Emerging Asia Pacific: Weak Global Cues Pose Stubborn Challenges
Major emerging Asia Pacific economies, which picked up growth momentum during the latter half of 2012, struggled to carry forward the economic pace during the initial months of 2013. China, India, and Indonesia, some of the most populous countries in the region and in the world, faced significant headwinds to growth as key engines of the economy – investment, consumption, and exports – came under strain. Although growth in the U.S. offset some loss in traction, the effects of a recession in the European Union were strongly felt by many of Asia’s export-dependent economies. China and South Korea, two of the region’s dynamic export-based countries, in particular, slowed down substantially. Both countries warned of slower expansion for the rest of 2013 on weak growth in global trade.
Consumption-driven economies of Indonesia and India, on the other hand, faced challenges to their domestic currency amidst rising current account deficits. India and Indonesia had current account deficits to the tune of 5 percent and 2.7 percent of their respective GDPs. Both countries import a substantial amount of oil to meet their energy needs and with a weak domestic currency both countries are seeing their current account deficits rising at a fast clip.
Smaller Southeast Asian nations, however, posted strong economic performance during the quarter aided by resilient domestic demand, stable exports, and robust government spending. Thailand and the Philippines ended 2012 on an upbeat note thanks to structural changes initiated a few years ago. While the Philippines won an investment grade bond rating in the wake of strong fiscal management and stable prices, Thailand was awarded a debt upgrade thanks to a sea change in the political environment that has ensured investment-friendly policies in the country.
CHINA: RECOVERY HITS A BUMP ON STRAINED INVESTMENT AND CONSUMPTION
China’s economic recovery sputtered during the first quarter of 2013. After slowing for nearly seven quarters, the export-dependent nation posted a robust 7.9 percent growth in the final quarter of 2012, setting the stage for a further improvement in 2013. However, China’s economy slowed to 7.7 percent in the first quarter of 2013 threatening the prospects of global growth to commodity prices, among other things.
A number of economic engines lost momentum during the initial months of 2013. Investment, industrial production, and factory output declined as the impetus from infrastructure spending and the strong export figures of late 2012 evaporated. For their part, Beijing’s newly-installed leaders of the ruling Communist Party curtailed conspicuous consumption in the face of public anger over corruption and lavish spending by the government. Consequently, spending by government officials came under strain leading to lower growth. Adding to this, the recession in the developed economies of the European Union stole the thunder from China’s exports.
Even property and construction markets, which for the longest time steered China’s economy on a strong growth path, lost vigor in 2013. During the quarter, new residential housing starts slipped, land purchases by property firms plummeted, and overall real estate investment declined, according to the country’s National Bureau of Statistics.
On the brighter side, however, inflation in the world’s second largest economy cooled. Earlier during the first quarter, the country’s central bank said it was on “red alert” over the issue of inflation touching a 10-month high in February. With March inflation declining and first quarter growth slowing, economists surveyed by Bloomberg opined that a rate hike or liquidity tightening is some time away.
INDIA: INFLATION DROPS TO A 40-MONTH LOW EVEN AS INVESTMENTS SLOW
Bogged down by high government debt, low levels of investment, and a large trade deficit, India’s economy had slowed down substantially over the past two years. Economic growth that frequently hovered around 8 percent in the mid-2000s slowed to a multi-year low in 2012. Although GDP growth stalled, high levels of public spending continued to stoke inflation, reducing the ability of the country’s central bank, the Reserve Bank of India, to trim interest rates.
On the other hand, high interest rates in India perpetuated a vicious cycle by restricting big-ticket infrastructure and factory investments in the country. This has caused a slump in both India’s factory output and industrial production in late 2012. In recent months, high interest rates also helped spread the slowdown to consumption, the mainstay of India’s economy. In 2012, India’s automakers witnessed their first annual decline in sales as consumers scaled back purchases. Despite frequent prodding by the government, the country’s central bank has resisted cutting interest rates beyond 50 basis points in 2013 for fear of runaway inflation.
In early April, however, India’s inflation plummeted to a 40-month low while the Indian government reported that it would cut spending for the year. Lower government spending and falling inflation has increased expectations of a rate cut among investors, according to a survey by Bloomberg.
SOUTH KOREA: STIMULUS MEASURES ARRIVE TO PROVIDE AN IMPETUS TO GROWTH
South Korea’s export-dependent economy is facing challenges arising from a listless global recovery, a slump in exports for its products such as cars for the European Union, and tight consumer spending at home.
Consequently, the country’s first female president, Park Geun-hye, who was elected in early 2013, is facing a series of tough choices. In the months after Ms. Park was installed as South Korea’s president, the country’s central bank cut the growth forecast for South Korea to 2.3 percent in 2013 from its earlier projection of 3 percent. South Korea’s poor economic showing in 2013 is largely viewed as a spill-over effect of 2012, during which time the country registered the slowest economic growth since 2009.
South Korea’s economy, dominated by large exporting firms like Samsung and Hyundai, is skewed towards global trade. With some of its key trading partners like the European Union mired in economic recession, South Korea’s economic engine has floundered over the past couple of years. Although big conglomerates have largely overcome the slump in exports through innovation and tight cost controls, the South Korean consumer is under tremendous pressure. South Korea’s households, which on average currently carry a personal debt of 160 percent of annual incomes, is one of the world’s most indebted. This fact has reined in further consumer spending in recent years.
Furthermore, with Japan, South Korea’s trade competitor in the auto and electronics segment, engaged in a monetary easing of gargantuan proportions, South Korea’s currency has strengthened substantially since 2013. A strengthened won hampers the country’s export products ranging from mobiles to ships, by making Korean products expensive for overseas buyers. Ms. Park, who had campaigned on a promise to increase welfare spending, announced a slew of stimulus measures in the face of sluggish economic growth.
In mid-April, the president announced $15.4 billion in government spending to help generate 40,000 jobs and to promote the growth of small and medium-sized enterprises. South Korea’s finance ministry added that the stimulus will boost growth by 0.3 percentage points for the year.
TAIWAN: WEAK CURRENCY KEEPS EXPORT ENGINE AND GROWTH GOING
Even as other export-based economies in Asia struggle, Taiwan continued to strengthen through the fourth quarter of 2012. Banking on this momentum, Taiwan opened its economy robustly in 2013 as well. One of Taiwan’s strong points during the fourth quarter was the vigor of China’s recovery in late 2012. Taiwan managed to raise exports to China and overseas sales of items such as computer chips soared.
And, unlike the South Korea currency, the won, Taiwan’s currency, the Taiwanese dollar, weakened during recent months. Traders, expecting interference from Taiwan in the currency markets in response to Japan’s loose monetary policy, pulled the Taiwanese currency further down. The weak Taiwanese dollar in turn played to the strength of the country’s exports in recent months.
During the first quarter of 2013, Taiwan’s export orders for electronics, telecommunication equipment, and information gear grew at the fastest pace in nearly two years primarily due to a marked recovery in the U.S. All these factors have helped Taiwan arrest its unemployment levels to 4.2 percent for the full year 2012.
With unemployment remaining low, consumer confidence on the island has increased incrementally. The consumer confidence index compiled by the Taiwan National Central University increased for the third consecutive month in March 2013, touching the highest level since June 2012. Consumers surveyed in the report expressed increasing willingness to buy durable goods over the next few months owing to the strength of the country’s economy.
Buoyed by low unemployment data, rising export figures and strong consumer confidence, as well as stable inflation, Taiwan’s central bank left interest rates untouched during its March policy meeting. Taiwan’s central bank has refrained from tweaking interest rates for the past seven policy meetings.
INDONESIA: RISING INFLATION AND FALLING EXPORTS PLAY A SPOILSPORT
Indonesia, one of Asia’s star economic performers in 2011 and early 2012, lost momentum towards the end of 2012. Indonesia’s quarterly economic growth during the final quarter of 2012 fell to a two-year low figure of 6.11 percent as faltering exports more than offset resilient consumption and investment-driven growth.
The archipelago largely maintained its growth during 2011 and early 2012 by keeping interest rates low, while the strong domestic currency, the rupiah, helped subsidize oil and food imports for its vast consumer markets. However, the currency of the world’s fourth most populous nation lost steam over the past year. This made subsidizing oil expensive over the past year even as the country’s current account deficit climbed steadily. The rupiah, the strongest currency of 2011, ended 2012 as one of the weakest performers.
The country of 240 million people is faced with the delicate task of balancing borrowing costs and maintaining economic growth. The country’s central bank is now worried that any hike in interest rates to combat inflation could be inimical to both the consumer and investment sentiment in the country. Both consumption and investment has remained robust in Indonesia thus far. Indonesia, which added seven million citizens to the middle class in each of the past seven years, has largely grown with the rise in demand for motor vehicles, cars, and consumer durables from its swelling middle class. As well, investments in ports, airport terminals, and roads have boosted Indonesia’s GDP. Now, with a resurgence in inflation and a drop in currency, Bank Indonesia, the country’s central bank, revised its growth projections downward to 6.2 percent-6.6 percent from its earlier projections of 6.3 percent-6.8 percent.
THAILAND: STRONG CAPITAL INFLOWS AND INVESTMENT BOOST GROWTH EXPECTATIONS
Thailand’s economy accelerated considerably during the fourth quarter of 2012 helped by record-low interest rates, strong credit growth, and a rebound in productive capacity from manufacturing industries. In fact, Thailand’s GDP during the fourth quarter of 2012 surged 19 percent over the fourth quarter of 2011. In 2011, Thailand’s GDP plummeted as a once-in-a-generation flood submerged large parts of the capital city of Bangkok and other industrial centers.
As car manufacturers and hard disk manufacturers located in southern Thailand brought back flood-affected factories back into operation, output from the Southeast Asian nation surged for the greater part of 2012 over 2011. Supportive monetary policy and expansionary fiscal policy also helped fuel the country’s resurgence in 2012. As many small and medium scale suppliers catering to Thailand’s auto and electronics industry borrowed money to build their repaired facilities, loans disbursed by the Thai financial system jumped 13.7 percent in 2012, helping generate higher employment and investment.
Furthermore, Thailand’s economy, which struggled in the face of political risks during 2010, has largely ensured stability by peacefully conducting parliamentary elections in 2011. Since then, the country has reaped a strong peace dividend with a marked improvement in the political and investment climate.
Affirming the country’s investment-friendly policies, ratings agency Fitch raised Thailand’s foreign currency debt rating by three levels. As of March 2013, nearly $7.3 billion had flowed into Thailand’s capital markets and key stock indices in Thailand have surged 48 percent over the past 14 months.
With inflation under control, the Bank of Thailand, the country’s central bank, revised Thailand’s growth forecast to 4.9 percent for 2013 from a previous projection of 4.6 percent. Flush with surplus cash, Hong Kong’s financial ministry, responsible for overseeing the country’s budget, announced that the government will increase social welfare spending by over 31 percent to $7.2 billion for the year 2013. These measures alone are forecast to contribute over 1.4 percent of Hong Kong’s GDP, which according to IMF’s estimates will grow by 3.5 percent in 2013.
PHILIPPINES: UPGRADE TO INVESTMENT GRADE DEBT STRENGTHENS GROWTH
The Philippines ended the first quarter of 2013 on an upbeat note. In late March, for the first time in history, the country received an investment-grade credit rating from a major debt rating agency, Fitch. The upgrade in rating marks a significant milestone for Philippines in its transformation into a fast-growing emerging economy from a badly-managed and corrupt economy.
Over the past decade, the Philippines strengthened its economy by reforming financial institutions and by giving greater independence to its central bank. These efforts resulted in deft management of inflation over the past decades. Further, Fitch also noted that the Philippines made notable improvements in fiscal management.
Starting from the mid-2000’s, the Philippines has developed a strong export-oriented industry based on commodities, electronics, and even services in addition to strong remittance income sent by Philippine expatriates from all over the world. All these factors have helped the country register a persistent current account surplus.
The investment grade debt rating upgrade has already cheered both global and domestic investors. Philippine stock exchange index (PSEi), which grew 30 percent in 2012, expanded a further 18 percent this year, making it the third-best performing stock market in world.
The improved investment climate also brought foreign direct investments into a variety of industries and has helped strengthen the domestic currency, the peso. The strength of the peso in turn has helped the country import oil inexpensively. After registering Asia’s second-fastest growth rate of 6.6 percent in 2012, the Philippines is expected to expand at a pace of 5.6 percent, fuelled by a rise in infrastructure investment and strong consumer spending.
MALAYSIA: GENEROUS SPENDING BY GOVERNMENT BEFORE ELECTION LIFTS GROWTH
Malaysia’s economy joined other southeastern Asia countries to produce a resilient economic performance during the fourth quarter of 2012. As major immediate threats such as breakup of the European Union and an intensifying slowdown in both the U.S. and China receded during the second half of 2012, Malaysia’s economy picked up momentum. As a result, Malaysia ended the fourth quarter of 2012 with 6.4 percent growth, far ahead of the 5.3 percent predicted by a group of analysts surveyed by Bloomberg. Malaysia’s fourth quarter 2012 performance was also the best in nearly ten quarters.
Part of Malaysia’s economic performance was fueled by a strong domestic market. Malaysia declared that it would conduct elections in May 2013. In turn, the country’s ruling party went on a spending binge and initiated populist policies almost six months before the election. Raising the salaries of civil servants and hiking subsidies helped domestic consumption over the past six months giving a shot in the arm to the economy. The strength of the domestic economy also offset the weakness in exports from Malaysia.
Investments, hiring, and business trends across the country also improved as the government spending kick-started the private economy during the past two quarters. According to private consultancy reports, optimism in the financial services industry and manufacturing industry rose during the first quarter of 2013 while expectations for revenues and profits among public companies shot up. With optimism over demand high in both the private and public sector, expectations for price rises are also inching up. While inflation remained stable for the greater part of the last quarter, it showed signs of a rise in early 2013 prompting the central bank to hold interest rates at 3 percent. Malaysia’s government expects GDP growth to be in the range of 4.5 percent to 5.5 percent for 2013.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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