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Analysis

Asean emerges as world growth engine

by William Baunton

Asean emerges as world growth engine

After 48 years in existence, 2015 will be the most significant year for the Association of Southeast Asian Nations when the Asean Economic Community is established at the end of the year. The AEC will form a common market, composed of the 10 member nations.

The single market will provide an unrestricted flow of goods, services, investment, skilled labour and freer flow of capital between members. This is a significant development for the world economy, and underlines that the Asian economy is driven by a wider group of nations than the largest economies, China, India, Japan and Korea.

Growth areas

Asean is now one of the world’s brightest regional growth areas. The main economic influence of the past 12 months has been the fall in oil prices, exerting a positive impact, particularly in lowering inflation. Problems over inflation had previously be seen as requiring additional central bank tightening to bring under control.

If Asean were a single economy, it would be the world’s seventh largest. The Asian Development Bank expects Asean’s GDP to grow 5.1% in 2015, well above the world average of 3.5%, illustrating how the region has acquired greater prominence.

The biggest economies within Asean are Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, together providing 95% of GDP in 2014.

Significant drop

The significant drop in oil prices has been mostly a welcome development for economies in Asean, reducing inflationary pressure and costs for local businesses, particularly in Thailand, Vietnam and the Philippines. Singapore entered a period of threatened deflation at the end of 2014, partly due to measures to cool the property market.

Low oil prices enabled Indonesia to scrap or adjust most of its fuel subsidies, making nearly €15bn available to spend in priority areas, such as infrastructure, as well as funding the budget deficit. Indonesia raised administered fuel prices in November, pushing the country’s inflation rate temporarily to its highest level in six years.

Biggest loser

Malaysia is the biggest loser from falling oil prices among the Asean group. Malaysia is a net exporter of oil, which makes up 30% of government revenue and 20% of GDP. The government has lowered its 2015 growth estimate to 4.5-5.5%. The fiscal deficit will be higher than forecast at 3.2% of GDP.

As in Indonesia, Malaysia has used falling oil prices to make much needed reforms of government fuel subsides.

Lower oil revenues have strengthened pressure on Malaysia to diversify its economy further away from undue dependence on energy, a move that many economists both inside and outside Malaysia see as overdue. Thailand has been struggling to recover, a result of weak domestic demand and exports. Growth last year was only around 1%, but is expected to pick up in 2015 to around 3%. Falling inflation caused by low oil prices allows the central bank to focus on stimulating growth by loosening monetary policy.

The Monetary Authority of Singapore, in its first unscheduled statement since 2001, announced it would allow the Singapore dollar to appreciate at a slower rate against a trade-weighted basket of currencies. The surprise move on 28 January brought repercussions throughout the region, for example by increasing pressure on the ringgit and the baht. However the MAS move was seen as necessary to help ward off the threat of deflation and ensure growth remains at 3%.

Welcome stimulus

The Philippines grew 6.1% in 2014, after growth of 5.4% in 2013, a welcome stimulus for the region. Cheaper oil will boost growth through 2015, pushing it towards the Manila government’s target of 6.5%.

Low oil prices will help the struggling agricultural sector and compounds the positive effects on growth of flourishing services businesses. Successful credit tightening by the central bank has eased inflation concerns, again aided by lower energy prices, allowing the central bank to concentrate on promoting growth.

Vietnam’s economy grew 6% in 2014 and 5.4% in 2013 thanks to rising manufacturing output and inward investment. The country is sustaining a healthy current account surplus, despite a weak banking sector and inefficient state-owned enterprises.

Rating agencies announced an improvement in Vietnam’s credit rating late in 2014, a timely boost enabling the government to raise $1bn on international capital markets. The government is targeting growth of 6.2% and inflation below 5% for 2015. 

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