Asian Insights

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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.

2017 outlook – the year when the rubber hits the road – CAA Weekly


Key highlights from the CAA Weekly Table

  • Global economy: Signs of an uptick in the global capex cycle bode well for export-oriented Asian economies while deflationary pressures continue to ease.
  • Global geopolitics: Claimant countries are entrenching their military positions in the East and South China Sea even as US-China tensions rise.
  • Asian economies: The cyclical recovery currently underway in China is coming at the expense of long-term stability. India’s cash crunch has dampened economic activity, putting pressure on fiscal and monetary policy to shore up growth. In Singapore, stronger export growth could offset the lacklustre domestic economy in the coming year.
  • Asian politics: President Jokowi has skilfully prevented his rivals’ efforts to exploit Islamic extremism to undermine him. In the Philippines, President Duterte remains highly popular as his predecessors did in the early stage of their terms but this can change quickly.

US-China relations enter a more dangerous phase

  • China carried out a brilliant manoeuvre by boldly seizing a US naval vessel from under the nose of the US then swiftly agreeing to return the vessel to the US, albeit on its own terms.
  • The US does not take lightly to being humiliated and is likely to respond with stepped up surveillance activities in the region.
  • While some countries like Malaysia and the Philippines may continue to edge closer to China, other Asian powers who have differences with China such as Japan, South Korea, India and Vietnam are more likely to seek ways of containing a rising Chinese threat than cave in to China. One obvious way is enhanced security ties with the US.
  • China is likely to step up measures to gain more influence in East Asia by rewarding those countries who cooperate with China such as Malaysia and the Philippines, while penalizing those nations who have been wary of them such as Singapore. The situation will remain volatile and there are likely to be more incidents from time to time as China tests the US and carefully pushes the envelope further.

Five drivers of the global environment for Asia

  • The world in which Asian economies operate will be shaped by five key themes: Stronger global growth, higher import intensity, improved inflationary expectations, more financial turbulence and heightened political stresses.
  • Our best guess is that while many unpleasant things could happen, the worst risks can be contained.
  • We analyse the implications of these global drivers and domestic forces on Asia.