amro digest 2 bleu - management insider digest offers a summarised version of amro’s report ......

DIGESTECONOMIC OUTLOOK OF ASEAN, CHINA, KOREA AND JAPAN

August 2017

AMRO, March 2017, ASEAN + 3 Regional Economic Outlook 2017ASEAN + 3 Region: 20 Years after the Asian Financial Crisis

MANAGEMENT INSIDER DIGEST | ASEAN + 3 - Regional Economic Outlook, 2017-07-11 August 2017

p. 1AMRO, ASEAN + 3 Regional Economic Outlook 2017

This digest offers a summarised version of AMRO’s report “ASEAN + 3 – Regional Economic Outlook, 2017 - ASEAN + 3 region: 20 Years after the Asian Financial Crisis”. The emphasis is put on important economic developments as well as risks in ASEAN, China, Korea and Japan. It aims to provide an understandable evaluation of recent developments in the regional economy. A focus is also given to the links between the ASEAN + 3 and the global economy.

“ASEAN + 3 – Regional Economic Outlook, 2017 - ASEAN + 3 region: 20 Years after the Asian Financial Crisis” tries to understand changes within the economic frame and in macroeconomic policies of ASEAN + 3 economies. The global context in which those changes take place is

one of uncertainty. The election of Donald Trump might affect global markets as a consequence of increased trade protectionism in the US. ASEAN + 3 countries could be affected by decrease in trade. In addition, global financial conditions have tightened and are thus shrinking space given to monetary policies.

Despite the fact that fiscal policy could play a more important role, it would depend of the available fiscal space of each economy. Economic growth and financial stability are now more difficult to balance. However, within a state of global uncertainty, the focus should be given to financial stability. Structural reforms and macroprudential policies should be used.

KEY TERMS+ 3: China, Korea and Japan.

Current account: Is an important indicator of an economy’s health. It defines the trade of goods and service of an economy with others in the world.

Economic shock: An event that produces a significant change to an economy, despite occurring outside of it. Economic shocks are unpredictable and typically impact supply or demand throughout the markets.

Macroprudential policy: This term refers to the regulation that aims to mitigate risk of a financial system as a whole or systemic risk. Portfolio: A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their funds counterparts. These financial assets are held by investors or managed by financial professionals.

Real economy: The part of the economy that is concerned with actually producing goods and services.

EXECUTIVE SUMMARY

KEY FINDINGS• Domestic demand is key to the growth of ASEAN economies.• Policy makers should focus on financial stability as a result of uncertain global environment.• Trade with the USA is decreasing while regional ASEAN trade increases. • Non-Asian emerging markets such as Brasil and Mexico are increasing their trade with China.• A part of the debt held in USD by regional Asian economies will mature during the 2017-2019 period. In 2015, a third of

the USD 10.0 trillion of external USD-denominated debt was located in global emerging markets. • On average, foreign exchange reserves cover 9 months of imports as well as 3.2 times the short-term external debt.• Cambodian macroeconomic projections: - GDP growth: 6.8% in 2017, 6.8% in 2018. - Headline inflation: 4.0% in 2017, 4.2% in 2018. - Current account balance (in % of GDP): -8.2% in 2017, -8.5% in 2018. - Central government central balance (excl grants, in % of GDP): -1.5% in 2017, -1.5% in 2018.



Global economic effects on ASEAN + 3ASEAN + 3 economies have handled external shocks in 2016 quite well. Nonetheless, the resilience could be weakened by global uncertainty and by increased protectionism. Moreover, global markets are fluctuant and could thus affect ASEAN + 3 economies.

Western economic influence on ASEAN + 3

Donald Trump’s pro-growth vision could be positive for the US economy. However, immigration and trade restrictions may hurt growth. In that regard, the International Monetary Fund (IMF) expressed concerns on Trump’s protectionism policies. The organisation warned that trade barriers would be a “self-inflicted wound” to the improving global economy. In perspective of the financial market, the sharp increase in the US Fed interest rates will tighten global financial conditions.

Europe’s growth has been stronger than expected. However, that growth has to be seen with caution. The slow resolution of Non Performing Loans in addition to policies uncertainty might affect that growth in the future. The policies uncertainties consist of major elections in France, Italy, the Netherlands and in Germany and of the BREXIT.

Chinese and Japanese economic influence on ASEAN + 3

Chinese and Japanese growth showed frequent stability. Furthermore, their growths are set to anchor those of ASEAN + 3. Growth predictions for ASEAN + 3 economies are of 5.2% in 2017 and 5.1% in 2018.

China’s economic growth should stabilise itself. The country

will keep its economic powerhouse status, thus China will continue to absorb imports from the ASEAN region. Key challenges for China are: accelerating state-owned companies reforms, pursue the reduction of industrial overcapacity, corporate debts and containing financial stability risks.

Japanese growth will also remain strong in 2017 due to macroeconomic policies and external demand. Moreover its outward portfolio is expected to continue moving towards ASEAN + 3.

Economic shocks

Real economy shocks coming from the US, China and Japan would be of importance. For example, a contraction in GDP in one of these three countries would then affect exports of emerging markets. US and Chinese real economy shocks are set to have higher impact on ASEAN + 3 exports than Japanese ones.

Furthermore, because of the centrality of China in the global value chain, a Chinese shock would be more persistent than a US one. Finally, pressure affecting the corporate sectors of the three countries would be transmitted to the financial and corporate sectors of ASEAN +3.

ASEAN + 3 economic specificities

In the views of an uncertain trade prospect, the region’s growth is driven mostly by domestic demand. Foreign Exchange reserves are solid amongst the regional economies.

ASEAN + 3 Foreign Exchange reserves are important (see Table 1). However, they should be reinforced in case of possible capital outflows. These are vulnerable to sudden withdrawal of foreign holdings as well as capital outflows. To lower down risks of external shocks, flexibility should be given to exchange rates in addition to wisely chosen pace-moderating interventions.

Nonetheless, as a result of increasing inflation and the tighten global monetary conditions, the room given to monetary policies is smaller in 2017 than in 2016. Regional economies that are financially vulnerable, with high credit growth or an external debt, would find it harder to pursue policies that support growth.

Cambodia 8,632China 3,148,401

Indonesia 124,953Japan 1,249,847

Lao PDR 914Malaysia 98,007

Philippines 82,176Thailand 184,469

Table 1: Foreign exchange reserves of selected ASEAN +3 countries, 2017. In million dollars. Source: IMF, CEIC



List of regions GDP Growth Inflation2016 2017 2018 2016 2017 2018

ASEAN + 3 Region 5.3 5.2 5.1 1.7 2.5 2.4Brunei Darussalam -2.5 1.6 2.9 -0.7 0.2 0.6Cambodia 6.9 6.8 6.8 3.0 4.0 4.2China 6.7 6.5 6.3 2.0 2.8 2.5Hong Kong 1.9 2.3 2.4 2.4 1.8 2.0Indonesia 5.0 5.1 5.2 3.5 3.8 4.0Japan 1.4 1.3 1.1 -0.1 0.6 0.9Korea 2.8 2.5 2.6 1.0 1.8 1.9Lao PDR 6.9 7.0 7.0 1.6 3.0 3.8Malaysia 4.2 4.5 4.6 2.1 2.7 2.9Myanmar 6.0 7.0 7.2 6.8 7.1 6.8The Philippines 6.8 6.8 7.0 1.8 3.1 3.2Singapore 2.0 2.0 2.2 -0.5 0.8 1.0Thailand 3.2 3.4 3.5 0.2 1.2 1.7Vietnam 6.2 6.4 6.4 2.7 4.0 3.0

ASEAN + 3 economic outlook and challenges

Economic growth is set to slow down by a little margin in the 2017-2018 period (see Table 2). Domestic demand is the main reason for growth and has thus served as a buffer to external shocks. It will continue to be the main factor for growth in 2017.

Another buffer is the internal trade between ASEAN + 3 countries (see Chart 3). 24% of ASEAN total trade is achieved between its members. In addition, trade with the + 3 has increased to 31,2% of total trade. Despite these significant numbers, ASEAN could be affected by the increasing state of defiance between the US and China.

Fiscal effect

Some ASEAN + 3 economies managed to recalibrate their budgets and maintain expansionary fiscal posture to carry growth without hitting debt-ceiling constraints. In addition, fiscal conditions are now tighter as a result of the decline of commodities. Oil-exporting countries, like Indonesia or Malaysia, attenuated the fall in oil revenue by stopping fuel subsidies.

Chart 3: ASEAN trade by selected partner country or region, 2015. Source: ASEAN.Notes: The following graphic refers to the ASEAN trade with selected partners. In 2015, total trade ac-counted for 2,270,370 million dollars. Internal trade accounted for 543,751 million dollars, hence consti-tuting the highest share of ASEAN trade. Those data are as of November 2016.

Table 2: Real GDP growth and headline inflation (in %, year-on-year) for 2016, 2017, 2018. ASEAN economomies that adopted inflation-targeting policies saw their inflation below the level when the policies are warranted. Inflation is however set to increase because of global oil prices.



Moreover, in view of increased global interest rates, fiscal policies would become more constrained in some economies in order to sustain debt.

Credit development

The growth in number of low interest rate credits created a consequent built-up in the private-sector debt and leverage. Credit stock to the private-sector, as a percentage of GDP, significantly increased as an aftermath of the Global Financial Crisis. In Thailand, Indonesia, Philippines and Malaysia, there are strong indications of households borrowing. In smaller economies such as Cambodia, it reflects financial inclusion as informal lending starts to be regulated and is thus counted in official statistics. Non-Financial Corporates (NFCs) in ASEAN +3 borrowed from banks and issued bonds using foreign currencies. Thus, a certain amount of the borrowed money is in USD. Economies that rely on banks for their loans or on portfolio inflows to finance their current account are more vulnerable to rising financial costs.

Current account

Decrease in imports and cheaper commodities for importers actually helped current accounts in 2016. However, 2017 projections show that current accounts should regress a bit. Net-oil importers, like China, Japan, Korea, Thailand

and Singapore, have their current account surpluses boosted due to a higher rate of import compression, relative to exports. Economy-specific reasons also affected the moderating current account surplus in the Philippines.

Sovereign bonds

When economies rely on foreign capital for their current account deficit and fiscal deficit, they are subjected to higher risks when global monetary conditions tighten. For example, after Donald Trump was elected, the US Treasury yields went up, that rise was then reverberated on the sovereign bonds of some emerging markets. Moreover, in some emerging markets, an important number of local currency sovereign bonds are held by foreign investors. These are thus vulnerable to investors.

Foreign Direct Investment

Following the election of Donald Trump, Korea, Thailand, Indonesia, Malaysia and the Philippines, experienced an important capital outflow, along with declining asset prices. On the other hand, smaller economies like Cambodia, Lao PDR and Myanmar, have a higher dependence to Foreign Direct Investments (FDI) as well as on concessional financing (see Table 4). Those smaller economies are thus less exposed to private portfolio flows. To grow, those economies have to stay in good terms with official financers and have to improve their economic appeal to FDIs.

2013 2015

Brunei Darussalam 725.5 171.3

Cambodia 1,274.9 1,701.0

Indonesia 18,443.8 16,916.8

Lao PDR 426.7 1,079.2

Malaysia 12,297.4 11,289.6

Myanmar 2,620.9 2,824.5

Philippines 3,859.8 5,724.2

Singapore 60,379.6 61,284.8

Thailand 15,936.0 8,027.5

Vietnam 8,900.0 11,800.0

Total 124,864.5 120,818.8

Table 4: Foreign direct investment (FDI) net inflows (in US$ million). Source: ASEAN. Note: Total net inflow of FDI has decreased over 2 years. Brunei Darus-salam, Indonesia, Malaysia and Thailand are the countries that saw their FDI grow negatively.



CONCLUSIONASEAN + 3’s growth is highly influenced by China and Japan. Domestic demand and strong ASEAN trade with ASEAN + 3, of about 55,2% of total trade, generates resilience to global economic shocks. However, global uncertainty and possible tensions between China and the US could lead to instability. If growth is steady, inflation is increasing in several countries. Combined with tightened monetary conditions, it will thus generate less room for monetary policies in 2017. Economies that rely on bank loans and on portfolio inflows are more vulnerable therefore constraints would then be more visible in those countries.

To help monetary policies support financial stability, specific macroprudential policies are of importance. Inflation-wise, regional central banks may have to calibrate monetary policies for the oncoming period. For countries like Cambodia that have dollarized economies, higher levels of reliance have to be given to proper systemic policies. Despite the importance of these measures, it should not be forgotten that they do not replace larger macroeconomic adjustments.

This digest is produced by Management Insider. Any interpretations or conclusions expressed are not necessarily those of the Management Insider employees. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of Management Insider, all of which are specifically reserved.

The factual information covers the period up to 22 August 2017, except when stated otherwise.

© 2017 Management Insider7B, Street 81Phnom Penh, [email protected]

Cover illustration: Morgan HavetLayout: Daniela Fendt

amro digest 2 bleu - management insider digest offers a summarised version of amro’s report ......

Documents