Asia’s developing economics have performed better than forecast earlier, according to the latest assessment by the Asian Development Bank in its mid-term review of the 2017 Asian Development Outlook. Some further slight improvement is forecast for 2018. However, much depends on external circumstances which have largely driven better-than-forecast 2017 performance.
Most notable has been a strong pickup in electronics exports after a weak 2016. This has been the main driver of the sharpest growth pick, Malaysia, where the forecast for GDP growth for the full year has been raised by a full percentage point to 5.4 percent, with electronics and palm oil exports as drivers plus consumption growth driven by higher wages.
Malaysia’s economy had appeared to shrug off negative effects of the sharp fall in the ringgit in 2015-16, though there was an inflation spike. Now stable, the currency seems unlikely to rebound much further unless the current account surplus surges. The ADB’s one and rather understated caveat looking ahead is the government deficit, which has surged to over 5 percent of GDP against an official target of 3 percent. Much of the government debt is foreign owned. A tax increase is necessary before long, the outlook warns.
Among Southeast Asian countries, Malaysia’s public finances look less healthy than most of its peers. Government deficits in the Philippines, Indonesia and Thailand are all around 2 percent of GDP as revenues have been rising almost fast enough to accommodate increased infrastructure spending. Progress in the Philippines in particular has brought investment up to 25 percent of GDP. This is not the result of a particularly strong 2017 but of a continuing surge since 2012. However, ambitious further spending on infrastructure will be dependent on revenues, and on progress in implementing public/private partnerships (PPPs).
In theory, according to the development outlook, the Philippines has an advanced framework for such projects, but few have been realized. Much too will depend on the progress of proposed tax reforms and whether the reforms have a positive net impact on revenues and investment. Private sector credit growth will also have to slow down after an 18 percent leap this year.
The development outlook is silent on the costs of rebuilding Marawi City after the recent battle but will inevitably set back other spending. It also avoids mentioning foreign investor disquiet over President Rodrigo Duterte’s drug war and threats of martial law. Meanwhile a continuing rise in remittances up 8.7 percent in the first half of 2017 is underpinning consumption and feeding through to the food processing and building materials sectors of manufacturing.
While manufacturing in the Philippines is performing adequately by its own modest standards, Indonesia’s manufacturing sector is a drag on an economy continuing to jog along at 5 percent growth. The development outlook’s 2017 forecast is unchanged at 5.1 percent despite a fall in the current account deficit and increased government spending on infrastructure which could push the budget deficit close to its 3 percent of GDP ceiling. Inflation remains low by local standards at 4 percent. Foreign investment has been flowing strongly but its impact on manufacturing remains modest and investment in mining is restrained by policy uncertainties.
The ADB outlook warns of the need to maintain flexible exchange rate policy to absorb possible shocks from international markets, be they commodity prices or interest rates.
Slightly higher GDP growth is forecast for 2018 partly to a spending boost from the Asian Games to be held in Jakarta and Palembang but there is not much sign of the 6.5-7.0 percent growth which Indonesia should be able to achieve.
Thailand should in principle be able to do a lot better than its 3.5 percent growth. Tourism, agricultural prices and other exports have done well and created a massive current account surplus of 8.5 percent of GDP this year and probably over 6 percent in 2018. The surplus has underpinned a strong currency and inflation below 1 percent. But private investment remains very weak, reflecting political and other uncertainties.
Although Thailand’s own population increase is now almost static, workers from Cambodia and Myanmar continue to undergird the labor force and Bangkok’s service industries to benefit from growth in Myanmar and Vietnam. But capital is leaving for better or safer projects elsewhere. Government infrastructure spending will continue to rise. The budget deficit, now 2.8 percent of GDP, has room to rise as government debt is only 32 percent of GDP. But, though the development outlook doesn’t say so, the traditionally conservative finance ministry is likely to keep a rein on spending regardless of the pronouncements of the political leaders.
Fiscal conservatism can also go too far in Singapore, suggests the ADB’s outlook in one of its rare critiques of government. It states: “policy makers should consider placing a high priority on reining in persistent current account surpluses, which are primarily the product of an unusually high savings rate. Even a modest adjustment to this perennial macroeconomic imbalance would boost domestic demand and raise the economy’s potential growth rate. To this end, the government has ample resources for fiscal expansion.”
Fiscal austerity however remains a necessity in Vietnam. This year the government deficit will be about 4 percent of GDP but with total debt over 65 percent there is scant room for a surge in public spending and a repeat of past cycles of inflation and devaluation.
There is pressure for more spending to offset what has been a slightly disappointing year so far, with GDP growth likely to be 6.3 percent against an earlier 6.5 percent projection with a small pickup in 2018. Vietnam has been hit by declining coal and oil output and prices partly offsetting strong manufacturing growth driven by foreign investment, and tourism. However both may ease off in 2018. The currency has been firm despite a small deterioration in the current account, and inflation is only around 4.5 percent.
Failure to resolve old non-performing loans remains a drag on the financial sector. There has been no consolidation in the banking sector and sale of equity by state firms has been slow despite a buoyant stock market driven in part by foreign portfolio flows.