Despite the global headwinds, the Southeast Asian economies recorded a solid growth of 5.2 per cent in 2018. This is in continuance of the region’s strong economic performance during 2017. While the GDP growth rates have remained robust, the country-wise trends have diverged somewhat. Several central banks in the region raised interest rates to address monetary normalisation in advanced economies as well as price and exchange rate pressures. Such moves were supported by policies to ease liquidity conditions for enhancing growth.
Southeast Asia Infrastructure takes a look at the economic performance of key countries in the region and the outlook for the future…
Thailand
During the year 2018, the Thai economy continued to grow steadily, recording a growth rate of 4.1 per cent over the previous year. This increase can be mainly attributed to an improvement in domestic demand, which was fuelled by an uptake in private consumption spurred by an increase in household spending, low inflation rate and increase in new car purchases. It was supported by an increase in domestic investment as well. While private investment was mainly driven by an expansion in construction activity, public investment grew due to the take-off of small- and medium-sized public construction projects.
However, on the flip side, the country faced weakened external demand. Its manufacturing exports, particularly tech exports, which make up 20 per cent of the country’s export basket, has decelerated. In addition to the China-US trade war, short-term factors such as a disruption in the production of major export commodities because of floods also contributed to the fall.
With an inflation rate well within manageable levels, the Bank of Thailand continued to maintain an accommodative monetary policy stance. However, going forward, the high levels of household debt are likely to be a cause for concern as the interest rate normalises. Further, low investor confidence on account of political uncertainty and a low capital budget disbursement rate due to the adoption of new procurement law also pose growth risks.
As per World Bank estimates, Thailand’s GDP growth rate is expected to fall to 3.8 per cent in 2019. This is mainly because global growth is expected to weaken, which is likely to have an impact on the country’s already slowing exports. In such a scenario, acceleration in infrastructure spending will provide the much-needed boost to the Thai economy.
In the first quarter of 2019, the economy slowed down markedly on the back of rising external headwinds and high political uncertainty.
Malaysia
The Malaysian economy continued to slow down for the third consecutive year with its GDP growth rate falling from 5.9 per cent in 2017 to 4.7 per cent in 2019. This slow growth trajectory can be attributed to a combination of domestic and external factors. After a new government assumed office in May 2018, it adopted an aggressive approach to reduce costs in an attempt to reduce mounting national debt. It cancelled two major infrastructure projects, the Kuala Lumpur-Singapore High Speed Rail and Mass Rapid Transit 3, worth over RM 100 billion. It has decided to put several mega infrastructure projects on the back-burner, citing huge costs to the government exchequer. The country’s export performance also weakened. In particular, export volumes of petroleum and palm oil declined because of faltering demand from China and the US.
Private consumption continued to be the main driver of growth for the economy during 2018. A significant increase was seen in the purchase of durable items, as well as food and beverages, with households taking advantage of the zero-rated goods and services tax (GST) period from June to September 2018. In addition, stable labour market conditions and steady income growth supported private consumption.
Going forward, falling exports are likely to be a cause for concern as Malaysia is excessively reliant on commodity exports. Private consumption will continue to dominate on account of implementation of the sales and services tax (SST), which covers a much narrower base of goods and services as compared to the earlier prevalent GST. Given the new government’s stance with regard to huge investment projects, public investment is likely to remain weak. Factoring all these conditions, the World Bank estimates Malaysia’s GDP growth to remain at 4.7 per cent during 2019 as well.
In the first quarter of 2019, the Malaysian economy grew faster than expected on account of a recovery in the agricultural sector, particularly in crude palm oil production, continued expansion in private sector spending as well as high net exports. However, except for the agricultural sector, slower growth or a wider contraction is likely in all other sectors.
Indonesia
The Indonesian economy maintained the same pace of growth as in the previous year, with GDP growing at a rate of 5.1 per cent during 2018. On the domestic front, there has been a pickup in consumption on account of job creation and social programmes being undertaken by the government. Further, subdued inflation also supported growth in real income. Besides, aggressive government spending on account of the elections, which touched a high of $155 billion or 99.2 per cent of the allocated budget in 2018, also boosted growth. Indonesia’s export of manufactured goods remained largely unaffected by the cyclical changes in global trade. On the flip side, a fall in the price of palm oil, which is the country’s largest export commodity, had a negative impact on growth.
Going forward, the World Bank expects the Indonesian economy to grow at around 5.2 per cent in 2019. This growth is likely to be driven by a continued pickup in consumption. Investment growth is also likely to remain robust on account of ongoing big-ticket infrastructure projects.
However, the economy is expected to continue facing the challenges, both external and internal, experienced during 2018. Although Indonesia is less integrated in global value chains than other countries in the region, escalating trade tensions between the US and China will slow growth through lower exports as well as indirectly via sentiment and commodity prices. Reportedly, for every 1 per cent decline in China’s economy, Indonesia’s economic growth slows down by 0.11 per cent, while the same decline in the US economy will hamper Indonesia’s economic growth prospects by 0.05 per cent. Further, an increase in the Fed’s funding rate could increase the country’s capital outflows, which is likely to lead to an increase in bank interest rates, inhibiting the growth of loans and leading to a spike in non-performing loans. These developments could prove detrimental to growth. Further, energy subsidies will continue to exert pressure on the state budget.
While huge capital inflows made the Indonesian rupiah one of Asia’s worst performing economies in 2018, it has relatively stabilised on account of the aggressive rate hike pursued by Bank Indonesia from May 2018 onwards. While the currency has not regained its full strength yet, the expectation of a dovish monetary stance from the Fed augurs well for its recovery. Besides, a decline in oil prices would ease cost pressures, boost growth and narrow the current account deficit.
In the first quarter of 2019, Indonesia’s economy expanded slower than expected on account of softer investment and cooling down of household consumption, which contributes more than 50 per cent to the country’s GDP.
Singapore
Despite slower growth of 2.2 per cent in the second half of 2018 as against 4.3 per cent growth in the first half, Singapore’s GDP recorded a growth rate of 3.1 per cent in 2018. This marked a decline from the 3.9 per cent growth in 2017. It was the electronics, transport engineering and biomedical manufacturing clusters which drove the country’s growth during 2018. Apart from these, precision engineering, chemicals and general manufacturing clusters also expanded during the year. While there was a slight fall in growth in service producing industries, the services sector as a whole recorded positive growth. Within the services sector, the information and communications, and finance and insurance sectors grew at the highest pace. The impressive performance of this sector can be attributed to the structural ramp-up of digital payment activities and the rising demand for insurance services. However, the construction sector continued to slow down during 2018 with the imposition of restrictions on housing as well as a slowdown in activity in the public construction segment.
During 2018, external demand grew by around 5.2 per cent, which is slightly lower than the 5.4 per cent growth recorded in 2017. This growth was mainly driven by real merchandise exports, with machinery and transport equipment, miscellaneous transactions, and chemicals and chemical products emerging as key contributors. It was supported by growth in the country’s real service exports in which transport services, financial services and other business services emerged as front runners.
Going forward, the Ministry of Trade and Industry, Singapore, has narrowed down the country’s GDP growth forecast for 2019 from 1.5-3.5 per cent to 1.5-2.5 per cent. It expects a sharp slowdown in the manufacturing sector, particularly in the electronics and precision engineering clusters, on account of a cyclical downturn in the electronics industry as well as uncertainties resulting from ongoing trade conflicts. However, the information and communications segment and the education, health and social services segments are expected to witness solid growth. The construction sector is also likely to see a sustained turnaround as the pickup in contracts awarded since 2017 is expected to translate into construction activities.
Philippines
Despite a moderation in the GDP growth rate from 6.7 per cent in 2017 to 6.2 per cent in 2018, the Philippines continued to be one of the most rapidly growing economies in the region. However, this was below the government’s targeted growth rate of 6.5-7 per cent. Several factors contributed to the moderation in the growth rate. The government’s push to develop infrastructure in the country through the Build, Build, Build programme had a negative impact on the country’s external balance, given the high import content of construction equipment required for the programme. At the same time, there has been a weakening of the country’s export performance because of a decline in both merchandise and service exports. The moderation in global growth and softening in global trade and manufacturing also led to a substantial fall in exports of other major commodity groups.
Bolstered by strong public investment spending, investment growth emerged as the leading driver of economic growth during 2018. Further, the recovery in private construction activities boosted growth in the construction segment. However, private consumption was undermined on account of the rising inflation. The implementation of the first of the five tax reform packages, which include excise taxes on a range of goods, also exerted upward pressure on prices.
The World Bank estimates the Philippines economy to grow at 6.4 per cent during 2019. This is based on the expectation of increased private consumption resulting from an easing in inflationary pressure. However, with the moderate growth forecasted for global trade, export performance is expected to remain weak. A possible increase in US interest rates, continuous trade tensions and geopolitical uncertainties pose risks for the country’s economic growth.
In the first quarter of 2019, the country grew at a slower-than-expected rate, mainly on account of weakening exports and lower government spending resulting from delays in passing the budget.
Vietnam
During the year 2018, Vietnam recorded a stronger-than-expected growth rate of 7.2 per cent, up from the 6.8 per cent growth in 2017. This strong performance was supported by large foreign direct investment, which has been steadily rising on account of the economic reforms undertaken by the government over the past decade. A notable step taken by the government to open up the economy was the signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The CPTPP officially came into force on December 30, 2018 and was signed by 11 countries. As per World Bank estimates, this move is expected to boost the country’s GDP growth by 3.5 per cent.
Expansion in the manufacturing, agricultural and construction sectors also contributed to growth. The continuous shift to higher value crops and increased output in the fishery sector contributed to agricultural growth while the construction segment was buoyed by robust investment activity and a dynamic real estate sector. The service sector also showed solid growth, supported by a higher number of tourist arrivals.
Moody’s estimates that Vietnam’s economy will grow at the rate of 7.1 per cent in 2019, clocking the highest growth rate in the region. While high wage growth will continue to support private consumption, economic policies to liberalise regulations and deepen global economic integration will further ease business investments. Export growth is also likely to remain robust.
The way ahead
Moody Analytics projects a moderation in regional economic growth during 2019, which is likely to decline to 4.8 per cent from 5.1 per cent in 2018. While Vietnam will continue to be the fastest growing economy in the region, GDP in the Philippines is also expected to grow at a rapid pace. However, Malaysia, Singapore and Thailand are expected to grow slower on account of the greater exposure of their export-oriented manufacturing segments to slower global growth.
The major threat to the region’s growth rate is the persistent trade tensions resulting from the exacerbation of the US-China trade war. This uncertainty in trade can deter consumption as well as investment. A sharper-than-expected slowdown in advanced economies, especially China, and increased trade protectionism pose a substantial risk for the region. So far, policymakers in the region have been quite vigilant and responsive to shocks. Such a response mechanism will be needed to ensure that the growth momentum in the region is maintained in the future.
