Centennial Asia Insights
Centennial Asia Advisors' Global Insights provide a conclusive weekly update of key global economic and political developments, with a keen focus on the forward looking drivers of Asian economies. Our Insights provide subscribers with an assessment of how global trends affect Asia while also keeping abreast of the macroeconomic and geopolitical trends within Asia. We mainly track Asian emerging economies such as China, India/SAARC, ASEAN, Korea, Taiwan, and Hong Kong.
Key highlights from the CAA Weekly Table
Asian economic integration headed in a new direction
- Global economy: Latest data continues to suggest the US economy has fundamentally recovered. This could be cause for the Fed to tighten ahead of expectations.
- Geopolitics: Trump's first 10 days in office has brought with it proposed changes to trade, immigration and international relations. American credibility is on the line.
- Asian economies: In Asia, supportive policy actions remain key to long-term vibrancy.
- Asian politics: In India, political parties are gearing up for make-or-break legislative assembly elections.
Trade intensity leading to Asian expansion
- US President Donald Trump has officially withdrawn US from the TPP agreement. This wave of American isolationism is in stark contrast to the openness projected by China in recent weeks; China is poised to become increasingly influential in Asia.
- While existing TPP members can forge ahead and implement some sort of a TPP-lite deal without the US, countries may not be willing to open up politically sensitive sectors without commensurate economic returns that is access to the large US market.
- Export-oriented Asian economies could find it pragmatic and beneficial to establish closer economic ties with China and accept closer geostrategic relations too. Already, talks of accelerating the RCEP and even inviting China to participate in the TPP have begun.
Malaysia: Politics poses risk to upside potential
- A recovery in global demand led by the G3 advanced economies have fed into export upturns in trade-focused East Asian economies. Japan, South Korea, Taiwan and Hong Kong have seen the renewed vigour in global trade leading to more robust growth.
- Furthermore, other Asian countries, such as those in Southeast Asia, will also see economic expansion being underpinned by an export upswing, chiefly in electronics and other tech components.
- There are increasing signs that suggest Malaysia could enjoy a good upside surprise to growth. There are near-term hurdles that need to be overcome, however the overall fading of negatives will alleviate strains on growth.
- Consumer psychology looks to have turned and will bolster private spending. Agricultural prospects are looking better and encouragingly, Malaysia looks to be a clear winner from the upswing in the global tech cycle.
- The risks lie in politics. With little time to remedy economic pain leading up to the general elections, rising discontent amongst voters could bring mischievous elements, such as stoking racial tensions, into play.
The Trump Presidency - Tax reforms will be the first test for Asia
India: Don't count India out just yet
- The incoming Trump Administration will work with House Republicans to implement a tax reform package that could include a Border Adjustable Corporate Tax. This border tax, by taxing imports and subsidising exports, raises the risk of trade tensions and threatens the exports and foreign investment so vital to Asian economic development.
- In its current form, the proposed tax probably contravenes WTO regulations. As major trading nations are likely to counter with similar taxes of their own or other forms of retaliation, the growth of world trade could be compromised. Its other effects are difficult to predict but, at least initially, the US Dollar could strengthen and foreign investment flows to emerging economies could weaken.
Indonesia in 2017: Accumulation of positives enhances long-term growth prospects
- The demonetisation exercise in Nov 16 has disrupted economic activity across multiple sectors, with consumer spending and real estate activities hurt the most. While monetary easing is an option, what the authorities really need to do is to enact further administrative measures to ease the effects of the cash crunch.
- The damage to Prime Minister Modi’s political standing has been muted, so far. Modi has benefited from divisions within opposition parties and the ineffectiveness of the Congress party, the former ruling party. State assembly elections in Uttar Pradesh, India’s largest state, could well deliver Modi a substantial political success in early March, giving him the political capital to push much needed economic reforms.
- Following years of below-trend growth, Indonesia is on track to achieve higher and more sustainable growth rates under the judicious management of current President Joko Widodo (Jokowi). His three major policy initiatives are beginning to yield results, albeit slowly:
- The first is fiscal prudence which has provided the room for necessary infrastructure expenditure. The second is improved governance which has improved the nation’s business environment. And the third is the tackling of infrastructure bottlenecks, which has got off to a slow start but is beginning to move ahead.
- President Jokowi faces political challenges but has so far been able to contain them. He continues to strengthen the coalition backing him and will be able to push through more vital policy reforms in the future.
Key highlights from the CAA Weekly Table
2017 outlook - the year when the rubber hits the road
- Global geopolitics: North Korea has threatened an imminent ICBM test, possibly at around the date of Trump’s inauguration, in an early test of his mettle. Distrust deepens in the South China Sea as China conducts military drills off its Liaoning aircraft carrier.
- Asian economies: Further USD strength will produce more rounds of capital outflows and downward pressures on local currencies, prompting policymakers to expand measures to reverse the capital account liberalisation of recent years. The Chinese government is increasingly worried that a further spike up in the US Dollar would precipitate more capital outflows from China, which would drain liquidity and depress the value of the Yuan.
- Asian politics: Infighting which has plagued the Uttar Pradesh’s ruling Samajwadi party, could set Modi and the BJP up for political dominance in the series of upcoming elections.
Global economy shaking off malaise
- The coming year will see many of the pressures building up in global politics, finance and economy crystallise with potentially negative implications. We select three key areas for comment: President-elect Trump’s likely “America First” strategy, monetary policy tightening and China.
- First, "America First" policies will create trade tensions, hurting Asia, especially China.
- Second, accelerated monetary policy normalisation in the US will crystallise financial stresses such as weaker Asian currencies and dollar debt woes for overleveraged firms.
- Third, China will face its toughest year since 1989: debt dynamics are becoming more difficult while policy tools are less potent. The upcoming 19th Party Congress also means that political leaders will be distracted.
- Strengthening economies in the G3 economies and China have led to rising global demand which has in turn fed into higher trade flows and positive spillovers into Asia. Economic growth in export-oriented Asian economies will likely register upside surprises.
- Manufacturing PMIs point to a year-end fillip for export-oriented Asian economies such as Singapore, the Philippines, Vietnam and Thailand, even though Malaysia and Indonesia faltered. China’s performance moderated slightly but India reeled from the demonetisation move.
- While pockets of weakness exist, global demand is gaining steam, led by the ascendant US economy. The virtuous circle of higher global growth feeding into external demand and exports will likely be self-reinforcing, particularly as capital spending in the US picks up pace and deflationary fears dissipate.
Key highlights from the CAA Weekly Table
US-China relations enter a more dangerous phase
- Global economy: Signs of an uptick in the global capex cycle bode well for export-oriented Asian economies while deflationary pressures continue to ease.
- Global geopolitics: Claimant countries are entrenching their military positions in the East and South China Sea even as US-China tensions rise.
- Asian economies: The cyclical recovery currently underway in China is coming at the expense of long-term stability. India's cash crunch has dampened economic activity, putting pressure on fiscal and monetary policy to shore up growth. In Singapore, stronger export growth could offset the lacklustre domestic economy in the coming year.
- Asian politics: President Jokowi has skilfully prevented his rivals’ efforts to exploit Islamic extremism to undermine him. In the Philippines, President Duterte remains highly popular as his predecessors did in the early stage of their terms but this can change quickly.
Five drivers of the global environment for Asia
- China carried out a brilliant manoeuvre by boldly seizing a US naval vessel from under the nose of the US then swiftly agreeing to return the vessel to the US, albeit on its own terms.
- The US does not take lightly to being humiliated and is likely to respond with stepped up surveillance activities in the region.
- While some countries like Malaysia and the Philippines may continue to edge closer to China, other Asian powers who have differences with China such as Japan, South Korea, India and Vietnam are more likely to seek ways of containing a rising Chinese threat than cave in to China. One obvious way is enhanced security ties with the US.
- China is likely to step up measures to gain more influence in East Asia by rewarding those countries who cooperate with China such as Malaysia and the Philippines, while penalizing those nations who have been wary of them such as Singapore. The situation will remain volatile and there are likely to be more incidents from time to time as China tests the US and carefully pushes the envelope further.
- The world in which Asian economies operate will be shaped by five key themes: Stronger global growth, higher import intensity, improved inflationary expectations, more financial turbulence and heightened political stresses.
- Our best guess is that while many unpleasant things could happen, the worst risks can be contained.
- We analyse the implications of these global drivers and domestic forces on Asia.
Key highlights from the CAA Weekly Table
Rising import intensity sets global economy up for a better 2017
- Global economy: The US economy is strengthening smartly but the Fed could be caught behind the curve and be forced to hike rates faster than expected. This will cause abrupt capital outflows from Asian emerging markets, resulting in destabilising swings in currencies.
- Asian economies: Intensifying inflationary pressures in China will have spillovers into the world economy; Singapore could be the potential beneficiary of a export-led cyclical upturn even though structural issues still need to be resolved.
- US-China relations are at risk, as President-elect Trump lashed out at China again, questioning the need for the US to recognise the “One China” policy. This could stretch China’s initial even-handed approach to the US and compel it to consolidate its clout in East Asia further.
Myanmar: Rising challenges but limited capacity to respond
- The stop-start nature of the recovery in the global economy has resulted in desultory growth in world trade. However, as major economies embark on more resilient growth trajectories, import demand has embarked on an incipient turnaround.
- There are two reasons why we think this nascent upturn can be sustained. First, core capital goods orders are gradually gaining momentum and should garner pace as the US economy strengthens further. Second, US new orders for computer and electronic parts - a lead indicator for Asian manufactured exports - picking up pace after a number of months of deceleration.
- If this upturn in import growth persists, a corresponding increase in demand for Asian exports could provide an upside surprise to expectations for growth, especially in places like Singapore, Malaysia, Thailand, South Korea and Taiwan.
- Barely eight months after taking power, ASSK’s government is facing growing challenges on both political and economic fronts. These challenges reflect deeply entrenched weaknesses in the system which cannot be easily resolved.
- On the economic front, the lack of specific details in policymaking has resulted in businessmen delaying long-term investment decisions while inflation is also rising. Political and social challenges have also grown – the plight of the Rohingya Muslims has drawn international scrutiny and compromised Myanmar’s relations with its ASEAN neighbours while sullying ASSK’s reputation for upholding human rights and democracy.
- ASSK needs to a more effective economic policy framework to buttress confidence while cutting a deal with the still all-powerful military to smooth out security issues.