Improved global demand to boost Asean economies next year: Moody's

The outlook for the “frontier” economies – Vietnam, Laos and Myanmar – is broadly positive, however structural issues must be addressed over the next decade, the company said.

The political impasse in the US, meanwhile, poses a significant threat to regional growth.

Policy-makers across the region must resist the urge to tighten interest rates in response to capital outflows, said the Moody’s unit.

The outlook for Asean remains positive and the steady improvement in the global economy should lift growth toward its long-run trend by the end of next year.

Southeast Asia’s economies tend to be export-driven, so the recent stabilisation in Europe, upbeat data from Japan, and a policy-induced soft landing in China are all seen as positive for the region.

The US political gridlock is expected to shave half a percentage point off fourth-quarter growth in gross domestic product, and possibly far more if lawmakers are unable to lift the debt ceiling. But at this stage Moody’s Analytics’ forecast for Asean is essentially unchanged. 

The most trade-exposed economies – Singapore, Thailand and Malaysia – will be the largest beneficiaries of stronger global demand, while Indonesia and the Philippines will also see some improvement.

The improving export sector and lift to confidence from healthier global growth will support domestic confidence and household-spending growth through 2014. Malaysia, however, is a notable exception, as its stimulus-induced pick-up in household spending will fade over the coming quarters, said the research company.

The investment drive that has gripped the region over the last couple of years should persist in 2014, although the pace of capital accumulation has likely peaked. Consequently, Moody’s Analytics expects the contribution to growth to moderate over the medium term.

The outlook for Vietnam, Laos and Myanmar is generally upbeat, as cheap labour and vast natural resources attract foreign direct investment. There are, however, country-specific factors weighing on the outlook. Vietnam’s central bank has cut interest rates since 2012, yet little of this has flowed into lending and economic activity as the banking system remains crippled by bad debts stemming from aggressive rate hikes in 2010 and 2011.

The government has set up an asset-management company to absorb bad debts in the banking sector, whilst implementing bank-restructuring programmes. High-frequency indicators suggest the economy is now on the mend, although the company expects the recovery to take a while and the days of more than 8-per-cent GDP growth in Vietnam are still a long way off.

 

Myanmar, Laos 

Myanmar and Laos are severely underdeveloped, with poor institutions and inadequate infrastructure, said the research house. This will need to be addressed over the next decade if these economies are to progress to the next stage of development.

In the near term, however, Myanmar has been welcomed back into the international community, which is positive for trade and investment. Laos, meanwhile, is benefiting from a steady stream of foreign investment in mining and electricity generation.

Capital inflows stemming from quantitative easing in the developed world, coupled with loose monetary policy at home, have fuelled rampant credit growth in various Asean economies over the last three years. This has increased the risk of asset bubbles, particularly in the property market, where real-estate values have risen substantially since 2010, the company warned.

Further outflows of capital linked to tighter monetary policy in developed nations may reduce liquidity, potentially exposing over-leveraged parts of the economy.

In this environment of tightening domestic liquidity, Indonesia’s central bank lifted interest rates aggressively as capital flowed out because of rumoured tapering by the US Federal Reserve. Moody’s Analytics sees this as a policy error that will exacerbate the growth slowdown.

The company’s baseline scenario assumes that Asean’s largest economy will refrain from further rate hikes, but if Bank Indonesia cuts interest rates again, GDP growth will likely be around 5.5 per cent next year, as opposed to the 6.1 per cent in the current baseline.

Most central banks across Asean are expected to keep interest rates in accommodative territory over the next six months, before a renewed tightening cycle commences in anticipation of rising price pressures and a stronger growth profile. 

Risks from the current US impasse will force central banks to maintain an easing bias in the near term, said the company.

The Apec (Asia-Pacific Economic Cooperation) summit in Indonesia this past week highlighted the shifting economic and political dynamics within Southeast Asia, which has historically been a key battleground between major global players. US President Obama was notably absent, but leaders from Russia, China, Japan and most of Asean attended.

Asean’s direct trade and financial links with China have strengthened over the last five years, while the US has been a major but fading player, said the Moody’s unit. But, with the recent US pivot to Asia, Asian governments may be able to leverage this rivalry to attract investment, capital and military know-how. it added.