ASIA HAND Down and still coupled
By
Shawn W Crispin
BANGKOK - With falling exports, declining confidence and tight liquidity
squeezed by fleeing foreign capital, Southeast Asia has wholly failed to
decouple from the mounting downturns in the United States and Europe. Looking
ahead to 2009, the question is not if, but rather how far, the trade-geared
economies of the Association of Southeast Asian Nations (ASEAN) members will
fall in line with the global economy.
As global trade collapses, some of ASEAN's 10 members will be hit harder than
others, economists predict. The region's most open economies, namely Singapore
and Malaysia, where merchandise exports respectively represent around 200% and
100% of gross domestic product (GDP), will be particularly hard
hit. Others including Thailand, Indonesia and the Philippines, where exports
represent a smaller, but still substantial, percentage of GDP will also see
declining growth.
Hopes that China - with which ASEAN has a trade surplus driven by exports of
raw materials and component electronics and computer parts for re-export to
third countries - might buoy the region's economies have faltered with recent
softening in China's export figures. Meanwhile, economists say that the
stimulus package announced last month by China has been tailored mainly to tide
over the domestic economy and Beijing has indicated no plans or extraordinary
measures to lift the region's sinking economies.
Swiss investment bank UBS said in a recent note to clients that for the first
half of next year it expects China's "appetite for FDI in the region will
remain quite low" and that China "would be only a marginal positive factor for
Asia and ASEAN commodity exporters in 2009".
That analysis underscores now prescient Credit Suisse quantitative research
from November 2007, which demonstrated that recent strong growth in ASEAN
exports to China were largely intermediate goods intended for final export to
now-slumping US, Europe and Japan. The same research questioned how much ASEAN
had really decoupled from US demand, noting that 70% of intra-Asia trade was in
intermediate goods and that more than half of China's total imports were
destined for re-export to mainly Western markets.
As such, slackening commodity demand, including from China, will impact
adversely on several economies in the region. Earlier this year, certain Asian
countries reaped huge profits from fast-rising global commodity prices but are
now doubly exposed to deteriorating global demand and declining terms of trade.
Malaysia and Indonesia, ASEAN's top commodity exporters, are expected to take
the biggest hits on this front.
Thailand, despite its position as the world's leading exporter of rice, tapioca
and raw rubber, is because of even higher oil and gas imports a net commodity
importer and so less exposed to global price swings. Net fuel and food
importing Philippines, which earlier this year experienced the highest local
inflation rates in 17 years at 12.2%, will also net-net benefit economically
from softening global commodity prices.
Policy matters
While all economies in the region are expected to fall, how hard they actually
land will depend on individual governments' policy responses. Some are better
placed than others to ramp fiscal spending and slash interest rates to spark
more domestic demand and locally oriented investment. How well governments
devise and implement those policies will go a long way in determining the
extent of individual countries' slowdowns in 2009.
Indonesia, which faces severe budget deficit financing issues and has in recent
months been hounded by rumors it may seek an International Monetary Fund rescue
package, is seen as the most wobbly of the regional lot. Faced with stubbornly
high inflation, current account deficits and a depreciating currency, the
government's fiscal options and Bank Indonesia's monetary maneuverability will
both be limited in their scope to stimulate economic growth.
UBS notes that around 50% of Indonesian government bonds are now owned by local
banks and few wish to increase that share, as seen earlier this year when
foreigners wishing to dump their local positions sold mainly to the central
bank and local pension funds. Should its terms of trade decline further in
2009, some analysts fear Indonesia could be pushed into a 1997-style crisis,
driven by both foreign and domestic capital flight. Barring that worst-case
scenario, UBS predicts growth will fall to 3% next year, or nearly half this
year's 5.8%.
Thailand is in better shape financially but faces uncertain political risks,
which took a sharp toll on the economy in 2008. Those risks were underscored
when anti-government protesters besieged Bangkok's main international airport
for eight days beginning in late November. The closure caused exports - which
currently represent around 65% of GDP - to fall 18.6% year-on-year in November,
resulting in a US$1.3 billion loss in overseas sales, according to Commerce
Ministry figures.
A new Thai government installed in December has raised hopes for stability and
has already indicated plans to double the outgoing administration's
extra-budgetary spending to 200 billion baht (US$5.8 billion), including funds
to prop up falling agricultural prices. Fiscal stimulus will be paired with
monetary loosening, signaled by the Bank of Thailand's drastic 100 basis point
benchmark interest rate cut on December 3. While many economists predict Thai
growth of around 2%, others believe the stimulus won't prevent the economy from
tilting negative in 2009.
As perhaps Asia's most trade-dependent economy, Singapore had already slipped
into recession by the third quarter of 2008, with - 0.6% year-on-year GDP
growth. With global trade forecast to contract further in the quarters ahead,
economists expect Singapore's growth to remain in negative territory through
2009. Given the government's perceived penchant for sometimes overstating
growth on the upside, the actual economic situation next year could be worse
than official statistics indicate.
Declining export volumes are expected to ripple adversely through the local
economy, leading to significant lay-offs in the manufacturing sector and
dampened consumer sentiment, including towards the crucial property sector. The
government is expected to provide substantial fiscal support, including through
the use of off-budget measures such as tax rebates, micro-loans and rental
rebates, according to UBS.
The establishment of a US$30 billion "swap line" between the US Federal Reserve
and the Monetary Authority of Singapore has alleviated earlier dollar liquidity
concerns and set the stage for monetary loosening at the MAS's next policy
meeting in April. But with global trade faltering, local demand for US dollars
should decline, depending, of course, on how deeply MAS cuts interest rates and
whether monetary easing can spark a new investment cycle, which seems doubtful
for 2009.
Malaysia will face similar if not tougher economic challenges. UBS predicts
economic growth will drop drastically from 5.4% in 2008 to 0% in 2009, driven
down by the double whammy of declining exports and terms of trade in line with
falling global commodity prices. Commodity exports represented 26% of GDP in
2007, driving a balance of payment surplus of $13.2 billion. This year's
balance of payments is on course to just break even, and economists expect that
statistic will likely turn negative in 2009.
Credit Suisse noted in the aforementioned 2007 research that for every
percentage point drop in US GDP growth, Malaysia's will fall 1.6%. That's led
some economists to contend the government has moved too timidly in using fiscal
and monetary policy to offset the negative impact of collapsing exports. The
perceived inaction is reflective of the government's still bullish forecast for
3.5% economic growth next year, optimism aimed at deflecting growing criticism
from a more assertive political opposition.
For all the bad news, there is some upside - at least for the brave of heart.
ASEAN stock markets collapsed across the board in 2008, with many losing around
half their market capitalization year-on-year due to foreign investor flight.
That's driven average share prices down to near 20-25 year lows on
price-to-book valuations and exceptionally low price-to-equity ratios of around
8.6 times earnings, according to UBS. For those with the liquidity and patience
beyond 2009, the region's battered, yet comparatively deleveraged equities are
trading at bargain basement prices.
Shawn W Crispin is Asia Times Online's Southeast Asia Editor. He may be
reached at swcrispin@atimes.com.
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