Asian Insights

Highlights from the CAA Weekly Table

• Global trade regime, Asia in the crosshairs next? The US is poised to press on with tariffs on USD200bn of Chinese goods, with President Trump upping the ante by threatening tariffs on an additional USD267bn of Chinese goods. If the US gets its way with Canada on NAFTA, it would feel its aggressive trade tactics had been vindicated and Asia would be next, with Japan most likely to come under pressure.
• Asian politics: In China, a rare about-face by the authorities to defer hikes to the social security levy in the face of popular protests betrayed a sense of insecurity within the government. In Thailand, the military Junta has been taking steps to extend its rule well after the 2019 election which is supposed to restore civilian rule.
• Asian economies: RCEP negotiations are stumbling over India’s stubborn refusal to budge on key issues. As for external demand, data from trade bellwethers such as Korea and Taiwan signal a strong export outlook. Sluggish GST revenues in India reignited concerns of fiscal slippage, in spite of buoyant growth. Indonesia’s government unveiled a slew of measures to stem the Rupiah’s fall but the measures are more reactive than proactive. In the Philippines, galloping inflation is chipping away at the authorities’ credibility but at least several fiscal reform packages have now cleared hurdles in the legislature. Buoyant domestic demand is driving the Thai economy, providing impetus for BOT to raise rates by end-2018.

Global economy: PMIs reveal sanguine outlook, albeit with moderation

• Two trends emerge from recent data. First, the global manufacturing economy remains in remarkably fine fettle despite trade war concerns while forward-looking indicators are positive as well. This upbeat outlook bodes well for Asian exporters.
• Second, the US economy is, if anything, too strong: the labour market is likely to tighten with spillovers into wage growth and inflation. It will not be long before Asian economies have to grapple with the fallout induced by a quicker pace of Fed monetary tightening.

Malaysia: The honeymoon is over, now for the governing

• As the post-election euphoria subsidies, political risks will rise. First, the underlying Anwar-Mahathir tensions could intensify, giving way to infighting within the ruling coalition and ramifications for policymaking and governance.
• Second, a slew of populist measures, such as the removal of GST and re-introduction of fuel subsidies, will weigh on the already-stretched public coffers.
• Third, the review of the affirmative action programme that has benefited the majority Bumiputera community could spark a backlash from the dominant Malay community which has been the primary beneficiary.
• Last, East Malaysian states will continue pressing for more rights, especially over the division of resource revenues.

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.