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Asian economic integration headed in a new direction; Political risks high in Malaysia – CAA Weekly


Key highlights from the CAA Weekly Table

  • 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.

Asian economic integration headed in a new direction

  • US President Donald Trump has officially withdrawn US from the TPP agreement.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.

Trade intensity leading to Asian expansion

  • 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.

Malaysia: Politics poses risk to upside potential

  • 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.

Trump and Asia; Growth prospects in India and Indonesia – CAA Weekly


The Trump Presidency – Tax reforms will be the first test for Asia

  • 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.

India: Don’t count India out just yet

  • 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.

Indonesia in 2017: Accumulation of positives enhances long-term growth prospects

  • 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.