Asean-6 economy is set to grow by 5.0% in 2018. Trade, policies and politics will shape the outlook in the near term


A story of trade, policies and politics

ASEAN-6 economy is expected to grow by a solid +5.0% in 2018 (after +5.1% in 2017). Three themes - trade, policies and politics - will likely shape the outlook in the near term. Firstly, trade related risks are rising with slower economic growth in China and a rising protectionist stance in the US. In that context, countries will have to either rely on their domestic demand or find ways to keep exports growth in-check (through alliances, or improved competitiveness).

Upside risks could stem from: (i) further regional integration (as part of the Belt and Road Initiative, e.g.) or (ii) the entry into force of a mega-trade agreement (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) for the country involved (Singapore, Malaysia, and Vietnam). Secondly, the global environment is getting less supportive on the credit and the financial sides with tighter monetary policy in the US and a rise in commodity prices. Thus, having strong policy buffers (sound public finances, low external debt, e.g.) and credible policies will be key to keep economic growth in check and preserve financial stability. Thirdly, we see pockets of political uncertainties in the region with elections in Malaysia, Indonesia, and continued postponements of elections in Thailand.

Singapore: after the peak

In Singapore, economic growth is set to slow to +2.9% in 2018 after +3.6% in 2017. Exports growth will likely decelerate but remain firm. The economy is not specifically targeted by the US for now but it would be adversely affected by trade frictions between China and the US due to the nature of its growth model (heavily reliant on global trade and global financial flows). Domestic demand shows signs of strength. Private consumption accelerated by +3.1% in 2017 and fundamentals are well oriented. Citizen unemployment rate decreased to 3% in Q4 2017 (from 3.5% in Q1 2017). Investment recovered in Q4 (+2.4% y/y) and a solid business sentiment (manufacturing PMI above 50) points to continued expansion. Fiscal policy is generally supportive with the 2018 budget including measures to boost both private consumption and business investment (active support to employment; extension of the Wage Credit Scheme).

This should help to compensate for a gradual tightening of monetary policy. In April 2016, the Monetary Authority of Singapore flattened the slope for the SGDNEER policy band, on the back of low economic growth and increased deflationary pressures.

With economic growth rising at a firmer pace (clearly above +2%) and inflationary pressures rising, the MAS increased the slope for the SGDNEER band in April.

Thailand: a light at the end of the tunnel?

We expect the Thai economy to slow to +3.6% in 2018 (from +3.9% in 2017). Exports growth should moderate; domestic demand should gain some traction. We expect public consumption and investment to pick up speed supported by a favorable policy mix. Monetary policy is accommodative and considering the low level of inflation (+0.8% y/y in March 2018 compared to target band of +1% to 4%), it is unlikely that the central bank will change its stance soon. Fiscal policy will likely become more supportive this year on the back of public infrastructure projects especially in the Eastern Economic Corridor.

We expect a limited improvement for household’s consumption. A rise of consumer confidence and an increase of the daily minimum wage (+2% to 7%) will be supportive. Yet, a still high household’s debt (77.5% GDP) may limit the momentum. 

Yet, risks to the outlook are elevated. It includes a tougher protectionist stance from the Trump administration as Thailand has an elevated trade deficit with the US (USD20.4bn in 2017 according to the US Census Bureau); a weaker than expected growth of private investment due to ongoing political uncertainties.  General elections have been postponed several times since the military took power in 2014.

Malaysia: keeping the balance

Economic growth is set to slow to 5% in 2018 after +5.9% in 2017. Firstly, we expect monetary policy to tighten. Bank Negara Malaysia raised its policy rate by 25bp to 3.25% in January on the back of rising inflation.

Moreover, authorities will likely continue to sustain a strong ringgit due to high external debt (nearly 70% GDP). Secondly, we expect fiscal consolidation to continue as the government expects to bring fiscal deficit to -2.8% GDP in 2018 (from -3% GDP in 2017). Thirdly, private consumption will likely remain constrained by a still high household’s debt (84.3% GDP). Fourthly, trade related risks remain elevated as Malaysia has a significant surplus with the United States (USD25.6bn in 2017).

Indonesia: improving slowly but surely

Economic growth is set to pick up speed to +5.3% in 2018 (from +5.1% in 2017) led by a positive investment cycle. Easier rules on foreign investment and less macro-imbalances (controlled inflation and lower current account deficit) help boost investors’ confidence and foreign direct investment. This has been reinforced recently by a rise in risk appetite globally. Infrastructure investment is rising supported by public investment. We expect the central bank to keep policy rate unchanged at a low level in 2018 (4.25) as inflation remains under control (at 4% against a target band of 2.5% to 4.5%).  Private consumption is expected to gather speed gradually driven by stronger job creation.

Risk relates to a busy political agenda this year and next that could weigh on investors’ confidence. This includes regional elections in June 2018 and the presidential election in April 2019. President Jokowi is still popular within the country, yet the opposition’s victory in Djakarta gubernatorial election points to a risk of changing majority. On the external front, pocket of vulnerability could stem from a tighter than expected monetary stance in the US.  

Philippines and Vietnam: prudent policies will be key

Philippines (+6.8%) and Vietnam (+6.7% in 2018) will likely be the growth champions among largest ASEAN economies.  Competitive cost advantages help the two markets to leverage on exports, but also to benefit from a rise in investment as companies look for alternatives to China. Domestic consumption is also strong supported by positive demographics and solid job markets. While the growth outlook is strong for now, economic policy risks are elevated for both markets. In Vietnam, risk stems from public finances management as debt is high (61.3% GDP) and critical external vulnerabilities especially poor import cover (below 3 months). For the Philippines, public debt is safe for now but one should pay attention to a strong rise of credit and a rise of inflation.