18 Jul 2016
The 10-members of the Association of South East Asian Nations (ASEAN) are facing a difficult year. Slower growth, higher interest rates and a trade war between China and the United States are expected to undermine stability in the financial markets.
Internal trade within the ASEAN Economic Community (AEC), a bloc now entering its third year, is expected to help cushion the negative impacts, which includes fears of a global recession towards the end of this year and stretching into 2020.
"With the AEC in general there still seems to be a long way to go.” – Smiddy
But an enduring question is AEC itself. How much has it really done and can it fulfill its potential?
As growth slows from 5.9 per cent in 2018, ASEAN leaders are being urged to speed-up reforms in line with the AEC Blueprint 2025, designed to further integrate the region, and finalise the Regional Comprehensive Economic Partnership (RCEP) with six Asia-Pacific states.
“That growth will slow is now a consensus and well discounted view,” says Sanjay Mathur, ANZ’s Chief Economist for Southeast Asia & India.
“What will matter for financial markets is whether growth differentials with the US move back in Asia’s favour and whether earnings estimates reflect the slowing business cycle.”
Meanwhile Focus Economics expects GDP growth in Southeast Asia of 4.9 per cent over 2019 while the OECD took a slightly more optimistic view forecasting almost flat growth at 5.2 per cent but that number was averaged-out over 2019 to 2023.
AEC, two years on
Beyond the macro-economic challenges however is the institutional one. The EU provided ASEAN with an economic role model but the AEC does not have a central bank nor its own currency and the mobility of labour has remained heavily restricted since it was launched at the start of 2016, pulling together a population of about 620 million people.
Critics also argue more needs to be done in regards to eight professions tapped to head the AEC free trade regime – doctors, nurses, dentists, engineers, architects, surveying, tourism and accountants – in terms of liberalisation, particularly the movement of labour.
“With the AEC in general there still seems to be a long way to go,” says Michael Smiddy, a senior economist with Emerging Markets Consulting (EMC). “They’ve made a lot of progress but to see meaningful impact we need a lot more done.”
The 2025 Blueprint focuses on the liberalisation of trade, finance, skilled labour, taxation, and research and development. Critics argue meaningful reform is being stymied by vested interests.
“The free movement of people is a difficult one… less palatable,” Smiddy said. “The AEC was never going to be like the EU, particularly in regards to certain skilled occupations.”
He said this was complicated by education standards, noting that qualified Cambodian nurses, like many others, still have to sit exams in Thailand if they are to work there.
The biggest issue confronting ASEAN is its diversity: ethnicity, religion – Christianity, Buddhism, Hinduism, Islam and atheism – and political make-up – democracy, military rule and communism.
“Their intent is positive, it’s all good stuff but you’ve got a lot of countries, a lot of bureaucracies, and a lot red tape to get through. But on the whole greater integration is a net positive,” Smiddy said, noting ASEAN economies were still driven by local fundamentals.
Of the five original members of ASEAN, Indonesia and Thailand are expected to hold national elections in the first half of this year while the Philippines will conduct mid-term elections, adding political clarity on the regional economic front.
High inflation, a week currency and increased excise taxes have hurt the Philippines, which is also struggling to recover from typhoon damage. However its economy will continue to be buttressed by remittances from its massive overseas workforce.
For Thailand, which Moody’s Investors Service says faces “high political risks”, the ballot will end more than four years of military rule and result in a return to badly need economic reforms ranging from infrastructure upgrades to skills training and a more equal distribution of wealth.
In Indonesia, where rising debt is a concern, reforms put in place by the current administration to improve competitiveness and spending on social services are expected to kick-in post-election, when a free trade deal with Australia could finally be signed-off.
Mathur says Asian central banks were more relaxed regarding monetary policy with the US Federal Reserve entering the final stages of the its rate tightening cycle and a single 25 basis-point hikes was expected in Thailand and Indonesia.
But he added trade tensions remain a source of volatility.
Moody’s expects Chinese growth to ease to 6.0 per cent from 6.5 per cent over the coming year. This was echoed by Mathur in his outlook for 2019: “Much of Asia is vulnerable to an intensification and broadening of tensions between the US and China.”
Analysts said Singapore, which has experienced a sharper than expected fall in growth, and Malaysia, where consumer spending is up after its value added tax was abolished, were being hurt by their exposure to Chinese supply chains.
This could lead to increased government spending.
“In some advanced economies, an increasing focus on social welfare and more inclusive growth, while conducive to social cohesion and policy effectiveness in the longer term, could hurt near term profitability and investment,” Moody’s added.
The CLMV club
Cambodia, Laos, Myanmar and Vietnam make up the CLMV Club, ASEAN’s poorer relations who joined in the bloc in the 1990s. But that’s changing rapidly in Vietnam, which has the brightest economic outlook for the year, and to a lesser extent Cambodia.
Moody’s says tensions between the US and China could weigh on investment and limit growth potential, with wider risk premiums weakening debt affordability, thus raising liquidity risks for governments in frontier markets.
“Shifts in domestic priorities away from fiscal consolidation, or in political appetite to address weaknesses in the financial sector, pose a risk to some emerging and frontier market sovereigns' credit profiles,” it said.
However, despite being vulnerable to a downturn in China, Moody’s says, Hanoi could benefit from US tariffs being slapped on China, particularly in the garment industry because of Vietnam’s ability to scale-up production.
It was a point take further by Thomas Hugger of Asian Frontier Capital. In a note to clients, he said a recent shift of manufacturing jobs from China to Vietnam was not a short-term trend.
“The trade war could actually increase the number of manufacturing jobs moving to Vietnam as companies in China look to reduce their exposure to existing as well as potential US tariffs.”
Cambodia, which has witnessed a post-war boom off the back of Chinese investment and Western donors, could benefit for the same reasons – if it escapes US sanctions and Europe decides not to withdraw trade preferences in response to a political crackdown before last year’s election.
Myanmar, blighted by civil conflicts and the influence of an over-arching military, was expected to lag alongside Laos. Both are major beneficiaries of Chinese investment, but anti-Chinese sentiment and concerns over debt traps persist.
“There was a lot of early excitement about Myanmar and a lot of scope for growth coming off such a low base when it first opened up and the sanctions were removed. But it hasn’t moved quickly, reform hasn’t been as quick as some would have hoped,” says EMC’s Smiddy.
“Laos has got some positive attributes in resources and a growing middle class but it’s small and landlocked,” he said. “China has obviously invested in infrastructure not just in Laos but across the region but we’ve seen a push back against that.”
Meanwhile, Brunei – once an independent voice in ASEAN – is doing it tough as it battles dwindling oil supplies, prompting the government to seek investment from China while using its Islamic religious credentials in seeking support from Saudi Arabia.
Whether China can maintain its big spending investment strategy in ASEAN remains to be seen but the current course does emphasise the importance of finalising five years of RCEP negotiations – a pan-Asian trade accord that covers half the world's population and about 30 per cent of global trade.
The pact – between ASEAN, Australia, China, India, Japan, New Zealand and South Korea –was expected to be concluded in November.
India, however, fearing an influx of Chinese goods, sought a delay until after elections due in May. Quoting sources, the Nikkei Asian Review reported India had mentioned elections in negotiations last year and asked for the understanding of other RCEP members.
Importantly, RCEP will help fill gaps in the world trade system and potentially complement the 11-nation Trans-Pacific Partnership (TPP), which does not include China or India.
Finalising RCEP, movement on the AEC Blueprint and improving the ability of people to move freely within Southeast Asia would go a long way in alleviating regional economic problems while providing a much-needed cushion for ASEAN, which will struggle in the year ahead.
Luke Hunt is a freelance journalist and Asian correspondent for a range of international business and political publications
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
18 Jul 2016
19 Oct 2018