2011 Oct 25
October 25, 2011

ASEAN losing steam: Moody’s Analytics

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The downbeat global environment will weigh on growth across all five ASEAN members

A research unit of Moody’s Investors Service said in a report that the deteriorating external situation will cap ASEAN growth below trend at about 4.8 per cent in 2011, and slightly weaker in 2012.

“Thai industry is growing at two speeds, with producers selling to the domestic market faring better than their export-dependent counterparts — textiles, clothing and electronics are feeling the pinch from a weaker global economy. The floods in Thailand, set to last another four to six weeks according to government estimates, are expected to shave up to 1 percentage point from 2011 GDP growth, pushing the forecast below 3 per cent on year (currently 3.7 per cent),” the report said.

The report, completed by Katrina Ell and Fred Gibson, associate economists, highlighted the impact in the second quarter from weaker global demand and supply chain disruptions following Japan’s natural disaster. In the quarter, Singapore was hardest hit, growing 0.9 per cent on year, after expanding 8.3 per cent in the March quarter. Electronics production was the main source of weakness as the disaster left Singaporean firms dependent on Japanese inputs unable to meet production targets. In the Philippines, industrial production was hit via its key electronics sector. In the four months following the catastrophe, production grew an average of 3.2 per cent on a year-ago basis, a marked slowdown from 14.5 per cent in the four months prior.

“Softer global growth will drag on export-oriented industries for the remainder of 2011 and well into 2012,” it noted.

ASEAN’s tech-dependent economies appear to be faring badly as the deteriorating global environment has crimped demand for consumer electronics. The Philippines is expected to grow 4.4 per cent in 2011, while Singapore will expand by 5 per cent. Meanwhile, Malaysia is on track for 4.3 per cent growth this year, weighed down by weaker demand for its export manufactures.

Indonesia is the bright spot in ASEAN. Unlike it neighbours, it is largely domestically driven and on track to grow 6.4 per cent in 2011 and 2012, the strongest pace in ASEAN. Growth has been driven by strong household expenditure, which accounts for half of GDP, and boosted by strong Asian demand for hard commodities, helped along by Japanese demand after the March earthquake.

With the bleak outlook, Moody’s Analytics view that monetary tightening is now off the cards.

Inflationary in ASEAN is moderating as global energy and food prices come off the boil. Meanwhile, moderating global conditions will flow through to slower production, employment and wages, reducing upward pricing pressure through 2012.

An upside risk to inflation is higher rice prices, a staple food in Asia. Flooding in Thailand—the world’s largest rice exporter—has damaged around 20 per cent of the country’s crops. The export price for Thai rice—the benchmark price in Asia—has increased 26 per cent since the end of May and is likely to rise further in the coming months as alternate supplies in India and Pakistan are unlikely to absorb the shortfall. With most ASEAN currencies depreciating since August amid heightened risk aversion, imported inflation could add to price pressures.

Further deterioration in the US or Europe would severely hamper growth in Southeast Asia. Moody’s Analytics has modeled the impact of a US and Europe growth shock, finding that a 1 per cent quarter-on-quarter contraction in the US and Europe immediately reduces ASEAN growth by 1.5 per cent quarter on quarter.

“This is not surprising given that most of ASEAN is heavily trade-dependent and Europe and the US are key export markets. Growth is further stunted via knock on effects from weaker Japanese and Chinese growth.”

In this environment, capital flight is likely. In the Philippines, sharp outflows of ‘hot money’ occurred in September, as investor funds were shifted to safer assets. Domestic lending conditions would also tighten as accessing offshore funds would become harder and interbank lending would likely dry up. This would crimp business and consumer spending.

“There is a sizable rebound in the periods following the initial shock, which could be attributed to a swift recovery in China lifting regional activity. The ASEAN policy response is also likely to lift growth. All governments have the ability to inject fiscal stimulus and reverse recent monetary tightening to rejuvenate domestic activity,” Moody’s Analytics said. –The Nation