Asian Insights

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Asia: Rising headline inflation but core inflation to remain benign; Singapore’s post-pandemic economic strategy could have gone further

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Highlights from the CAA Weekly Table:

  • Asian political risks – watch Malaysia: There is rising resentment against the political class in Malaysia. With the tinder dry, a surge in COVID infections that could strain the healthcare system to breaking point or the embattled leadership’s manoeuvrings to prolong its rule could be the spark for instability.
  • Asian economies: Lead indicators give us more confidence in our call for more upside in global demand for Asian exports. China’s growth momentum remains solid despite disappointing April data. With India’s recovery looking shakier, our nowcast forecast for 1Q21 growth has been revised down to just 1.4%. Indonesia, Thailand and the Philippines continue to struggle with the pandemic but some tentative positive signs are emerging.

Asia: Rising headline inflation but core inflation remains benign

  • While headline inflation could remain elevated in the near term on higher raw material prices and supply bottlenecks, we still see a large amount of regional spare capacity keeping core inflation relatively benign.
  • There are relatively higher upside risks to inflation in China where the output gap has closed and the extent of pass-through of cost increases is greatest, even as the extent of input cost inflation remains comparatively modest.
  • Rising input costs are most salient in Taiwan, Malaysia and Vietnam but weak pass-through associated with firms’ pricing power limits the risk of a surge in inflation there.
  • Higher food and energy prices later in 2021 could raise headline inflation in India and Thailand, both of which feature relatively high food and energy weights in their CPI baskets.

Singapore’s post-pandemic economic strategy could have gone further

  • The Singapore government has lived up to its reputation for forward-thinking by issuing a report on its economic development strategy for the post-COVID future.
  • There are some strong points in the Emerging Stronger Taskforce report. There is a welcome bias towards action that can yield near-term gains. Its mobilisation of economy-wide resources towards promising opportunities of the future raises the likelihood of discovering commercially viable products and solutions. Some promising areas of likely development have been identified. Singapore will be making a big push to be a leading carbon trading and services hub. The AgriTech sector will also be a focus of government support.
  • That said, the report suffers from an inadequate examination of the Singapore economy’s structural weaknesses. Some of the big issues confronting Singapore are not addressed: What is the optimal rate of inward migration in Singapore? Why have innovation outcomes been so disappointing despite the massive inputs mobilised for innovation? Why are indigenous companies performing so poorly? What can be done about high business costs?
  • This raises the question: Without these critical challenges being addressed, can its earnest and well-meaning recommendations really produce the best outcomes for Singapore?

Asian political risks continue to creep up; Taking stock of the Philippines with 1 year left on Duterte’s term

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Highlights from the CAA Weekly Table:

  • COVID and Asia: The renewed surge in infections will hurt economic activity but the impact will vary. Even as there are tentative signs that the worst is over in India, it will be a while before the pandemic is brought under control there: the near term prospects therefore remain dull. Similarly, Malaysia is struggling to cope with renewed infections. In Indonesia and the Philippines, economic activity shows signs of rebounding – but tepidly and off a very low base. Singapore’s new lockdown will, however, have limited downside effects as most economic activity will continue and external demand will help offset any domestic weakness.
  • China confronts short term and long term policy dilemmas: We disagree with the view that recent monetary data shows that monetary policy is tightening. Weak credit demand rather than a policy-induced deceleration in credit supply is at the root of the slower monetary growth. China’s recently released census will, we believe, force quicker policy changes in areas where China’s leaders had preferred to move slowly. The demographic headwinds have turned awkward more quickly than they had anticipated. Economic growth need not decelerate markedly so long as successful efforts are made to boost total factor productivity. But this will entail a slew of possibly unpopular changes such as raising the retirement age, faster reforms to ease the plight of migrant workers and widening the fiscal base.

Asian political risks continue to creep up:

Conditions are falling into place for potential political frictions in two areas – territorial disputes and country-specific risks, particularly in Thailand.

  • Territorial disputes: China has increased the number of its “fishing vessels” in Philippine-claimed waters, putting its relationship with the Philippines at risk, especially when President Duterte finishes his term next year. China’s reported occupation of a swathe of Bhutanese territory, if true, will be resisted by India which is Bhutan’s protector.
  • Thailand – rumours about the health of the King cannot be verified with certainty but there is reason to believe that he has not been well. Given the more prominent role the King has taken in the nation’s politics, a health crisis would affect political stability. This is particularly the case given the lack of clarity on royal succession.

Taking stock of the Philippines with 1 year left on Duterte’s term

  • Duterte has been a controversial president in many ways but his economics team has done a sterling job. The tax base has been decisively widened, which has allowed a sizeable increase in infrastructure spending, which will help the country overcome a major constraint on growth. Some other supply side reforms have been made including easing limits on foreign investment.
  • However, progress has stalled, exposing some of the continued weaknesses in the country’s political economy. Resistance in the Senate to needed reforms is one example.
  • Duterte’s political approach has, however, weakened national institutions and undermined democratic practices. This could compromise some of the gains that the country has made.