asia pacific economic outlook emerging market currencies against the dollar since the us...

Asia Pacific Economic Outlook2nd Quarter 2017

COVER IMAGE BY JESSICA MCCOURT

03 Malaysia Subdued growth prospects

09 Taiwan Exports set the stage for growth

13 Thailand Pausing to mourn, but ready to rise

19 Vietnam Growth story likely to continue

25 Asia’s retail spending boom Shoppers go on a frenzy, and why not?

34 About the authors

35 Additional resources

CONTENTS

Asia Pacific Economic Outlook

1

MalaysiaSubdued growth prospects

By Lester Gunnion

THE Malaysian economy grew 4.2 percent in 2016, its slowest rate of growth since the global recession in 2009.1 Growth in private

consumption expenditure, though having slowed over the past four years, remains relatively healthy. In contrast, government expenditure and overall capital formation have slowed rapidly over the same period, reflecting fiscal consolidation and reduced business confidence. Export growth has petered out over the last two years due to weak global demand. The challenges confronting the Malaysian economy are likely to persist. The ringgit is weak and is likely to remain under pressure due to capital outflows; price pressures due to a weak ringgit along with ris-ing interest rates in the United States could push domestic interest rates higher in 2017, burdening private consumption. Furthermore, fiscal consolida-

tion is likely to keep government spending in check, and uncertainties in the global economy, particu-larly related to trade, are likely to persist over the near to medium term. As a result, Malaysia’s growth prospects in 2017 are expected to remain subdued.

Defending the ringgitThe Malaysian ringgit has been one of the worst performing emerging market currencies against the dollar since the US presidential election in November 2016. It has depreciated nearly 50 percent against the US dollar since mid-2013 (as of February 24, 2017) (figure 1).2 Weak crude oil prices, a financial and political scandal involving a sovereign invest-ment fund, and slowing economic growth linked to

A slowdown in export growth, a weak ringgit, and rising interest rates in the United States, along with fiscal consolidation putting a brake on government consumption, are likely to persist over the medium term. As a result, growth prospects for Malaysia in 2017 remain subdued.


3

external factors such as a slowdown in China have all contributed to the slide in the currency.

The Bank Negara Malaysia (BNM) is most con-cerned with offshore non-deliverable forward (NDF) trading of the ringgit. NDF trading allows foreign investors to hedge against sparsely traded, nonconvertible currencies. Settlement of an NDF at maturity is in US dollars via an international finan-cial center, which eliminates the need for physical delivery of the sparsely traded, nonconvertible cur-rency. Foreign investors own more than a third (36 percent) of Malaysian government debt, and hedge their exposure to the ringgit by using NDFs.3 How-ever, in November 2016 the BNM clamped down on NDF trading by directing foreign banks to stop trad-ing the ringgit in offshore NDF markets.

The BNM’s concern is that possible speculation in offshore NDF markets could affect onshore de-liverable forward trading of the ringgit. Onshore trading of the ringgit follows offshore NDF trading as indicated in a study by the Bank of International Settlements in 2013.4 The study of nine NDF markets

found that both offshore and onshore markets influ-ence each other except in the case of the Malaysian ringgit where the onshore market follows offshore trading.5 The BNM’s measure, seen as a proxy capital control to defend the currency and protect the coun-try’s dwindling foreign exchange reserves, is likely to keep foreign investors wary of exposure to the ring-git, especially as domestic dollar liquidity for forward trading remains insufficient for investors to hedge.

Deloitte University Press | dupress.deloitte.comSource: Bloomberg.

May 2013 Feb 2014 Aug 2015Nov 2014 May 2016 Feb 2017

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Figure 1. The ringgit has depreciated nearly 50 percent against the US dollar since mid-2013

The Bank Negara Malaysia is most concerned with offshore non-

deliverable forward trading of the ringgit.

Q2 2017

4

A bond sell off in the final quarter of 2016 saw the yield on 10-year government bonds jump from 3.5 percent in September to 4.4 percent in November 2016.6 Bonds have regained some ground since then, with 10-year yields declining slightly to 4.2 percent in January 2017.7 Nevertheless, tighter ringgit con-trols, potentially quicker monetary policy tightening in the United States, and continued global uncer-tainty are all likely to have a negative impact on foreign investment in the Malaysian economy in the near to medium term.

The ramifications of a weaker ringgitA potential upside to the weak ringgit is that Ma-laysia’s export volumes might get a boost. Improved competitiveness of exports along with stronger global demand for key products such as semicon-ductor equipment could support a resurgence in export growth experienced at the end of 2016. However, uncertainties regarding global trade are likely to persist through the near and medium term. Furthermore, a weak ringgit and relatively healthy

domestic demand will likely contribute to dearer imports and increased price pressure. In the event of inflation edging up and US interest rates rising through 2017, the BNM could come under pressure to raise domestic interest rates in the second half of the year. Higher interest rates, however, are likely to add to the debt burden of leveraged households and businesses. Household debt as a percentage of GDP is estimated to stand at 88.5 percent in 2016.8 Similarly, corporate debt is also sizeable at about 70 percent of GDP.9 An increase in the debt servicing costs for the private sector would likely dampen pri-vate consumption expenditure.

Fiscal policy is likely to remain tight Potentially, tighter monetary policy in 2017 is highly likely to be accompanied by an effort to consolidate government spending. The Malaysian government’s debt to GDP ratio rose from less than 40 percent in 2008 to 54.5 percent at the end of 2015 (figure 2).10 An additional 15 percent of GDP in debt is in the form of contingent liabilities to state-owned companies.11

Deloitte University Press | dupress.deloitte.comSource: Bank Negara Malaysia via Haver Analytics.

2000 2005 2010 2015

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Figure 2. Malaysia’s debt to GDP ratio rose from less than 40 percent in 2008 to 54.5 percent at the end of 2015


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Malaysia’s relatively high debt exposure to foreign investors makes the economy vulnerable to capital outflows, which would result in higher yields on government bonds. What might work in favor of the government’s budget is improved revenue from oil exports due to an uptick in global crude prices. The newly introduced goods and services tax system is also likely to boost government tax revenues.

Nevertheless, government spending is likely to re-main tight in 2017 in order to restrict the budget deficit to a target of 3 percent of GDP.

GDP growth unlikely to speed up Given the current scenario, overall GDP growth in Malaysia is unlikely to accelerate in 2017. Growth is likely to be approximately 4.3 percent, marginally higher than in the previous year.12 Downside risks in the form of a slowdown in China and increased global trade protectionism could add to the list of challenges that Malaysia faces in becoming a devel-oped nation by 2020.

Malaysia’s relatively high debt exposure to foreign investors makes the economy

vulnerable to capital outflows, which would result in higher yields on government bonds.

Q2 2017

6

1. Department of Statistics, “Malaysia, Real GDP by expenditure, millions of 2010 ringgit,” accessed February 24, 2017, via Haver Analytics.

2. Bloomberg, Deloitte Services LP economic analysis.

3. Jeevan Vasagar and Katie Martin, “Malaysia asks foreign banks to stop ringgit trading,” Financial Times, November 21, 2016, https://www.ft.com/content/45a4d89c-af81-11e6-9c37-5787335499a0.

4. Robert McCauley, Chang Shu, and Guonan Ma, Non-deliverable forwards: 2013 and beyond, Bank of International Settlements, http://www.bis.org/publ/qtrpdf/r_qt1403h.pdf.

5. Ibid.

6. Bank Negara Malaysia, Government bond yields, accessed February 26, 2017, via Haver Analytics.

7. Ibid.

8. Daljit Dhesi, “Household debt may increase, warn economists,” Star Online, February 13, 2017, http://www.thestar.com.my/business/business-news/2017/02/13/household-debt-may-increase-warn-economists/.

9. Enda Curran and David Roman, “Southeast Asia’s debt problem hasn’t gone away,” Bloomberg, April 7, 2016, https://www.bloomberg.com/news/articles/2016-04-06/southeast-asia-s-original-sin-fears-masked-by-market-rally.

10. Bank Negara Malaysia, Federal government debt, accessed February 27, 2017, via Haver Analytics

11. Hélène Drouot, Malaysia: fragilities in the growth model, BNP Paribas, January 2017, http://economic-research.bnpparibas.com/Views/DisplayPublication.aspx?type=document&IdPdf=29435.

12. Bloomberg, Contributor composite forecast

ENDNOTES


7

TaiwanExports set the stage for growth

By Ira Kalish

Economic situationTaiwanese exports are rebounding at a healthy pace, setting the stage for stronger economic growth. In recent months, exports to China and the rest of Asia have risen strongly, and those to the United States have also grown at a strong pace, albeit from a small-er base. The Chinese story is the most important. China is Taiwan’s principal trading partner. Indeed, Taiwanese exports to China and Hong Kong com-bined account for about 39 percent of the total. The stabilization of China’s economy and the improve-ment in the state of its manufacturing industry have evidently helped boost Taiwan’s exports. Moreover, the rebound in exports will likely have a positive im-pact on capital spending. Imports of capital goods have accelerated, suggesting that businesses are

on the verge of an investment rebound. Going for-ward, the rebound in exports should continue, as evidenced by the recent uptick in new export orders. Taiwan’s fortunes are, to some extent, tied to the fortunes of the consumer electronics industry, and

The stage seems set for stronger economic growth, given the healthy recovery of exports. But since Taiwan’s economy is heavily depen-dent on exports to China, any blips in the Chinese economic story are likely to find a reflection in Taiwan’s.

Consumer spending in Taiwan has been growing modestly,

a trend that is likely to continue in the coming months.


9

there is considerable talk about how to diversify the economy so that it becomes less vulnerable to the vicissitudes of the electronics market.

Consumer spending in Taiwan has been growing modestly, a trend that is likely to continue in the coming months. Spending is being fueled by rising employment, itself the result of improved exports. In addition, a strong equity market is boosting con-sumer wealth. Also, the Taiwanese labor market is relatively tight, and productivity has been rising, thus setting the stage for wage gains that could have a positive impact on consumer spending. On the other hand, wages in Taiwan have been remarkably resistant to improvement, unlike in neighboring South Korea. Thus, it remains uncertain whether an improvement in the export environment will actu-ally generate significant wage gains.

Areas of risk and opportunity Taiwan’s economic outlook appears positive and, at the least, benign. Yet, risks remain. The biggest risk for Taiwan is that of China failing to avoid a slow-down in economic growth. China has seen rapid growth in debt, even as the economy has decelerat-ed. The result is that the debt is not fueling stronger

growth. Rather, it is enabling poorly performing enterprises to stay in business. The risk is that, fail-ure to resolve bad debts will have a negative impact on investment and, consequently, growth in China. That, in turn, would suppress growth in Taiwan.

Another risk is the erection of trade barriers by the US. Even if they are aimed at China rather than Tai-wan, it would still have a negative impact on Taiwan, whose industries supply components to factories in China that then produce final products for export. Thus, Taiwan is vulnerable to the state of trade rela-tions between China and the rest of the world.

Of course, Taiwan directly exports to the United States as well. If there is stronger economic growth in the United States, that would be beneficial to Tai-wan. The strength of equity markets in the United States likely reflects optimism that a combination of tax reform and deregulation in the United States will boost economic growth. That, in turn, would boost imports from Taiwan and elsewhere.

Spending is being fueled by rising

employment, itself the result of improved

exports. In addition, a strong equity

market is boosting consumer wealth.

Q2 2017

10

A longer-term risk to Taiwan is the country’s large dependence on information technology and other high-tech areas. Although much of the assembly of technology products long ago left Taiwan for the mainland, Taiwan contin-ues to engage in the higher-value processes that are a critical element of this industry. About 41 percent of Taiwan’s exports are in this arena. The next downturn in this industry could hit Taiwan hard. On the other hand, ex-pertise in this area will serve the country well as technology continues to become the most important element in the development of most products and services.

Finally, Taiwan faces the same decline in the working age population that is already af-flicting most developed economies. In 2016, for the first time, the working age population fell. This will continue. It means that the cost to society of support-ing an aging population will grow. For Taiwan, the best way to finance this transition will be to boost pro-ductivity growth. That, in turn, will require continued movement up the value chain by investing in in-novative technologies that increase each worker’s output. Making Tai-wan an attractive place to invest will be critical. Already the country has an attractive workforce, favorable government finances, stable prices, stable government, and a strong infrastructure.

Taiwan faces the same decline in the working age population that is already afflicting most

developed economies. In 2016, for the first time, the working age population fell.

ThailandPausing to mourn, but ready to rise

By Akrur Barua

ON February 2017, the Bank of Thailand (BOT) kept its key policy rate—the one-day repurchase rate—unchanged at 1.5 percent,

continuing with its accommodative monetary policy. The BOT had last changed rates in April 2015, when it cut the policy rate by 25 basis points to the present level. The bank’s February rate move did not come as a surprise, given the need to aid economic growth with inflation within the central bank’s target range of 1.0–4.0 percent. Key indicators covering both consumers and businesses point to a possible slow-down in overall economic activity in Q4 2016, partly due to the subdued sentiment following the demise of the much-revered monarch, King Bhumibol Adu-lyadej in October. Any slowdown in GDP growth last quarter is, however, likely to be only temporary, with the economy likely to bounce back in the first quarter of 2017.

Consumer spending subduedThe king’s passing away and the subsequent period of mourning weighed on consumer spending in the last quarter of 2016. Passenger car sales volumes, for example, fell by 10.6 percent year over year in Q4, reversing strong gains in the previous quarter (10.6 percent). Similarly, retail sales, which had slowed in Q3, fell by 2.0 percent in October before recov-ering in November. Consumer confidence was also affected, declining in October and November before edging up slightly in the next two months.1 The fig-ure, however, is still below 100, which implies more pessimism than optimism.

These indicators point to a possible slowing of private consumption in Q4. In the prior quarter, private consumption grew by a healthy 3.5 percent,

The recent demise of Thailand’s much-revered monarch weighed on consumer spending in the last quarter of 2016. But any slowdown in GDP growth is likely to be temporary, and the economy is likely to bounce back in the first quarter of 2017.


13

continuing from a strong 3.8 percent rise in Q2—the highest in three years. The situation is, however, expected to improve in Q1 2017, given healthy con-sumer fundamentals. For example, the labor market

remains strong with unemployment remaining low and growth in monthly wages in the private sector going up in Q4 2016 (figure 1).2 Consumers also

Deloitte University Press | dupress.deloitte.comSource: Haver Analytics, Deloitte Services LP economic analysis.

Jan 2015 May 2015 Jan 2016Sep 2015 May 2016 Sep 2016

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Figure 1. The labor market continues to remain strong, while private sector wages have gone up


Jan 2012 Jan 2013 Jan 2015Jan 2014 Jan 2016

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Industrial production index (seasonally adjusted, 2011=100, left axis)Capacity utilization (seasonally adjusted, percent, right axis)

Figure 2. Capacity utilization is low relative to 2012–13, so is industrial production

Q2 2017

14

seem relatively more upbeat about their future com-pared to the present.3

Businesses don’t fare any betterBusinesses did not fare any better in Q4 2016. Ca-pacity utilization (seasonally adjusted) in industry was 66.3 percent, much lower than the highs of 2012–13. Industrial production picked up pace in November, only to weaken in December. Sentiment

in industry also remains pessimistic, although the figure appears to be edging up since August 2016.4 Businesses in the tourism sector have been affected by weak tourist arrivals, which fell in November (-3.7 percent year over year), before picking up partially in December (2.4 percent). It’s not all gloomy news, however, with businesses likely to be encouraged by a recovery in exports in Q4. Exports, valued in US dollars, grew 3.6 percent year over year in Q4, the second such quarter of growth in the last two years. Also, similar to consumer sentiment, businesses ap-pear more optimistic about the future.5 This augurs well for the economy, especially for investments, given that gross fixed capital formation has slowed over the past year.

BOT keeps its focus An area of concern for the BOT is slow credit growth, although there was a mild uptick in Q3 2016 (fig-ure 3). Slowing credit, could however, be a welcome pause for households, given high household debt. During 2008–16, the ratio of total financial liabili-ties of households to disposable personal income is estimated to have increased by a staggering 53.5 per-centage points to 143.9 percent.6 The BOT will also

Households Businesses Total


2010 2011 20132012 2014 2015 2016

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Credit growth: total and by key sectors (year-over-year, percentage)Figure 3. Credit growth has slowed in recent quarters

Businesses in the tourism sector have

been affected by weak tourist arrivals, which

fell in November, before picking up

partially in December.


15

likely keep an eye on rising non-performing loans (NPLs), which went up by 14.3 percent to THB 385.7 billion (US$ 10.9 billion) in 2016 with gross NPLs as a share of total loans edging up to 2.8 percent during the year. Policymakers will likely focus on the sec-toral distribution of NPLs—sectors like commerce, private consumption, and manufacturing are the most affected (figure 4).

The central bank, however, has many things going in its favor. Inflation, at 1.6 percent in January, is still well within the BOT’s target rate. Core inflation has been stable at 0.7–0.8 percent in the last eight months with much of the push on headline inflation coming from energy prices (figure 5). Also, key bank-ing parameters have either improved or stabilized. For example, regulatory capital to risk-weighted as-sets has increased since Q1 2015 and is now at 18.2 percent.7 Return on assets for the banking sector ap-pears to have stabilized at 1.4 percent after declining steadily between Q3 2014 and Q4 2015.8 Finally, a housing bubble appears unlikely with house prices slowing from the fast-paced growth of 2012–14.

Fiscal push likely if external concerns riseWhile an accommodative monetary policy is helpful for the economy and keeps debt servicing costs in check, especially for households saddled with large debt, the scenario may change if the United States Federal Reserve pursues a more aggressive rate hike path than initially assumed.9 A casualty of this could be the Thai baht, which stabilized last year after steadily losing ground to the greenback since 2013. Any sharp currency depreciation due to a rising in-terest rate differential with the United States along with a sharper-than-expected rise in global energy prices, could impact headline inflation in Thailand, thereby queering the pitch for the BOT. It is likely, then, that the onus of economic growth will fall more on the fiscal side. With elections due in a year and fiscal accounts relatively healthy, the government will only be happy to oblige.

Personal consumption Services Commerce

Real estate business Manufacturing


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Share of key sectors in NPLs (percentage)

Figure 4. The share of commerce in NPLs has gone up over the past two years

Q2 2017

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Inflation (year-over-year, percentage) Inflation (year-over-year, percentage)

Figure 5. Rising energy prices have pushed up headline inflation, while core inflation remains stable

1. University of the Thai Chamber of Commerce, Consumer Confidence Index (non-seasonally adjusted), February 2017; sourced from Haver Analytics.

2. National Statistics Office via Bank of Thailand, Labor Force Survey, February 2017; sourced from Haver Analytics.

3. University of the Thai Chamber of Commerce, Consumer Confidence Index (non-seasonally adjusted), February 2017; sourced from Haver Analytics.

4. Bank of Thailand, Business Sentiment Index (non-seasonally adjusted), February 2017 (sourced from Haver Analytics).

5. Ibid.

6. Oxford Economics, Global Economic Databank, February 2017.

7. Haver Analytics, February 2017.


9. Dr. Daniel Bachman and Dr. Rumki Majumdar, US economic forecast: 4th quarter 2016, Deloitte University Press, December 13, 2016, https://dupress.deloitte.com/dup-us-en/economy/us-economic-forecast/2016-q4.html; Dr. Patricia Buckley, United States: An economy in transition, Deloitte University Press, February 14, 2017, https://dupress.deloitte.com/dup-us-en/economy/global-economic-outlook/2017/q1-united-states.html.

ENDNOTES


17

VietnamGrowth story likely to continue

By Dr. Ira Kalish

AFTER a difficult first half in 2016, primarily resulting from a slowdown in the agricul-ture sector because of widespread drought,

Vietnam recovered, and posted annual growth of 6.2 percent. Though marginally below target, eco-nomic growth has been healthy. The drivers of this growth—foreign investment and exports—are like-ly to continue through the near to medium term. Despite the demise of the proposed Trans-Pacific Partnership (TPP), Vietnam looks set to grow at a healthy pace in 2017 due to various favorable fac-tors. Moreover, if economic reforms, political sta-bility, and prudent decision-making continue, Viet-nam could sustain growth and move closer to its goal of becoming an upper-middle-income nation.

Healthy FDI inflows, exports likely Foreign direct investment (FDI) disbursement in Vietnam reached $15.8 billion in 2016, up 9 percent from a year ago.1 The total value of new FDI commit-ments and additional funding for existing projects climbed 7 percent from a year ago to $24.4 billion. By country of origin, South Korea was the largest di-rect investor in Vietnam in 2016, investing a total of $7 billion. Japan and Singapore were second and third respectively. South Korean direct investment was bolstered by a $1.5 billion investment by LG Dis-play Company to produce and process plastic OLED display for mobile phones. Additionally, LG Innotek

The Trans-Pacific Partnership may be in jeopardy, but Vietnam, whose GDP growth depends heavily on foreign direct investment and exports, is likely to grow at a healthy pace due to favorable factors beyond demography and cheap labor.


19

invested $550 million to produce camera actua-tors.2 Electronics manufacturing has grown rapidly in Vietnam as technology firms shift low-end pro-duction and assembly out of China into South-East Asia due to the availability of abundant, relatively cheap, skilled labor. The shift is not limited to large foreign-owned multinational corporations; Chinese firms are also ramping up investment in Vietnam, as indicated by China’s outbound direct investment into Vietnam (figure 1).

Apart from electronics, apparel, textiles, and foot-wear are sectors in which Vietnam continues to attract investment. The country is already home to factories catering to international clothing and footwear brands. Vietnam’s primary destination for the export of apparel, textiles, and footwear is the United States. In fact, exports of apparel, tex-tiles, and footwear to the United States represent 40 percent of total exports to the United States and roughly 9 percent of Vietnam’s total annual exports.3 The prospect of the TPP coming to frui-tion had been the immediate incentive for FDI into Vietnam’s apparel and textile sector. The death of the TPP in its proposed form, after the withdrawal of the United States, may moderate the pace of FDI inflows into the apparel and textiles sector. Never-theless, Vietnam will continue to remain attractive

to prospective investors in apparel and textiles due to favorable free trade agreements (FTAs) and grow-ing domestic demand.

The FDI sector is closely linked to Vietnam’s export success: It accounts for 70 percent of Vietnam’s ex-ports, while the domestic sector accounts for only 30 percent.4 Overall exports grew 8.9 percent in 2016,

Deloitte University Press | dupress.deloitte.comSource: China National Bureau of Statistics/Haver Analytics.

2004 2006 20102008 20122005 20092007 2011 20142013 2015

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Figure 1. Chinese net FDI into Vietnam is on the rise

The shift is not limited to large foreign-

owned multinational corporations; Chinese firms are also ramping

up investment in Vietnam, as indicated by China’s outbound

direct investment into Vietnam.

Q2 2017

20

converting a trade deficit in the previous year to a surplus of $2.4 billion.5 Steady inflows of FDI and subsequent growth in exports are likely to continue to buoy Vietnam’s economy in the near to medium term. For instance, January 2017 saw FDI disburse-ment rise 6.3 percent from a year ago.6

Loss of the TPP may not deter progressThe proposed TPP had added considerably to Viet-nam’s attractiveness as a destination for foreign investors, primarily because the country was like-ly to be the biggest beneficiary of the agreement. However, the loss of the TPP in its proposed form (without the participation of the United States) is unlikely to stall Vietnam’s overall progress. The country is likely to remain an attractive destination for foreign investors due to several factors that work in its favor. Indeed, 70 percent of Vietnam’s total population is of working age, and wages in Vietnam are a third of those in China.7

However, Vietnam’s comparative advantage stretches beyond demographics and labor costs. The other fac-tors that keep Vietnam attractive are its geographical proximity to China and, therefore, to manufacturing supply chains; its long coastline, which stretches a lu-crative nautical corridor; political stability; improved ease of doing business; and its membership in the As-sociation of South-East Asian Nations (ASEAN) and FTAs. In the 2017 Doing Business report, the World Bank ranks Vietnam 82 out of 190 countries, an im-provement of 9 ranks from the previous year.8

Furthermore, Vietnam’s membership in ASEAN and its FTAs adds to its appeal as a lucrative economy. Among Vietnam’s FTAs and economic partnerships

are the ASEAN free trade area, agreements with China, Japan, South Korea, India, Australia, and New Zealand via ASEAN, independent bilateral agreements with South Korea and Japan, and an FTA with the Eurasian Economic Union led by Rus-sia. An FTA with the European Union has also been successfully negotiated. Additionally, the Regional Comprehensive Economic Partnership (RCEP), championed by ASEAN and China, could support Asia-Pacific economic integration and free trade, which in turn will likely benefit Vietnam. Moreover, a resurrection of the TPP without the participation of the United States, remains a possibility. Finally, any protectionist policy from the United States targeted at China might hasten the shift of manu-facturing investment across the border to Vietnam.

Policy outlookVietnam’s omnidirectional foreign policy and a gradual weakening of the dong are likely to support exporters over the near to medium term. On the internal front, monetary policy is likely to remain unchanged in the near term though tighter policy is likely later in the year in response to rising interest rates in the United States and domestic inflation. Prices are likely to rise in 2017 due to cost-push fac-tors such as higher crude oil prices and rising wages as well as demand-pull factors due to expanding eco-nomic activity. Fiscal policy consolidation is likely to be gradual due to Vietnam’s spending on infrastruc-ture and due to revenue loss from the lowering of import tariffs. However, expanding economic activ-ity and the continued privatization of state owned enterprises (SOE) are likely to have a counterbal-ancing effect. Commitment to fiscal consolidation is likely to continue through the medium term as the

The country is likely to remain an attractive destination for foreign investors due to

several factors that work in its favor.


21

debt to GDP ratio approaches the predefined ceiling of 65 percent.

Vietnam should stay the course of economic reformDespite the demise of the TPP, Vietnam’s drive to reform the economy, invigorated by the effort to comply with standards set by the trade deal, should continue. Efforts to privatize large and in-efficient SOEs that account for a substantial share

of non-performing assets as well as reforms in the banking sector should continue as important focus areas. Developing domestic infrastructure beyond ports, such as approach roads and railway networks is also likely to be beneficial to the economy. Addi-tionally, efforts to integrate small and medium-sized domestic industries into export supply chains as well as efforts to upskill the existing workforce are likely to be advantageous in the long term. Finally, politi-cal stability and prudence during the current period of growth will likely set the stage for sustained eco-nomic success in the future.

Q2 2017

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1. Ministry of Planning and Investment, Brief on foreign direct investment in 2016, January 6, 2017, http://www.mpi.gov.vn/en/Pages/tinbai.aspx?idTin=35721&idcm=122.

2. Ibid.

3. General Statistics Office of Vietnam, International Trade and Balance of Payments, accessed February 20, 2017, via Haver Analytics.

4. Ibid.

5. Ibid.

6. Ministry of Planning and Investment, Brief on foreign direct investment of January 2017, February 10, 2017, http://www.mpi.gov.vn/en/Pages/tinbai.aspx?idTin=35921&idcm=122.

7. Census Bureau International Demographic database, Vietnam Population by sex and 5-year age groupings, accessed February 20, 2017, via Haver Analytics; International Labor Organization, “Global wage database, country profiles,” http://www.ilo.org/ilostat/GWR , accessed February 20, 2017.

8. World Bank, “Doing business,” http://www.doingbusiness.org/rankings, accessed February 20, 2017.

ENDNOTES


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Asia’s retail spending boomShoppers go on a frenzy, and why not?

By Dr. Ira Kalish

A large and growing retail market If you are an avid shopper and find yourself in a big city in Asia, you will probably not be disappointed. From the latest brands to more affordable goods, shoppers have never had it so good in the region. Strong economic growth over the years has meant that consumers have more money to spend, even as banks increasingly offer credit for a wide variety of purchases—from motor vehicles to luxury vacations. Adding to the retail buzz in the region is the rise of key emerging markets like China and, to a lesser extent, India. As prosperity increases in the world’s two most populous nations, people there are natu-rally spending more. No wonder then that Asia is a

lucrative proposition for global brands. While many are already increasing their presence, they may not have it all easy as they contend with strong competi-tion, especially from domestic businesses that won’t give in without a fight.

In 2001, combined nominal retail sales for 11 key Asian economies, excluding Japan,1 was about US$ 1.0 trillion, just 41.9 percent of the total retail sales in the United States. Travel forward in time to 2016 and there is quite a change—retail sales for the same 11 economies jumped to an estimated US$ 6.6 tril-lion (figure 1), much higher than the corresponding US figure (US$ 3.9 trillion).2 The surge is even more apparent when the figures are adjusted for infla-tion and purchasing power parity (PPP)—combined retail sales for the Asian economies valued at 2012

As prosperity and access to credit increase in the world’s two most populous countries, China and India, people there are spending more on a wide variety of products—from motor vehicles to luxury vaca-tions. Asia is thus a lucrative proposition for global brands.


25

Deloitte University Press | dupress.deloitte.com

Note: Figures for India, Indonesia, the Philippines, and Thailand; 2015 figure for Vietnam; and 2016 figures for all countries are estimates by Oxford Economics.

Source: Oxford Economics, Deloitte Services LP economic analysis.

2000 2005 20092003 2007 2011 2013 2015

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Nominal retail sales in US$ trillion

ChinaMalaysiaTaiwan

Hong Kong, ChinaPhilippinesThailand

IndiaSingaporeVietnam

IndonesiaSouth KoreaUnited States

Figure 1. In 2013, China surged past the United States in nominal retail sales valued in US$




US China HongKong

India Taiwain Thailand VietnamIndonesia Malaysia Philippines SouthKorea

14

10

6

0

12

8

4

2

Percentage

2.7

12.3

4.8

7.1

4.7

7.5

5.9

1.92.9

6.3

9.3

Figure 2. Retail sales (2012 US$ PPP) in China grew at an astounding rate over 2001-16

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26

US$ PPP was 3.3 times the corresponding US value in 2016, according to Oxford Economics.33 While combined sales levels are impressive, so is the growth rate over the years for each country (figure 2). Interestingly, figures 1 and 2 reveal the growing role of China, globally and figure 3, within Asia.

The paths to soaring retail spending Rising retail spending in Asia is a natural corollary to growing incomes and wealth. For example, over 2001–16, real disposable personal income is esti-mated to have grown at an average annual rate of 11.5 percent in China, 7.5 percent in India, 6.6 per-cent in Vietnam, and 5.7 percent in Malaysia (figure 4). In addition to overall income, the size of the middle class in Asia has expanded as millions come out of poverty due to strong economic growth. Fig-ure 4 shows us the average annual rate of growth in the number of households earning US$ 20,000–200,000 in constant PPP for key economies in Asia, with emerging economies clearly outpacing more developed counterparts in the region.4 This trend is likely to continue with the Asia-Pacific region’s share in the global middle-class population expected to rise to 66 percent by 2030 from 28 percent in 2009.5

Asian consumers have also benefitted from rising house prices, a key component of household wealth.6 A quick look at housing data reveals that house pric-es, on average, have gone up by 14.4 percent every year between 2008 and 2016 in India, by 8.0 percent in Malaysia, and by 7.2 percent in Taiwan. While growth in the national average has been relatively low in China in the above period, prices in key cit-ies in the country have increased sharply in the past two years.7 In addition to home prices, strong eq-uity market returns (figure 5) have also propped up household wealth in the region.




2000 2005

ChinaMalaysiaTaiwan

Hong Kong, ChinaPhilippinesThailand

IndiaSingaporeVietnam

IndonesiaSouth Korea

Figure 3. China’s share in Asian retail sales sans Japan (2012 US$ PPP) has increased over time

In addition to overall income, the size of the middle class in

Asia has expanded as millions come out of

poverty due to strong economic growth.


27




US China HongKong

India Taiwain Thailand VietnamIndonesia Malaysia Philippines SouthKorea

16

14

10

6

0

12

8

4

2

Percentage

Average annual growth in households with incomes between US$ PPP 20,000–200,000at 2012 prices (2005-14)

Average annual growth in real disposable personal income (2001–16)

Figure 4. Incomes have grown quickly in Asia; so has the number of middle-class households


Note: The equity indices are Singapore Straits Times Index (Singapore), Bangkok SET (Thailand), FTSE Bursa Malaysia KLCI (Malaysia), KOSPI (South Korea), Jakarta Composite (Indonesia), BSE Sensex 30 (India), Hang Seng (Hong Kong), Dow Jones Shanghai (China), Ho Chi Minh VN Index (Vietnam), Taiwan Composite (Taiwan), and Manila Composite (the Philippines).

Source: Haver Analytics, Deloitte Services LP economic analysis.

Singapore Thailand Malaysia SouthKorea

Vietnam Taiwan PhilippinesIndonesia India HongKong

China

1,200

800

400

0

1,000

600

200

Growth in key equity indices between Jan 2001 and Jan 2017 (percentage)

53.0

405.4

142.9

252.4

1177.3

539.2

47.2 69.2

288.0

71.9

363.1

Figure 5. Equities have surged over the years in Asia, adding to household wealth

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28

While rising incomes and wealth have helped retail sales in Asia, increased access to credit has been a major catalyst too. In China, for example, a total of about 5.0 million credit cards were issued in Q3 2016, nearly 2.8 times the corresponding value seven years ago.8 In India, personal loans grew at an average annual rate of 17.9 percent between De-cember 2009 and December 2016 (figure 6), while the corresponding figure for Malaysia was 12.9 percent.9 This trend of rising credit for consumer purchases is similar for the Philippines, Singapore, and Thailand.10

Changing lifestyles and the advent of globalization have also opened up the world to the Asian shop-per. Demographics is another advantage, with Asia playing host to a large population.11 Add to it the fact that Asia’s population is relatively young and that it is moving fast into urban centers—where avenues for spending abound—and you have a nice mix of enabling factors playing into the retail story in the region.12

What are Asian shoppers buying?Automobiles are a major item of retail purchase in key Asian economies. In China, the share of automo-biles in retail sales at large establishments went up to 27.8 percent in 2016 from 18.3 percent in 2005.13

During the same period, sales of passenger vehicles and two-wheelers—motorcycles and scooters—in India went up per year on average by 9.3 percent and 8.8 percent, respectively. In contrast, the fortunes of automobiles in Taiwan have remained relatively unchanged and have declined in Singapore, where

Personal loans

Credit card outstanding

Vehicle loans

Consumer durables


20102009 2011 20132012 2014 2015 2016

3,500

1,500

0

2,000

500

1,000

2,500

3,000

Loans outstanding (INR billion)Figure 6. Consumer loans have been increasing steadily over the years in India

Changing lifestyles and the advent of

globalization have also opened up the world to the Asian shopper.


29

apparel and footwear and food and beverages have instead aided retail growth.

Consumers are also buying more of home furnish-ing-related items; in China, the category’s share has gone up over 2005–16, perhaps driven by rising homeownership and improved living standards.14 Interestingly, data on retail sales volumes in Indo-nesia (figure 7) reveal a strong surge in the share of information and communication equipment (ICE), similar to trends in consumer spending in the United States.15

Online retail has been rising fast in Asia, sometimes even faster than in the United States where the share of e-commerce in total retail sales has been increas-ing steadily.16 In China, for example, sales of goods and services online grew by 26.2 percent in 2016 to US$ 750.5 billion (about 15.5 percent of total retail sales), up from a strong 40.5 percent rise in 2015.17

And China is not alone, with non-store retailers (a proxy for online sales) in countries like South Korea and Taiwan increasing their share in overall retail sales.18 India is also witnessing strong e-commerce

Motor vehicles, parts, and accessories

Food, beverages, and tobacco

Information and communication equipment

Total retail sales


2010 2011 20132012 2014 2015 20172016

500

300

0

350

50

250

400

100

150

200

450

Index values (NSA, 2010=100)

Figure 7. In Indonesia, real sales of ICE went up by 372.7 percent in the seven years to January 2017

Consumers are also buying more of home furnishing-related items; in China, the

category’s share has gone up over 2005–16, perhaps driven by rising homeownership

and improved living standards.

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30

growth, with the market likely to touch US$ 60 bil-lion in 2017, according to Deloitte, from US$ 10.9 billion in 2013.19 Forecasts by Morgan Stanley put the market size for 2020 at US$ 137 billion.20

Not an easy roadWith the retail market expanding fast and much growth yet to come, Asia is a lucrative proposi-tion for global companies. In the auto sector, for example, the share of Asia Pacific in Volkswagen’s revenues (in US$), has almost tripled to 16.5 per-cent over 2005-15. Similarly, between FY2005 and FY2016, Toyota’s net revenues from Asia (excluding Japan) nearly doubled.21 And auto companies are not alone. China accounted for 21.5 percent of Apple Inc.’s net revenues in FY2016 compared to nothing 11 years ago; the company is now targeting India to drive growth.22 Global fast-food majors and even luxury brands like Christian Dior are also turning toward the Asian market for revenues.23

The road ahead for global majors is not easy how-ever. They will run up against competition from domestic companies with deep knowledge of the market. Apple Inc., for example, faces competition

in China and India from local smartphone makers, some of which price their products much lower.24

In e-commerce, Amazon ran up against Alibaba in China, and is changing track by betting big on India—in June 2016, it said that it would ramp up investments in the country by an additional US$ 3 billion from the US$ 2 billion initially planned.25

But, even in India, it faces a formidable domestic opponent in Flipkart, which started the race much earlier.26 In multi-brand retail, major markets like India are still a hurdle, as foreign investments in the sector remain relatively closed.27 Infrastructure and ease of business concerns are other issues that add to the pain of companies operating in countries like India, Indonesia, and the Philippines.28

So, while Asia may be too attractive a market to ig-nore for global companies, it may require a lot of innovation, especially targeted at the young popula-tion, and patience to win the race. They may need to partner more with local talent and smaller enterpris-es to carve out a winning strategy, one that also adds value to the economies they serve. Only then will they be able to capture hearts, minds, and wallets.


31

1. The 11 economies we have considered are China, Hong Kong (China), India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam.

2. Oxford Economics, Global Economic Databank, February 2017; estimates for 2016 are by Oxford Economics.

3. Oxford Economics, Global Economic Databank, February 2017.

4. Oxford Economics, Global Economic Databank, February 2017; a longer time series is not available for some countries; 2014 figures for China, India, Indonesia, the Philippines, Thailand, and Vietnam are estimates.

5. Wolfensohn Center for Development, Brookings Institute, November 2015, http://www.brookings.edu/~/media/research/files/papers/2010/3/china%20middle%20class%20kharas/03_china_middle_class_kharas.pdf; Homi Kharas, The emerging middle class in developing countries, OECD Development Center, January 2010, http://www.oecd.org/dev/44457738.pdf.

6. Credit Suisse, “Global Wealth Report 2014,” October 2014, http://economics.uwo.ca/people/davies_docs/credit-suisse-global-wealth-report-2014.pdf.

7. Haver Analytics, February 2017; Akrur Barua, Realty check: Asian real estate market feels the heat, Deloitte University Press, April 6, 2016, https://dupress.deloitte.com/dup-us-en/economy/asia-pacific-economic-outlook/ 2016/q2-asian-real-estate-market-outlook.html.


9. Ibid.

10. Ibid.

11. Ibid.

12. Oxford Economics, “Global economic databank,” February 2017.

13. Haver Analytics, February 2017; this data is for retail enterprises with annual sales of over RMB 5 million and with over 60 employees.


15. Akrur Barua, Shifting sands: Examining patterns of spending on durable goods, Deloitte University Press, April 20, 2016, https://dupress.deloitte.com/dup-us-en/economy/behind-the-numbers/consumer-durable-goods-spending-patterns.html; Haver Analytics, February 2017.

16. Haver Analytics, February 2017; Dr. Daniel Bachman and Akrur Barua, Ring in the new: Holiday season e-commerce sales poised for strong growth, Deloitte University Press, September 22, 2016, https://dupress.deloitte.com/dup-us-en/economy/behind-the-numbers/holiday-ecommerce-sales-growth-forecast.html.

17. Haver Analytics; February 2017.

18. Haver Analytics, February 2017; the analysis is restricted to countries where a time series for online, e-commerce or non-store retail sales is available.

19. Deloitte, “Online retail in India: Clicking towards growth,” November 2014, file:///C:/Users/abarua/Downloads/in-cb-online-retail-in-india-clicking-towards-growth-noexp.pdf; Saritha Rai, “The death-defying delivery men who cater to India’s shopaholics,” Bloomberg, November 17, 2016, https://www.bloomberg.com/news/features/2016- 11-16/meet-the-flipkart-delivery-men-in-india-s-e-commerce-battle.

ENDNOTES

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32

20. Morgan Stanley, “Get ready for India’s Internet boom,” June 5, 2015, http://www.morganstanley.com/ideas/rise-of-internet-in-india.

21. S&P Capital IQ, February 2017; FY2016 for Toyota ended on March 31, 2016.

22. S&P Capital IQ, February 2017; FY2016 for Apple ended on September 24, 2016; James Crabtree and Amy Kazmin, “Apple applies to open own-brand stores in India,” Financial Times, January 20, 2016, https://www.ft.com/content/98b9c6b4-bf3b-11e5-a8c6-deeeb63d6d4b.

23. S&P Capital IQ, February 2017.

24. Tim Bradshaw, “Apple faces China challenges despite iPhone resurgence,” Financial Times, February 2, 2017, https://www.ft.com/content/474aec32-e82e-11e6-893c-082c54a7f539; Arjun Kharpal, “Apple renaissance in China key for iPhone 8 success, but it faces a tough road ahead,” CNBC, February 1, 2017, http://www.cnbc.com/ 2017/02/01/apple-china-revival-key-for-iphone-8-success-but-it-faces-a-tough-road.html.

25. Newley Purnell, “Jeff Bezos invests billions to make Amazon a top e-commerce player in India,” Wall Street Journal, November 18, 2016, https://www.wsj.com/articles/bezos-invests-billions-to-make-amazon-a-top-e-commerce-player-in-india-1479384001; Anirban Sen, “Amazon will continue to invest heavily in India, says Amit Agarwal,” Livemint, November 1, 2016, http://www.livemint.com/Companies/isNVr2GgyInzvmRQnboLIK/Amazon-will-continue-to-invest-heavily-in-India-says-Amit-A.html.

26. Aditi Shrivastava and Madhav Chanchani, “Flipkart sells 15.5 million units, claims top spot,” Economic Times, October 7, 2016, http://economictimes.indiatimes.com/small-biz/startups/flipkart-sells-15-5-million-units-claims- top-spot/articleshow/54725155.cms.

27. Economic Times, “Not yet, says Nirmala Sitharaman on FDI in multi-brand retail,” September 8, 2016, http://economictimes.indiatimes.com/industry/services/retail/not-yet-says-nirmala-sitharaman-on-fdi-in-multi-brand-retail/articleshow/54048468.cms.

28. World Bank, “Doing business rankings,” February 2017, http://www.doingbusiness.org/rankings.


33

ABOUT THE AUTHORS

Akrur Barua is an economist and a manager at Deloitte Research, Deloitte Services LP.

Lester Gunnion is an economist and a senior analyst at Deloitte Research, Deloitte Services LP.

Dr. Ira Kalish is the chief global economist of Deloitte Touche Tohmatsu Limited.

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34

ADDITIONAL RESOURCES

Deloitte Research thought leadershipGlobal Economic Outlook, Q1 2017: United States, Eurozone, China, Japan, India, Mexico, Turkey, South Africa, and a special topic

Issues by the Numbers, November 2016: The US housing market recovery: The past is not prologue

United States Economic Forecast, Q1 2017

Please visit www.deloitte.com/research for the latest Deloitte Research thought leadership or contact Deloitte Services LP at: [email protected].

For more information about Deloitte Research, please contact John Shumadine, director, Deloitte Research, part of Deloitte Services LP, at +1 703.251.1800 or via e-mail at [email protected].


35

Q2 2017

Global Economics TeamRamani Moses Deloitte Services LPIndia Tel: +1 615 718 5204E-mail: [email protected]

Dr. Ira KalishDeloitte Touche Tohmatsu LimitedUSA Tel: +1 213 688 4765E-mail: [email protected]

Dr. Rumki MajumdarDeloitte Research Deloitte Services LPIndia Tel: +1 615 209 4090E-mail: [email protected]

Lester GunnionDeloitte ResearchDeloitte Services LPIndia Tel: +1 615 718 8559E-mail: [email protected]

Akrur BaruaDeloitte Research Deloitte Services LP India Tel: +1 678 299 9766E-mail: [email protected]

Global Country Services Group Leader George Warnock Deloitte LLP USA Tel: +1 212 436 2733 E-mail: [email protected]

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Hitoshi Matsumoto Deloitte Touche Tohmatsu LLC Japan Tel: +09 09 688 8396 E-mail: [email protected]

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George Warnock Deloitte LLP USA Tel: +1 212 436 2733 E-mail: [email protected]

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Global Industry LeadersConsumer Business

Tim HanleyDeloitte Touche Tohmatsu LimitedUSA Tel: +1 414 688 2052E-mail: [email protected]

Energy & Resources

Rajeev ChopraDeloitte Touche Tohmatsu LimitedUK Tel: +44 77 7578 5350E-mail: [email protected]

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CONTACTS

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Life Sciences & Health Care

Mitch MorrisDeloitte Touche Tohmatsu LimitedUSA Tel: +1 310 966 0566E-mail: [email protected]

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