The Economic Outlook for Southeast Asia 2016
Steady as she goes, dull but not disastrous
Economic forecasting is a mug’s game. But here are a few generalizations about issues likely to impact Asian in the coming year.
The year 2016 begins not with a bang but with a whimper, to misquote the poet Eliot. It marks the end of two trends without signalling the beginning of a new one. For Asia as a whole this promises to be another dull but not disastrous year. It is one which also sees the formal beginning of the ASEAN Economic Community, a nice idea which faces challenges both from economic nationalism in the larger member countries and competition between China and the US overshadowing the multilateralism of the World Trade Organization.
Of the medium-term factors, first there is the ending – slowly – of the era of minimal interest rates, years when major central banks have attempted with modest success to use monetary easing rather than fiscal stimulus to spur economic growth in the wake of the 2008 financial crisis. Second is the ending of the steep decline in commodity prices seen over the past two years.
The two have conspired to bring about the decline of almost all Asian currencies against the dollar –including those such as China and South Korea that are net beneficiaries of commodity price declines. Indeed for Korea and Taiwan, terms-of-trade gains are being more than offset by weak demand for manufactures from the west, softer markets in China and now difficulties in commodity-dependent developing countries whose currencies have declined by large amounts.
The prospect of higher interest rates should scarcely be frightening given that in real terms they will remain at historically low levels. The dangers lurk however in certain markets such as Hong Kong property where rates have encouraged a bubble which now faces the added challenge of a currency pegged to a rising US dollar.
Debt in Thailand
There is also plenty of corporate debt around the region, not least in Thailand, which was driven by empire-building acquisitions at a time when interest rates were not only low but currency stability against the US dollar had become assumed. There are echoes of 1997/98 – but mostly only faint ones as net foreign debt for most countries is minimal compared with then. The problem is at individual corporate level, not systemic.
The dramatic decline in energy and most mineral prices is probably close to an end but recovery is still distant. Declines in oil, coal and iron ore in particular have been caused mainly by increases in supply, not the fall-off in China’s growth. That new supply will not go away anytime soon. Similarly with the likes of gold and copper, cheap money and the 2013/14 price bubble saw new mining investment.
The issue for all these commodities now is how far the low cost producers will go to sustain production in the hope that low prices will drive out the higher cost producer as the Saudis are trying with oil. It is a game of chicken which doesn’t augur well for exporters of iron ore, coal and gas, the most important of which in this region are Australia, Indonesia and Malaysia – all three in the case of Australia.
Ag looking good
Agricultural commodities on the other hand have better prospects. The El Niño phenomenon producing droughts in parts of Asia and excessive rain in South America has already caused a 20 percent recovery in palm oil prices. Its impact on rice and other cereal prices, sugar, etc., has so far been limited despite the likelihood of stronger import demand in Indonesia and the Philippines while weak prices as well as the weather could curtail Thai and Vietnamese output. The impact has yet to be fully felt. Any serious 2016 setback in India, currently a significant net agricultural exporter, could have a major impact especially on rice and cotton, and add to its palm oil imports.
Rubber prices can get a little lift from El Niño but cannot recover significantly while oil is still low while other tree crop exports will remain more impacted by weather and other issues in the main global producers.
It is difficult to see any significant improvement in manufactured exports over the year as the recoveries in the west will, even if they continue, remain sluggish. Asian currency falls have been roughly matched by those in Europe.
The Chinese economy is neither headed for disaster nor a return to fast growth. Some shakeout of money-losing excess capacity will happen in 2016 which will be of long run benefit but the transition to a more service-oriented economy will remain gradual. Excess capacity is having a depressive impact on global prices particularly of basic materials such as steel.
So a shakeout would be good for the world as well as for China. But don’t expect economic logic to take precedence over interest in staying in power of the Communist Party and state enterprise bosses.