Joseph Incalcaterra, Chief ASEAN Economist
ASEAN, the 10-member Association of South-East Asian Nations, turned 50 in 2017. Economic integration has gathered pace during those years, inflation volatility has reduced, and currency reserves plus current accounts have improved. For 2018, the policy focus is now squarely on growth.
The region can be divided into trade-sensitive economies – Singapore, Thailand and Malaysia - whose fate depends partly on the global technology and capital-expenditure cycles, and the domestic-demand driven economies (the Philippines and Indonesia) where national government policies will be more important.
We expect growth to decelerate in most members this year, but economic expansion should become broader based, particularly in Singapore (where we forecast growth to fall from 3.5% to 2.7%) and Thailand (down from 3.9% to 3.7%). This will reduce the ‘two-speed economy’ trend seen in the export-driven countries.
Indonesia, Malaysia and the Philippines saw domestic-demand fuelled growth in 2017, driven by private consumption or investment: this year growth should be 5.2%, 5.1% and 6.7% respectively. However, in Singapore and Thailand – economies plugged into Asia’s electronics and industrial supply chains – stockpiles jumped significantly as manufacturing production surged.
The region’s semiconductor industry has fewer large domestic players than Korea or Taiwan, but the supply chain is important for the export mix. The electronics ecosystem amassed since the 1970s allows ASEAN to benefit from the global consumer tech cycle. Electronic sales comprise about 30% of its exports – up to 50% in the Philippines.
The region is a link in the supply chains for both the big US and South Korean electronics companies. Singapore’s semiconductor foundries produce chips; firms in the Philippines, Malaysia and Thailand test and assemble them; Vietnam is a final assembler of smartphones and screens.
Singapore benefited most from last year’s electronics boom, with semiconductor production surging 60% and accounting for a third of the city-state’s growth, even though the sector employs only 1.5% of workers.
ASEAN supplies China’s demand for components. Most Chinese smartphone makers have postponed key product releases into 2018, so exports should remain strong. Recent capacity additions across the region, including Korean investment in Vietnam, are intended for the Chinese market.
Beijing is now backing semiconductor production at home – building six large memory foundries on the Mainland – but while this may affect future ASEAN demand, 2018 sales should not suffer.
Even if China’s demand for ASEAN commodities slows, policymakers there prefer Indonesia’s low-sulphur coal over domestic production and sales of palm-oil - ASEAN’s largest commodity export - should remain robust, given its use in a wide range of consumer goods.
Investment increasingly drives growth across ASEAN. The Philippines, Indonesia, and Thailand have benefited from government-funded infrastructure but public investment is becoming important in Singapore and Malaysia too.
ASEAN countries are now also striking infrastructure deals under China’s One Belt, One Road initiative. Construction should accelerate over the next two years, having a sizable impact on growth in Malaysia, Indonesia, the Philippines and, to a smaller extent, Thailand. Withdrawing subsidies has boosted inflation but consumer pressures have had little effect. That may mean Malaysia becomes the first ASEAN country to raise interest rates in 2018, followed by Singapore, and the Philippines. Indonesia, however, may still have scope for a further cut.
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Joseph Incalcaterra
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