Oil Prices not Delivering Asia Boom
The best efforts of central bankers in the West and Japan to re-ignite inflation have thus far failed. The rest of Asia, which once seemed partly immune to the problems of aging and indebted societies, is now looking far more vulnerable to deflationary forces. Low and still-falling interest rates should in principle benefit these countries but a more important factor now seems to be the excess of supply created in Asia, and elsewhere. China, the cause of so much comfort in the past, is both the direct and indirect cause of the discomfort.
East Asia divides fairly equally into two groups, the northern exporters of manufactured products and importers of commodities, and the southern exporters of commodities and recipients of large net tourist revenues. The one thing shared by almost all is a dependence on imported oil but that does not deliver equal benefits.
For the South, and Australia, gains from lower oil prices are being more than offset by the decline in other commodity prices. Thus even Thailand, with its heavy dependence on oil imports, is finding that the decline in prices of its rice and rubber exports offset much of that gain, and with a more direct impact on household incomes than in the case of oil. Nor is there much evidence that manufactured exports or tourism are offering alternative comfort.
One problem appears to be weak investment in export manufacturing in Thailand other than automobiles; another issue is the weakness of European and Russian currencies, which has a negative impact on a tourism sector that is already bruised by politics. China and India may be insufficient counterweights.
Another problem may be the massive investments abroad by major Thai companies such as the CP Group. Thailand does not face any significant debt problems in either the public or private sector, but near-term scope for growth is very limited, and that has political implications that could unnerve investors and consumers. An aging and inadequately educated population compounds the problem. In time, investment in railway projects will help boost growth but there are many implementation hurdles.
Malaysia Has its Own Problems
Malaysia at least does not have a demographic problem like Thailand but its terms of trade face much more strain. For sure, it is a net oil importer but more important are its exports of gas and palm oil. And price reform has drastically cut the cost of oil subsidies. A surfeit of foreign exchange reflected in a still large current account surplus have led to some massively wasteful investment, not merely by opaque state enterprises such as the 1Malaysia Development Berhad fund but also in overly ambitious projects like the Iskandar development zone, and marginal ventures overseas ventures involving state oil company Petronas. The current account surplus is now around 3 percent of GDP, low by standards since the 1997 Asian crisis, and not much of a cushion given that capital outflows, driven by racial politics, are endemic.
The impact of various issues has been partly reflected in a 5 percent fall in the Ringgit against the US dollar over the past year. Interest rates on government bonds remain attractive to international buyers but they are already large owners of Malaysian public debt and sentiment could change. There is also now less free Gulf oil money for investment or tourism and concerns for further Ringgit weakness are an obstacle.
Indonesia’s situation is similarly difficult looking ahead given its reliance on gas, coal and palm oil exports. For sure, foreign direct investor interest remains strong as does the fiscal position. The slashing of fuel subsidies has again given a boost to confidence. But the decline in the terms of trade will dampen growth in the medium term. Money for badly needed infrastructure remains available, not least from China, but implementation capacity remains a barrier.
Less abundant commodity profits in Malaysia and Indonesia inevitably have a negative impact on Singapore, despite its financial and higher-tech manufacturing, though India is of increasing importance. The property market is off the boil despite low interest rates and political pressures are crimping population expansion, for long a major factor in GDP growth. Overall for the region, bank lending looks likely to stall as banks are starting to nurse losses both on commodity loans and real estate in the region – and also in China.
The South’s losses are in principle the North’s gains but in reality that is not the case. With an already large trade surplus, China simply does not need the additions that the collapse in oil, coal and iron ore prices is delivering. These are only of very marginal impact on China’s problem of domestic debt resulting from over-fast past growth with excesses of low-yielding or loss-making investments in manufacturing, housing and infrastructure. There will be some badly needed gains for consumption but these could be offset by lower interest rates which help indebted enterprises at the expense of households.
Cold Comfort further North
Japan should be a huge beneficiary of low commodity prices but this compounds long-standing deflationary factors and as yet there is little sign of an uptick in consumption and the government is meeting resistance in efforts to encourage firms to raise wages. The weak yen, intended to spur price rises and exports, may help but in turn is putting pressure on the export engines of Korea and to a lesser degree Taiwan. It is also holding back further shift of manufacturing to Southeast Asia.
Korea is also finding it tougher to compete in Europe given the decline in the euro and while its external account and currency remain strong, high levels of household debt and zero workforce growth impede domestic demand. All told, Northeast Asia is comfortable but a reduced force in global growth.
On a different list are the Philippines and India, both countries given a large bonus by the oil price collapse while heavily reliant on services and remittances for foreign income. In both, the obstacles to rapid progress are ones of politics and governance, but at least these are no worse, and in the case of India, probably better than customary. Vietnam and Myanmar are also outliers for other reasons. Vietnam has had some losses from commodity prices but its manufactured export base continues to grow and low inflation and currency stability may finally have been achieved. It should be able to grow by 6 percent this year. Myanmar’s progress may still be slow given the needs, but it should continue at 7-8 percent regardless of international events or even prices for its oil and gas exports. All these four countries also happen to have favorable demographics, which could well prove the single most important factor in Asian growth in the coming decade.