Impact of shifting composition of global demand on Asia Indonesia’s 2002 Budget; Ambitious consolidation plans hinge on growth

Highlights from the CAA Weekly Table:

Asian political risks: two potential flashpoints

• Even with a tiny parliamentary majority and a fractious coalition, Malaysia’s new prime minister Ismail Sabry could, with the right policies, eventually contain the pandemic and revive the economy. This will enable him to lead his alliance to victory in early general elections, likely sometime early next year. Whether that gives Malaysia long term political stability, however, is moot.
• Thailand, suffering from a renewed anti-government protests and a raging pandemic, is approaching a turning point. There are rumours of a coup, either to oust Prime Minister Prayuth or one carried by Prayuth himself to replace the elected government with a technocratic one that need not answer to troublesome political parties.

Asian economic prospects: 

• China’s President Xi is seeking a substantial redefinition of its political economy. Instead of dressing up a capitalistic economy with enough socialism to make things look ideologically proper, Xi seems to want to revive the Communist Party’s original mission: the defence of the downtrodden who were the peasants in the past but now include lower income urban workers and the rural poor. Expect many unsettling policy turns as a result.
• External conditions are helping the region. Strong exports are supporting Indonesian growth while keeping its current account deficit low. The Philippines, on the other hand, has been helped by revived growth in foreign worker remittances.

Impact of shifting composition of global demand on Asia

• The outlook for Asian exports hinges upon two questions: is the current growth of global goods spending sustainable? And, how would the shift in composition of global demand shifts from goods to services impact Asia?
• We see the pace of global goods trade decelerating as the recovery in the developed economies matures and spending shifts back to services from goods. However, our analysis shows that tech-related goods spending is likely to remain above-trend.
• The net impact will be slower growth in demand for Asian exports. But, the continued strength in demand for tech goods will support the crop of Asian economies that are deeply integrated in regional tech supply chains and which serve final demand generated by advanced economy goods spending e.g., China, Malaysia, Philippines, Vietnam. Singapore.

Indonesia’s 2002 Budget: Ambitious consolidation plans hinge on growth

• President Joko Widodo’s 2022 budget proposal focused on stability. He promised an early return to the previous budget deficit cap. The planned budget will be slightly contractionary in its impact on demand and its assumptions and planned spending are conservative.
• But the budget plan also showed up deep weaknesses in Indonesia’s fiscal position. Its tax to GDP ratio fell to a record-low of 8.3% in 2020 and is set to remain low.
• More positively, hints were dropped of a broadening reform agenda that goes beyond just infrastructure and human capital development to include fiscal reforms.

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