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Indonesia: Jokowi still in the driver’s seat, with bright portents for reforms; Singapore: A prudent Budget; needed structural adjustments remain unmet


Highlights from the CAA Weekly Table:

  • Asian political risks: China is preparing legislative amendments that will in effect end the limited autonomy enjoyed by Hong Kong since July 1997. Geopolitical risks in East Asia are hotting up, with Taiwan the most salient risk. The situation in Myanmar is inching very close to the point where the military will crack down harshly on the protestors. Any one of these developments would serve to aggravate the current awkwardness in US-China relations.
  • The normalisation of economic activity continues apace in Asia. Another quarter of record-high profits in India is fuelling expectations of an upside surprise to growth. Malaysia has loosened mobility curbs across large swathes of the economy, as the authorities prepare to kickstart the inoculation drive. The Philippines is set to follow suit but bureaucratic hold-ups keep the vaccination drive in abeyance.
  • Policymakers are stepping up policy responses: Bank Indonesia cut rates, signalling its confidence in the Rupiah. The Duterte administration approved the creation of asset management companies that would help banks offload distressed assets and boost credit growth, which contracted for the first time in more than a decade amid tighter lending standards.

Indonesia: Jokowi still in the driver’s seat, with bright portents for reforms

  • Recent surveys point to President Jokowi’s continuing popularity, despite his government’s incoherent response to the pandemic. President Jokowi has put his significant political capital to work with tough attempts to roll back growing Islamisation in Indonesia.
  • The economic reform agenda clearly has legs. The draft implementing regulations for the omnibus bill on job creation virtually halves severance pay, which bodes well for the investment climate. Other planks of the reform agenda include the looming establishment of a land bank, the proposed revision of the negative investment list, bureaucratic reforms and tax hikes, all of which will provide a powerful cumulative impact to growth.

Singapore: A prudent Budget that misses the mark on required structural adjustments

  • Policy support will significantly taper over the course of the year, with the estimated fiscal impulse reaching a record negative of -6.1% of GDP in FY21 (FY20: 12.5% of GDP).
  • The optimal policy choice may have been to maintain a higher level of discretionary fiscal spending that catalyses a more robust recovery in the domestic-oriented sectors, as the economy awaits the pick-up in external demand.
  • The longer term policies outlined in the budget statement do not go far enough to address Singapore’s challenges. Structural adjustments are needed to reverse the economy’s poor record on productivity and innovation. But these involve policy choices such as the desired rate of labour force expansion, governance standards within the government-linked corporate (GLC) sector and top-down industrial policy to boost local enterprise including small and medium enterprises which the government does not seem prepared to make currently.

A populist turn in Asian policy making? India: Farmers’ protests could complicate any future reform agenda; Singapore: Sizable labour market slack likely despite growth rebound


Highlights from the CAA Weekly Table: what has changed?

  • Geopolitical risks: US-China ties are off to a rocky start, with Taiwan a flashpoint. Chinese air force intrusions into Taiwan’s airspace have forced the Biden Administration to make an early and forceful commitment to Taiwan’s defence. Expect several months where each side tests each other, creating episodic tensions but probably nothing more serious.
  • Asian economies: Global demand for the region’s exports remains intact despite new waves of virus outbreaks around the globe. As we warned, lockdowns were extended in Malaysia and Indonesia, whose central banks are likely to cut rates soon despite holding off in January. Indonesia’s reform agenda appears to be gaining traction: bureaucratic reforms are now expected, in addition to improved conditions for foreign investors announced earlier. Bumper investment commitments will burnish Singapore’s medium-term outlook.

A populist turn in Asian policy-making?

  • Elements of policy changes in Asia that reeked of populism have raised eyebrows. It is in China where such moves have aroused the greatest concerns, such as the crackdown on the near-monopolisation of online payment system by such fintech behemoths as Ant Financial.
  • A growing backlash against big tech is evident elsewhere too. Korean leaders are talking about getting platform companies to share profits with mom-and-pop stores. In Southeast Asia, there is growing traction for digital taxation as governments eye a share of the spoils from irreversible digitisation.
  • The trend will intensify: Policymakers fear an overly light-touch regulation of fintech will foster financial instability. Policymakers are also uncomfortable about the growing market and political power of big tech companies and are more conscious of the need to demonstrate that they are acting to address widening inequality.

India: Farmers’ protests could complicate any future reform agenda

  • The pushback against agrarian reforms is a symptom of a broader problem. The ruling BJP party was clearly caught off-guard by the tenacity of the farmers, which has upset their earlier calculation that the protests would fizzle out.
  • The government is now dithering on its response. It offered to suspend the reforms, only to walk back from its initial promise. This sets a poor precedent for future reforms.
  • Even Premier Modi’s stratospheric popularity has failed to calm tensions. This dearth of trust in the political class will plague future efforts to obtain popular buy-in for reforms.

Singapore: Sizable labour market slack despite growth rebound

  • We studied the historical relationship between output and unemployment (Okun’s law) in the Singapore context to forecast labour market outcomes in 2021.
  • Our estimates imply that the labour market would have avoided a “cliff” effect upon the expiration of policy support measures in the second quarter – a key downside risk that we had flagged early on. However, our forecasts still imply significant slack in the labour market by the end 2021 consistent with a modestly large negative output gap, that will pose headwinds to consumer spending for some time.