ASEAN's Growth Likely to Stay a Touch Under Trend in 2013

Members of the Association of Southeast Asian Nations are expected to expand a touch below trend in 2013, says Moody's Analytics.


Thailand, Singapore, Indonesia and Malaysia all recorded slower growth in the first quarter thanks to mediocre export demand. The Philippines, meanwhile, continues to expand at a breakneck pace as the surging domestic economy more than offsets weakness in the export sector.


"Robust investment and household consumption remain the key pillars of growth across the region, a theme we expect to persist for the rest of 2013," says Frederick Gibson, Associate Economist, Moody's Analytics.


Gibson notes that higher minimum wages and strong labor markets are supporting consumer spending, while government initiatives across developing ASEAN and solid foreign direct investment boost infrastructure spending.


In Indonesia, however, the government’s recent decision to reduce fuel subsides will likely cause consumers and businesses to cut back spending in other areas to fund higher petrol prices. All told, the ASEAN region is forecast to grow 4.8% in 2013, a touch below the 5% long‐run growth rate.


Markets take a hit across Southeast Asia
Financial markets across ASEAN tumbled over the last month as heightened volatility and speculation the Federal Reserve may taper its asset purchase program caused investors to sprint for the exits. Stocks in the Philippines were hardest hit, dropping 11%, while Malaysian shares dipped just 0.3% over the month.


Higher yielding emerging market assets, particularly in Southeast Asia, benefited from developed economies' various stages of quantitative easing, with stocks and currencies trending higher since 2009. However, investors are now starting to liquidate their positions in line with the withdrawal of monetary stimulus from the U.S. and eventually Europe. This will continue to put downward pressure on exchange rates and equity markets across ASEAN.


Currencies are already feeling the effects, with the Thai baht and Philippine peso recording large declines against the U.S. dollar, mirroring the outflow from equities.


Capital flight has real implications
Tighter monetary policy abroad will spur the withdrawal of liquidity from ASEAN, causing lending rates to rise more in line with domestic funding conditions, with knock‐on effects for house prices, debt fueled consumption and investment.


The banking system across most of the region has also undergone significant reform over the last decade with regulators ensuring banks are well capitalised.


"The downward pressure now facing ASEAN currencies will lift export competitiveness and receipts, with positive knock‐on effects for output," notes Gibson. "Policymakers should monitor the region’s shift towards domestic‐led economic growth and away from the traditional export‐led model."


Meanwhile, current account balances across ASEAN have shrunk, confirming that these economies are saving less and consuming more. "The anticipated recovery in the global economy will eventually lift exports, but the days of outsized external surpluses are unlikely to return," says Gibson.


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