Asian Insights

Highlights from the CAA Weekly Table

What has changed?

• Global economy: The partial deal between the US and China is of such limited scope that it will do little to remove the overhang of uncertainty. Business sentiment and thus capital spending will remain moribund, which will constrain global trade flows.
• Asian economies: Exports continue to contract across the region, with little sign of a recovery. Even in Malaysia which had remained resilient, industrial production is now weakening as exports falter. Despite the Bank of Thailand’s concerns over economic growth, a rate cut in 4Q19 is not likely as policymakers remain cautious, preferring to conserve policy space to act should growth weaken more severely.
• Asian political risks: Despite the upbeat press releases, the Xi–Modi summit does little to resolve longstanding grievances that hang over the Sino-Indian bilateral relationship. In Indonesia, optimism over the reform agenda is petering out as the President remains reluctant to acquiesce to protestors’ demands for him to reverse a controversial revision to the anti-corruption law. Meanwhile, some headway over the contentious CITIRA tax bill portends well for the tax package in 2020 in the Philippines but confirmation of the President’s ill-health could derail the cherished tax reform agenda.

Singapore: Riding out the cyclical downturn

• The Singapore economy essentially stagnated for a second quarter in succession. Looking ahead, the composition of growth will shift toward services as manufacturing continues to struggle and construction appears likely to underperform expectations.
• Possible downside risks to the outlook could emerge if small-and-medium enterprises (SMEs), the economy’s soft underbelly, lose their footing. Policy settings should thus be configured to lean heavily on fiscal rather than monetary or macroprudential loosening, and be enacted with a surgical focus to backstop the vulnerable SME sector.

Malaysia: Budget 2020 yields little by way of surprises

• First, the fiscal stance of Budget 2020 is contractionary, as the fiscal deficit held steady in absolute terms whereas the authorities expect growth to edge up marginally in 2020.
• Second, the authorities are persisting with fiscal consolidation efforts to build on gains from the previous budget. Revenue pressures are salient, as the authorities did not unveil any new taxes, save for the introduction of a new income tax band for the ultra-wealthy.
• Third, budget assumptions are reasonable, bolstering the government’s credibility. Growth will remain robust, while oil prices – a key determinant of petroleum-related revenues accounting for a fifth of total revenues – are unlikely to surprise on the upside.
• Fourth, the quality of spending edged up slightly as the authorities step up social and development spending to bridge the rural-urban divide and assuage fears of the prohibitively high cost of living by way of toll reductions and a targeted fuel subsidy scheme.
• Last, several measures were rolled out to placate the increasingly restive bumiputra community. Incentives for smallholders toiling in the commodity-related sectors, including palm oil, rubber and padi, also featured in Budget 2020.

Highlights from the CAA Weekly Table

What has changed?

• A glimmer of hope for regional trade agreements: There is somewhat more hope now that the ambitious RCEP agreement could be sealed, after India, the sole holdout, softened its position. Negotiations should conclude in November.
• Disconcerting political trends: President Jokowi’s moral authority has been diminished by protests and his weak response to them, thus endangering his reform agenda. In Malaysia, the ruling coalition is at risk as Premier Mahathir’s manoeuvres over succession deepen suspicions that he is not serious about ceding power as promised. In protest-hit Hong Kong, increasing violence, signals of Chinese impatience and deepening divisions suggest an inflexion point is near.
• Growing fears of slowdown in Asia, policy is responding slowly: The Modi government outlined more stimulus efforts to drum up animal spirits in India’s sluggish economy but a sustained recovery is not assured. There is little light at the end of the tunnel for the Philippines as far as tax reforms are concerned while policy rates are unlikely to budge in 4Q19. Broad-based weakness is evident in Thailand with buoyant tourism a sole bright spot.

Global economy: Emerging patterns disfavour Asia

• The global slowdown, mostly concentrated in manufacturing, is now spreading to the so-far resilient services sectors in the G3. This together with the deepening rout in the global tech cycle, point to moribund export prospects for Asia.
• Mounting resistance to monetary accommodation in the US and EU means that Asian central banks will have to tread cautiously in pursuing rate cuts to support their flagging economies.
• Despite the more uncertain backdrop, Asian economies still remain on good footing for now.

China: Outlook finely poised as political leaders grapple with challenges

• China took a step back to re-think strategy following the breakdown of talks on trade with the US in May. The political leadership has used the time wisely, successfully consolidating its political position whilst formulating a new strategy for the long-term which it is confident will place China in an even stronger position eventually.
• Nevertheless, our view is that the near-term risks to growth remain high. Should these risks materialise, the policymakers’ reaction function of doing just enough to prevent a collapse in aggregate demand will be inadequate.
• Barring a major shock to the economy, the economy will manage a controlled descent in the near-term as policy effectiveness has improved and the “buffers” which prevent risks from crystallising remain considerable.
• We are sanguine on the long-term strategy that the authorities are in the midst of devising. That said, if it is to effectively place China on a robust footing for the long-haul, policymakers need to formulate a more convincing response to China’s long-suffering deficiency that is its sub-par productivity performance.