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Asian integration update: Some stagnation but outlook remains sanguine; Global economy: Brace for a bumpy ride – CAA Weekly

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Highlights from the CAA Weekly Table

  • Global trade regime: Trade integration efforts in Asia are humming along, with the CPTPP likely to take effect whereas RCEP is facing resistance from India. Meanwhile, Asian currencies have remained relatively resilient despite the sell-off in emerging market currencies. As Turkey and Argentina’s travails worsen, there will be more pressures, Asia’s currency resilience will remain intact if policy makers remain pro-active.
  • Geopolitics: Asia must expect more geopolitical contestation. Convinced now that the US is out to contain its rise, China will proceed to modernise its navy to challenge American maritime supremacy and US-China relations will remain testy for the foreseeable future.
  • Asian politics: President Xi has re-asserted his authority over the Chinese political elite but social unrest point to the enormity of the task ahead. Malaysia’s Dr. Mahathir has taken a publicly combative stance toward Chinese investments but both sides are likely to find an amicable solution. Domestically, Anwar’s plans for a comeback could set the stage for a tussle with Mahathir. In the Philippines, a series of bombings have fueled calls for an extension of martial law in Mindanao.

 Asian integration update: Some stagnation but outlook remains sanguine

  • Asian integration has deepened in the last 20 years but this progress has now plateaued. Intra-Asian trade and financial integration has decelerated even as intra-Asian flows of FDI and tourism climb higher. In 2015, intra-Asian tourism accounted for 80% of Asia’s total tourist arrivals, a trend that has persisted since 2006 (78%).
  • But much of ASEAN “integration” reflects Singapore’s centrality in economic flows in ASEAN. Trade with Singapore constituted 84% of intra-ASEAN trade in 1991, falling to 53% in 2017. Even more telling is that trade between Singapore and Malaysia made up 51% of intra-ASEAN trade in 1991, and comprised a significant 23% of intra-ASEAN trade in 2017.
  • Looking ahead, Asia fundamentally understands that economic integration facilitating trade and other associated flows remains crucial to its continued development and prosperity. A slew of economic projects in the works will undergird this.

Global economy: Brace for a bumpy ride

  • While global economic momentum is clearly slowing, the US is poised to go from strength to strength on the back of fiscal stimulus. A resurgent US economy buoys Asian exports, at the expense of financial stability as liquidity becomes scarcer and the Federal Reserve presses ahead with its monetary tightening.
  • Yet an erratic Trump Administration poses the biggest risk to Asian economies, as the embattled President resorts to unilateral imposition of tariffs to shore up his political base.
  • Policymakers in Asia have to thread carefully to mitigate the risks confronting their economies. Central bankers have to stay ahead of the curve while the government needs to rein in populist spending to retain the confidence of markets and investors.

The US poses two risks for Asia; Thailand: Solid growth, monetary tightening and greater political clarity; Indonesia: Budget 2019 – A mix of conservative and populist budgeting – CAA Weekly

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Highlights from the CAA Weekly Table

  • Geopolitics – watch North Korea: The US and South Korea are increasingly divided over the approach to North Korea. Moreover, the US-China trade spat gives China less incentive to enforce sanctions on North Korea and so reduces the US ability to pressure the North.
  • Global economy: Risks to oil prices are tilted firmly to the upside, with supply-side disruptions on the horizon. Asian economies could suffer from dearer oil prices through worsening external accounts and growing fiscal pressures.
  • Asian politics: In Malaysia, there is a growing suspicion of a rift between PM Mahathir and the man he has promised to hand power to, Anwar Ibrahim. The political honeymoon that prevailed after the May election is likely to end soon.

The US poses two risks for Asia

  • The political threat to the Trump presidency has grown sharply, making it more likely that Trump will seek a distraction as the noose tightens around him. Key flashpoints such as trade tensions and geopolitical tussles could be aggravated.
  • On monetary policy, the Fed’s potentially overly cautious stance could lead to a bigger shock later as we believe that there are more upside rather than downside risks to US growth and inflation. Failure to address this upside risk could lead to a much more abrupt shift in policy.

Thailand: Solid growth, monetary tightening and greater political clarity

  • Thailand’s economy looks to be on track for a solid year in 2018, even though 2H18 should see some moderation. Growth will be supported by robust exports, rising domestic demand and concerted government spending.
  • Consequently, the Bank of Thailand will probably have to start raising policy rates by end-2018.
  • On the political front, the timeline for the upcoming election is now clearer but the junta is going after the emerging political star Thanathorn. He and two party colleagues face police charges. Furthermore, Gen Prem, a stalwart of the royalist establishment, appears to be in declining health, causing the vacuum left by the late King Bhumibol to grow ever larger.

Indonesia: Budget 2019 – A mix of conservative and populist budgeting

  • President Jokowi submitted Budget 2019 to the parliament in his annual Independence Day address. The budget assumptions are more realistic, given modest estimates of growth while factoring in a weaker Rupiah and higher oil prices.
  • The budget prioritises stability above all else, given the narrower budget deficit, alongside curtailed spending growth in infrastructure investment. That said, the government is expanding social spending to shore up the incumbent’s political base ahead of the 2019 Presidential elections.
  • The fiscal stance remains mild, though further attempts to rein in spending remain possible if there is further depreciation of the Rupiah.