Chetan Ahya and Deyi Tan | Mumbai Cyclical growth story to face challenge in 2007. The ASEAN region has achieved respectable average growth of 5.6% over the last three years. However, in 2007, the ASEAN-5 countries are likely to remain middling performers in terms of their growth trend. The region is still struggling to stimulate internal demand on a sustainable basis, resulting in a high dependence on exports. With global growth likely to decelerate in 2007, the region is likely to lose support from its major growth driver — exports. We are looking for a global soft-landing scenario in 2007, with world GDP growth decelerating to 4.4% from 5% in 2006. Reflecting this trend, we expect ASEAN-5 GDP growth to decelerate to 5.1% in 2007 from 5.6% in 2006.
Not yet realizing its potential. The growth potential for this group, considering its demographic trend, is still very high. Indeed, the demographic trend for the region is as favorable as that in India and China. However, after the 1997 crisis, growth rates in the region have consistently been below potential. The most important challenge for the region (except for Singapore) is to build a stable political structure and a transparent institutional framework that will enable it to shift from an individual- to an institution-driven policymaking process.
Private consumption trend lacks vigor. The region’s overall efforts to pursue domestic demand growth strategies have not been very successful. Both Malaysia and Thailand, which had managed to revive domestic demand in the recent past, have witnessed a reversal in this trend. In Thailand, a lack of stable government has again made the economy dependent on export growth for sustaining its overall growth rates. In Malaysia, we believe the household balance sheet is already too stretched to continue with strong growth in private consumption in 2007. Indonesia is the only country in the region that should witness a meaningful improvement in private consumption in 2007, although from a low base in 2006.
Still struggling to revive domestic investment. The investment-to-GDP ratio for the ASEAN 5 has remained significantly below savings since the 1997 crisis. Apart from the unwinding of excess investments in the construction sector as one of the key reason for this poor overall investment trend, we believe the region’s private business investments have also been unable to fill the void. This is likely a function of the speed with which these countries are implementing structural reforms. In our view, Indonesia’s investment climate needs a major overhaul in the areas of infrastructure, tax and labour, whilst Malaysia needs to reform the softer institutional framework to push through higher productivity growth. On the other hand, Thailand continues to suffer from lack of stable political structure, which is necessary for pushing investments. For Singapore, the savings-investment gap is large, and investment is low by way of economic policy design and will likely remain so.
No major support from monetary or fiscal policy. Policy interest rates have peaked out but we are unlikely to get major support from rate cuts. We expect Thailand to start cutting rates in 1Q07 whilst Malaysia’s monetary policy will likely mirror the Fed’s. Only Indonesia is likely to see substantial cuts in interest rates in the near term. On the fiscal front, none of the ASEAN 5 countries is likely to pursue an aggressively expansionary policy. The interim government in Thailand is unlikely to take up the mega-infrastructure projects on the same scale planned by ex-PM Thaksin, and the Malaysia government is also planning to implement more disciplined fiscal policy to reduce its deficit in 2007. While the Philippines will see some increase in its deficit in 2007, it will most likely be marginal.
Thailandlikely to be worst performer in 2007. Indeed, specifically in terms of each individual country, we expect the growth trend for Singapore and Malaysia to be largely linked to global demand, given their degree of export orientation. On the other hand, domestic factors are likely to play a more significant role for Indonesia and Thailand, spurring growth in the former and constraining it in the latter. Prospects look most promising for Indonesia, where the government is likely to be successful in implementing structural reforms and reviving domestic demand. We expect GDP growth in Indonesia to be the highest in the region at 5.5% in 2007 and 6% 2008. Thailand will likely record the lowest growth at 4.5% in 2007 amid continued political uncertainty. For 2008, we believe that private consumption and investment should support a recovery in GDP growth to 5%, assuming elections are held by the end of 1Q2008. Lastly, the Philippines is likely to continue to deliver modest growth in the absence of major improvement in the pace of reforms.
Bottom line — moderation in external demand to cause a growth slowdown in 2007. ASEAN 5 GDP growth has increased at a respectable rate of 5.6% average over the last three years. However, over the next 12 months, as external demand moderates in line with global growth, we believe aggregate GDP growth for ASEAN 5 will dip to 5.1% in 2007.