South East Asia (SEA) as a whole rising 4.5% year on year from 4.4% in Q2. The US-China conflict has been a key driver of the slowdown in growth, with trade uncertainty a key drag on manufacturing, exports and investment. Indeed, Singapore as a highly export-oriented economy only narrowly avoided a technical recession (two consecutive quarters of negative growth) in Q3. The exception has been Vietnam, which has benefited from some trade diversion effects caused by the trade war. That said, we suspect some Chinese goods have been re-routed via Vietnam to avoid higher tariffs.

Although the US and China recently agreed on a ‘phase one’ deal, frictions between the two remain high and the bulk of tariffs already imposed are unlikely to be lifted anytime soon. As such, alongside slower Chinese domestic demand, the outlook for regional exports and private investment will remain challenging. However, against this weak global backdrop we expect macro policies to become more supportive of domestic demand.

Fiscal support to be stepped up amid accommodative monetary policy

Alongside a more dovish US Fed, low inflation and a deteriorating economic outlook, regional central banks have shifted to a more accommodative stance. We expect the Philippines, Malaysia and Indonesia to reduce interest rates by a further 25 basis points (bp) over the coming quarters. Then we expect an extended pause with fiscal stimulus to complement central bank efforts in cushioning the economic slowdown, however, the room for fiscal maneuvering varies across the region.

After running a series of fiscal surpluses, Singapore has the most fiscal room to ease policy and given the highly uncertain trade environment, we expect the government to announce measures such as cash handouts and funding support for SMEs in next year’s budget.

In contrast, both Vietnam and Malaysia are constrained given current levels of public debt and, while Malaysia did announce a mildly expansionary budget for 2020, the government’s continued emphasis on fiscal consolidation and the risks of fiscal slippage suggests limited room for further support.

Meanwhile, we expect that the rest of the SEA countries to roll out stronger fiscal impulses. Thailand unveiled a fiscal stimulus package worth US$10.2bn to support household spending and the tourism sector and has approved a 6.7% increase in the government’s spending for 2020. Government spending is also set to pick up in the Philippines following the approval of a 12% annual increase in expenditure with a focus on infrastructure, healthcare and education.

Overall, we forecast average SEA GDP growth to be 4.5% in 2020, unchanged from 2019. Across the region, we expect momentum in Vietnam to ease to 6.6% from 7% this year given weaker Chinese import demand and increased trade protectionism (there remains a risk that the US could impose tariffs on some Vietnamese goods). And while we expect more supportive fiscal measures will see GDP growth improve modestly in Thailand and the Philippines next year, growth is still set expected to be below potential.


Asia: GDP growth


The Indonesian economy grew by 5% year on year in the third quarter, broadly unchanged from the previous quarter, supported a by better-than-expected contribution from net trade. Exports were flat on the year, while imports contracted 8.6%. Domestic demand components, however, painted a more sombre picture.

After benefitting from pre-election boosts in the first half of 2019, private consumption growth slowed to 5.1% year on year in Q3 from 5.4% in Q2. The slowdown in government spending was more marked, moderating to only 1% from 8% in Q2. Fixed investment growth also decelerated to 4.2% from 5% in the previous quarter. Looking ahead, we maintain that growth will slow to 4.9% in 2020 from 5% this year. High frequency data suggest that domestic demand remains weak, with the PMI falling below the neutral line of 50 for the fourth consecutive month in October. Moreover, we forecast net exports to be a drag on growth next year as exports recover at a slow pace against the backdrop of sluggish global growth and weak Chinese domestic demand. Indeed, policy uncertainty surrounding US-China trade tensions still runs high, keeping us cautious in our external outlook. Meanwhile, continued import controls from last year and weak export earnings will also keep a lid on investment growth in the short term.

That said, we expect that the accommodative macroprudential policies and monetary easing will prevent a marked deceleration in private spending and we expect GDP growth to ease modestly to 4.9% next year from 5% in 2019.

Bank Indonesia shifts its focus towards growth

After aggressively raising interest rates by a cumulative 175bp in 2018, to support the Indonesian rupiah, Bank Indonesia (BI) has returned to an easing bias this year. For the fourth consecutive month, BI cut its benchmark interest rate in October to further boost domestic demand. In recent months, the rupiah has performed relatively well thanks to the stabilising trade position and some hints at a US-China trade deal. However, we remain cautious as we forecast the export recovery to take some time while the situation surrounding US-China trade tensions is still very fluid.

Moreover, the currency remains especially vulnerable to swings in investor sentiment. We think the BI has space to cut its policy rate further by another 25bp to 4.75% in Q4 2019 before taking a long pause. Core and headline CPI inflation rates remain well anchored, within the BI’s inflation target range, backing the central bank’s stance. Weak interest rate transmission channels also support ‘front-loading’ the rate cuts. We also expect BI to remain data-dependent in assessing domestic and global economic momentum.

The possibility of further rate cuts cannot be ruled out in the current environment of weak global growth. But BI has alternative tools in its arsenal to support lending, such as accommodative macroprudential policies, which we expect to remain in place. Some of these measures include bolstering bank financing to the corporate sector, managing market liquidity through hedging instruments, relaxing the rules on property loans and financing, and strengthening the payment system.

Target fiscal measures

The government is also joining hands with targeted fiscal measures. President Joko Widodo issued a regulation on major tax deductions aimed at boosting R&D investment and skills training. In addition, next year’s budget reflects more infrastructure spending plans, which should help investment growth accelerate next year. In the medium term, the government also plans to gradually reduce the corporate tax rate from 25% to 20% by 2023. These measures should help sustain consumption and investment, the key pillars of growth.

Although the budget follows a fiscal consolidation plan (from -1.9% of GDP this year to -1.8% next year), we think the government will end up running a bigger deficit in 2020 due to lower-than-expected tax receipts. Moreover, the finance minister has hinted that there’s fiscal space for more stimulus if needed. We continue to forecast a budget deficit of 2.1% of GDP in 2019 and 2.3% in 2020, still well within the constitutional budget deficit ceiling of 3% of GDP.

Indonesia: Government budget balance and debt


GDP growth eased back in Q3 to 4.4% year on year, from 4.9% year on year in Q2, in line with our forecast. Sequential GDP momentum maintained a solid pace, with strong quarterly gains in private and public consumption, together with more positive inventory developments, outweighing weaker investment and exports.

Domestically, household spending remained the key driver of growth. Supported by subdued inflation and low debt servicing costs, household spending grew 7% year on year, although this was down from the strong 7.8% growth recorded in the previous quarter. Public consumption rose a solid 1% in Q3. However, given the sharp 14.4% year on year decline in public investment, overall public spending remained a drag on GDP growth, subtracting 0.9ppt from annual growth.

Meanwhile, net exports added 1ppt to annual GDP growth as a 1.4% fall in exports was more than offset by a larger fall in imports (-3.3% year on year).

GDP growth set to moderate as fundamentals soften

We expect momentum to continue to moderate over the next year as several tailwinds that have supported growth, notably household spending, will continue to fade. We also expect the effects of the sluggish external environment to start having a larger impact on the domestic economy. Indeed, there are already signs of softening in the underlying fundamentals that have supported domestic demand. Based on our forecast slowdown in GDP growth, we believe that more monetary policy easing is warranted.

Amid weak business loan growth, imports of capital goods adjusted for prices (a proxy for investment demand) have contracted sharply this year, falling -11.2% in the past nine months. Lower business sentiment and capacity utilisation rates also point to not only subdued business investment but also diminishing employment prospects, which would weigh on household spending.

Household spending has been the key driver of growth over the past year, aided by a three-month tax-free holiday, low inflation, and income tax returns and cash handouts boosting disposable income. However, we look for momentum to ease back as the effects of many of these benefits start to fade.

Employment growth eased to 1.9% year on year in Q3, and other indicators signal that growth will remain moderate. We also estimate that real wages grew by only 0.5% year on year in the third quarter. And with inflation edging up, albeit gradually, and wage growth likely to remain soft, real wages will rise at a more moderate pace than in 2017-2018.

Against a backdrop of sluggish export growth and moderating domestic demand we expect GDP to grow by 4.4% this year, slowing to only 4% in 2020. Based on our forecast slowdown in GDP growth, we believe that more monetary policy easing is warranted as the government presented only a mildly expansionary budget for 2020. Given the government’s continued emphasis on fiscal consolidation and risks of fiscal slippage, we believe Bank Negara Malaysia (BNM) will need to do more of the heavy lifting to support growth.

Inflation edges higher but not a concern

Inflation dynamics also favour a more accommodative monetary policy stance. While inflation picked up to 1.3% year on year in Q3, in the nine months to date it averaged only 0.6%. We expect inflation to trend higher as the impact of the removal of the Goods & Services Tax fades and a targeted fuel subsidy and digital tax are introduced in 2020. However, we still forecast overall inflation to be only 0.7% this year before rising to 2.1% in 2020, on par with average inflation over the past decade.

Lastly, while the US Federal Reserve signaled a pause in November, we still expect it to reduce rates once more in March 2020. Regional central banks are also set to maintain an accommodative bias in their policies. This provides a window for BNM to adjust rates lower without excessive pressure on the ringgit. Following the recent 50bp cut in the Statutory Reserve Requirement, we expect the BNM to reduce the policy rate by 25bp in Q1 2020, bringing the policy rate to 2.75%.

World: Asia and US policy rates

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