The economic outlook for 10 ASEAN (Association of Southeast Asian Nations) member states and other major East Asian economies including China, India, Japan and South Korea, remains optimistic following a strong start in 2017. In a report published by RAM Ratings - a credit rating agency based in Malaysia - these nations managed to overcome domestic and external challenges in 2016 despite the uncertain trade outlook for three quarters of the year and exchange-rate pressures amid volatile fund flows. On the other hand, RAM Ratings Head of Sovereign Ratings Esther Lai said downside risks remain following rising dependency on trade and investments in China, rendering a significant contagion credit risk for the region. China is expected to release official trade data on September 8, 2017.
Through its publication - Asia Sovereign Focus 2017 - the credit rating agency pointed out that infrastructure spending, which is at the heart of the reform plans for Indonesia, the Philippines and Thailand, has been gaining traction following continuous efforts to improve business conditions in the interest of long-term economic sustainability. Elsewhere, the frontier economies of Cambodia, Lao and Myanmar are still addressing structural constraints in physical infrastructure and human capital development with the support of multilateral and bilateral funding, although they remain highly susceptible to external shocks.
Meanwhile, the export-oriented economies of Japan, South Korea, Singapore, Malaysia, Thailand and Vietnam are riding on the cyclical rebound in electronics and firmer commodity prices. “Growing US trade protectionism, rising geopolitical risks and security threats as well as the risk of capital outflows that will inflate financing costs are also factors we are keeping a close eye on,” Lai added.
Nonetheless, the rating agency remains vigilant on the for key risks that could be credit negative including China’s rebalancing, capital volatility, protectionist policies and policy execution, geopolitical risks and rising security threat. The Philippines’ ability to withstand external volatilities, its impressive progress in key legislative and administrative reforms, and a continuous reduction in foreign-currency debt as a proportion of total government debt, support the upgrade of its credit ratings on the ASEAN and Malaysia national scales. However, these positive developments are insufficient to warrant a credit rating upgrade on the global scale given the government’s fiscal constraints and structural issues such as underemployment, poverty and poor infrastructure conditions, which weigh on the Philippines’ competitiveness and global ranking in ease of doing business.
As for Malaysia, the present pace of inflation will remain manageable and low compared to its peers. As stronger GDP (gross domestic product) growth indicates a greater probability of demand-pull inflation, there is a higher possibility of twenty-five basis point hike in the central bank’s overnight policy rate towards the end of this year. The acceleration in exports amid the recovery in global demand and commodity prices had fuelled economic activity in the first quarter of 2017, with an expansion of 5.6 percent. This and a corresponding increase in investments had led a revision of RAM Ratings’ GDP growth forecast to 5.2 percent for 2017 from its previous projection of 4.5 percent.
In Myanmar, the civilian-led government saw the passing of a new investment law (effective April 2017) - which relaxes the overly restrictive requirement that all foreign direct investment or joint ventures in Myanmar must be greenfield investments - and a revision of its Companies Act to improve domestic business conditions. The rating agency said this is a step in a right direction given Myanmar’s relatively low ranking in terms of ease of doing business - 170th out of 190 countries. Nonetheless, Myanmar’s institutional capacity remains underdeveloped, and is further complicated by its challenging political environment as the military still exerts significant influence over various policy decisions. Given these conditions, the pace of future reforms is expected to be gradual. Consequently, investment growth will only be at a measured pace from its low base; this is also reflective of the country’s significant infrastructure shortfalls and increased global risk aversion.
As for Singapore, its robust financial profile is its key strength, underpinned by the requirement under its constitution to maintain a balanced budget throughout the government’s five-year term. Singapore’s fiscal position is estimated to clock in at Singapore dollar 1.9 billion or 0.5 percent of GDP in fiscal 2017. Prudent budgeting over the years has enabled the accumulation of sizeable fiscal reserves held in the country’s sovereign wealth fund which provide an additional boost to the government’s revenue. Macroprudential measures and weaker economic sentiment have effectively cooled the overheated property sector following the 2008 Financial Crisis. As a result, home prices have declined 11.6 percent since their peak in 2013. The effects appear to be bottoming out, with slower price declines and rising transaction volumes. The government also slightly eased its cooling measures in 2017, with tweaks to sellers’ stamp duties and total debt-servicing ratio. Nonetheless, these are not expected to exert a significant impact on the property sector.
Thailand remains financially stable as its domestic banks are generally well capitalised. The Thai financial industry has recorded an average common-equity tier-1 capital ratio of 14.5 percent as at the end of March 2017. Nonetheless, the quality of loans extended to households and businesses, especially SMEs (small and medium enterprises), has deteriorated amid persistently weak macro conditions.
The Vietnam banking sector’s risks stem from weak and declining profitability, limited transparency, poor reporting standards and the central bank’s inability to effectively regulate this sector. This is, however, moderated by ongoing reforms such as the phasing out of explicit loan-classification forbearance, increasing the risk weight for real-estate loans to avoid a bubble and enhance supervision.
Despite Indonesia’s reliance on commodity exports and external sources of financing, it has proven more resilient against capital flight in recent years. Notably, its short-term external debt cover came up to a substantial two times in 2016, this acts as a significant external buffer as the rupiah has been much less volatile after the US presidential election in November 2016, an event that had heightened global risk aversion.