Asia Pacific Economic Outlook - deloitte.com

Asia Pacific Economic Outlook2nd Quarter 2016

MalaysiaTaiwanThailandVietnamRealty check in Asia

Cover illustration by Jessica McCourt

Contact informationGlobal Economics TeamRamani Moses Deloitte Services LPIndia Tel: +1 615 718 5204E-mail: [email protected]

Dr. Ira KalishDeloitte Touche Tohmatsu LimitedUSATel: +1.213.688.4765E-mail: [email protected]

Dr. Rumki MajumdarDeloitte Research Deloitte Services LPIndiaTel: +1 615 209 4090E-mail: [email protected]

Lester GunnionDeloitte ResearchDeloitte Services LPIndiaTel: +1 615 718 8559E-mail: [email protected]

Akrur BaruaDeloitte Research Deloitte Services LP IndiaTel: +1 678 299 9766E-mail: [email protected]

Chinese Services Group Leaders Global Chinese Services Group Lawrence Chia Deloitte Touche Tohmatsu Limited China Tel: +86 10 8520 7758 E-mail: [email protected] US Chinese Services Group

Mark Robinson Deloitte Touche Tohmatsu LimitedCanada Tel: +1 416 601 6065E-mail: [email protected]

Japanese Services Group Leaders Global Japanese Services Group Hitoshi Matsumoto Deloitte Touche Tohmatsu LLC Japan Tel: +09 09 688 8396 E-mail: [email protected] Japanese Services Group

John Jeffrey Deloitte LLP USA Tel: +1 212 436 3061 E-mail: [email protected]

Global Industry LeadersConsumer BusinessAntoine de RiedmattenDeloitte Touche Tohmatsu LimitedFranceTel: +33.1.55.61.21.97E-mail: [email protected]

Energy & ResourcesCarl HughesDeloitte Touche Tohmatsu LimitedUKTel: +44.20.7007.0858E-mail: [email protected]

Financial ServicesChris HarveyDeloitte LLPUK Tel: +44.20.7007.1829E-mail: [email protected]

Life Sciences & Health CarePete MooneyDeloitte Touche Tohmatsu LimitedUSATel: +1.617.437.2933E-mail: [email protected]

ManufacturingTim HanleyDeloitte Touche Tohmatsu LimitedUSATel: +1.414.977.2520E-mail: [email protected]

Public SectorPaul MacmillanDeloitte Touch Tohmatsu LimitedCanadaTel: +1.416.874.4203E-mail: [email protected]

Telecommunications, Media & TechnologyJolyon BarkerDeloitte & Touche LLP UKTel: +44 20 7007 1818E-mail: [email protected]

Malaysia: Cautiously walking the tightrope | 3

Taiwan: In the shadow of the Chinese slowdown | 7

Thailand: Getting back on its feet | 11

Vietnam: In the fast lane | 19

Realty check in Asia: The heat is on | 27

About the authors | 32

Additional resources | 33

ContentsPublic SectorPaul MacmillanDeloitte Touch Tohmatsu LimitedCanadaTel: +1.416.874.4203E-mail: [email protected]

Telecommunications, Media & TechnologyJolyon BarkerDeloitte & Touche LLP UKTel: +44 20 7007 1818E-mail: [email protected]

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Asia Pacific Economic Outlook

The Malaysian economy continues to decline. Despite stable growth momentum, global uncertainties and political developments and weak domestic fundamentals are weighing on the economic outlook.

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Q2 2016

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MalaysiaCautiously walking the tightrope

By Dr. Rumki Majumdar

WHEN we last took a look at the Malaysian economy, the country was reeling under the impact of falling oil prices, a depreciating currency,

and rising inflation. The situation has continued to significantly decline since. Although the growth momentum has been stable so far, global uncertain-ties, together with political developments and weaker domestic fundamentals, are weighing on the overall economic outlook. A predominance of downside risks has prompted a few credit rating agencies to cut Malaysia’s sovereign ratings outlook.

Concerns from all corners

Government revenues from oil and gas income have been under pressure for some time now due to falling global oil prices. Any further descent in prices, and the government will likely miss its fiscal deficit target of 3.1 percent of GDP, which is required to rein in public debt, this year. At the same time, falling export receipts of energy producers are causing the current account surplus to shrink. In addition, global events, such as the economic slowdown in China, the appreciation of the US dollar, and the recent Fed funds rate hike in the United States, have led to large capital outflows, sharp cur-rency depreciation, and fall in reserves in Malaysia.

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Alongside external shocks, domestic funda-mentals and imbalances pose significant risks to economic growth. Malaysia’s public debt has been on the rise, and debt affordability has seen limited improvements despite the govern-ment’s recent initiatives for fiscal consolidation. Although the goods and services tax (GST), implemented as a part of fiscal reforms, is expected to improve the government’s revenue, its impact on consumption demand has been adverse so far.

Private consumption has been slowing, and consumer confidence is waning in response to rising prices stemming from higher taxes and

imported inflation, falling government subsi-dies, declining personal financing by non-bank lenders, and softening of the labor market. In addition, the household sector is highly leveraged—its debt-to-GDP ratio has almost doubled between 2008 and 2014. Favorable credit conditions reinforcing high consumer demand led to a ballooning of household debt during this period.

Falling demand for exports and a depreciat-ing domestic currency have adversely impacted business sentiments. Consequently, growth in private fixed expenditures has shown signs of vulnerability. The industrial production

index increased 1.7 percent year over year in November 2015, the slowest rate of growth since July 2014. Growth revived in the following month, but only modestly. Weak global demand and a decline in mining production were the primary factors behind poor growth.

Inflation has been inching up, primarily due to the impact of the GST. That said, even as the GST effect tapers over time in the near future, inflation is expected to remain high due to the depreciating ringgit and the impending rise in minimum wages effective from July 2016.

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Q2 2016

A more realistic budget

The sharp decline in government revenues due to falling oil prices, strong capital out-flows, and depreciating currency prompted the government to announce a revised budget on January 28. It announced a series of restructur-ing measures that are likely to save the govern-ment 9 billion ringgit (US $2.1 billion). Several development projects have now been repriori-tized in order to cut government expenses. The government has announced lower employee pension contributions and tax relief for low-income earners in order to boost consumer spending—the key driver of economic growth. At the same time, it has assured that there will

be no capital controls to check domestic cur-rency depreciation, which shows the govern-ment’s confidence in the economy.

The measures announced by the government in the revised budget were necessary, given the changing economic conditions and external uncertainties. However, these actions may not be sufficient to contain the fiscal deficit within the target range. Downside risks to growth are significant and are impacting economic outlook. That said, the government has made a sincere effort to consolidate its expenses for this year and to present a more realistic budget as global uncertainties continue to challenge eco-nomic growth. This will likely boost investors’ confidence during these troubled times.

Private consumption has been slowing, and consumer confidence is waning in response to rising prices stemming from higher taxes and imported inflation, falling government subsidies, declining personal financing by non-bank lenders, and softening of the labor market.

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A drop in Chinese exports is hurting Taiwan, as many of China’s exported products are assembled from components manufactured in other East Asian countries, including Taiwan. For 2016, the question is whether domestic demand will offset weak exports and how closely the recently elected government will work with the mainland.

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Q2 2016

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TaiwanIn the shadow of the Chinese slowdown

By Ira Kalish

TWO of the biggest issues facing Taiwan’s economy are the slowdown in China and the results of the recent election in Taiwan.

First, consider the Chinese economy. The slowdown of China’s growth has involved a significant deterioration of Chinese exports. In February of 2016, for example, dollar-denominated exports from China were down 25 percent from a year earlier. Many finished products that are exported from China involve assembly of components that are made in other East Asian countries, including Taiwan. This is especially true of electronic components. Thus, weakness of Chinese exports hurts Taiwanese manufacturers. Indeed dollar-denominated Taiwanese exports were down 13 percent in January versus a year earlier, the 12th consecutive month of decline. This was disproportionately due to a drop in exports to China.

Despite trade headwinds, the Taiwanese economy is rebounding following a brief recession in the middle of 2015. The economy grew again in the fourth quarter. This was due to strong growth of consumer spending as well as modest growth of business investment. For 2016, the question will be whether strengthening domestic demand will offset continued weakness of exports. Consumer demand should be helped by a modest increase in wages combined with low inflation, rising employ-ment, and rising confidence. Indeed after a long period of stagnation, real wages are starting to rise, which could indeed set the stage for a consumer-led recovery. Another question is whether export weakness is bottoming. Moderate demand growth in the United States could play a role in this. On the positive side, the latest purchasing managers’ indices for Taiwanese manufacturing have improved

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since mid-2015, suggesting that the decline in the manufacturing sector is abating. In addi-tion, the rebound in investment in the second half of 2015 bodes well for increased manufac-turing output in 2016. Thus, a reasonable fore-cast is modest but positive economic growth in 2016.

Still, there are risks to the Taiwanese economy, largely stemming from China. One risk is that China’s slowdown becomes deeper.

That would hurt demand for Taiwanese prod-ucts. It could also hurt Taiwanese banks as Chinese companies are the largest foreign debtors of Taiwanese banks. Another risk is that an excessive tightening of monetary policy by the US Federal Reserve hurts global economic growth, suppresses global asset prices, and weakens global credit market activity. In such a scenario, demand for Taiwanese goods would be damaged.

Despite trade headwinds, the Taiwanese economy is rebounding following a brief recession in the middle of 2015.

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Q2 2016

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Q2 2016

Thailand seems to be recovering from the lackluster performance of 2014, though questions remain with regard to the rising tide of financial market volatility, slower growth in other Asian countries, and the results of a referendum on a new constitution.

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ThailandGetting back on its feet

By Akrur Barua

THAILAND’S economy bounced back modestly last year after a lackluster 2014. While a much-needed fiscal stimulus helped, a swing in investments

appears to have dispelled some of the clouds of political uncertainty. Tourists also flocked back to the country, with arrivals going up by 20.5 percent. There are, however, some concerns as the economy charts its course this year. For example, the rising tide of global financial market volatility is likely to keep Thai policymakers on their toes. Slower growth in other Asian countries with strong links to Thailand through demand and supply chains could also put a spanner in the works. Most importantly, a referendum on a new constitution will be keenly watched, both within Thailand and outside. Investors, in particular, will be hop-ing that sound economics triumphs over uncertain politics in the years ahead. From recent trends, it appears their hopes may materialize.

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Q2 2016

The economy stays on track in Q4

Real GDP grew by 2.8 percent year over year in Q4 2015, marginally lower than the previous quarter’s rise (see figure 1). This took annual GDP growth for 2015 to 2.8 percent, the highest in three years. The economy benefitted from strong growth in government spending in Q4 (4.8 percent) due to fiscal stimulus measures. Investments also revived during the quarter, with gross fixed capital formation rising by 9.4 percent, the highest rate of growth in three quarters. Private consumption—a key growth driver in recent years—also accelerated in Q4 to

2.5 percent from 1.8 percent in Q3. Consumers appear to be benefitting from real income gains due to declining prices. However, with house-hold debt high, consumers are likely to be more cautious than in the heady days of the credit-fueled growth of 2010–12.

GDP growth would have been higher had it not been for the external sector. A slowdown in economic growth in key markets continued to weigh on Thailand’s exports in Q4. Exports contracted by 3.5 percent, the first contrac-tion since Q3 2014 and the most severe since Q3 2009.

Slow growth in new markets is pulling exports down

Exports show no signs of recovering soon, with merchandise exports declining by 8.9 percent. Sales to major markets like Japan, the Association of South East Asian Nations (ASEAN), and the United States have all suf-fered in recent times (see figure 2). It is inter-esting to note that Thailand’s export markets have changed over time, shifting from the United States and the European Union to Asian markets like Japan, ASEAN, and China (see figure 3). Aiding this transformation is

Figure 1. Real GDP expanded at a moderate pace in Q4 despite a contraction in exports

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It is interesting to note that Thailand’s export markets have changed over time, shifting from the United States and the European Union to Asian markets like Japan, ASEAN, and China.

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Thailand’s rise as a manufacturing hub (like for automakers), more integration within ASEAN, and the growing economic might of China. Strong growth in these markets helped shield Thailand’s exports when growth in the United States and the European Union slowed down after 2009. Now, with Asia also showing signs of strain, Thai exports are on shakier ground. Moreover, with production linkages spread across Asia through global value chains, any dent in demand in one country is likely to impact production and investments across the region, including Thailand.

With the baht depreciating, one would have expected Thailand’s exports to be more competitive. However, major Asian currencies,

including those of key export competitors, have all been hit since 2015 (see figure 4), thereby nullifying any gain in competitiveness in Thailand’s exports due to a weak currency.

With exports declining, manufacturing has been hit

Slowing exports also had implications for the manufacturing sector. For example, as mer-chandise exports fell in January, so did manu-facturing output (see figure 5). With exports and manufacturing under pressure, capacity utilization has also edged down. In January, capacity utilization was 63.2 percent, nearly 10 percentage points lower than three years before.

Figure 2. Merchandise exports fell in January at the sharpest pace since November 2011

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Figure 3. Changing shares of key markets in Thailand’s merchandise exports

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Q2 2016

Less capacity utilization will, in turn, weigh on investment growth. Although, at 4.7 percent, annual growth in gross fixed capital formation in 2015 was the highest in three years, it was much lower than in 2012 (10.7 percent).

Any succor from housing?

Construction rebounded in 2015 (15.8 percent) after contracting in 2014. Housing, however, is a different story despite a 39.8 percent year-over-year rise in residential construction permits in January. It is still too early to predict a strong housing sector in 2016 (see figure 6). House prices have gone up by just 0.4 percent since the beginning of 2015 after rising 26.7 percent between January 2009 and January 2015. While slow growth in prices will make housing more affordable, demand also depends on sustainable improvements in household income and wealth. As economic growth slowed in 2013–14, growth in nominal personal disposable income also went down (see figure 7).

Figure 4. The baht has weakened against the dollar, but so have other Asian currencies

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Figure 5. Manufacturing output and capacity utilization are under pressure

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Consumers will likely benefit from low inflation and a strong labor market

Fortunately for Thailand’s consumers, the labor market is healthy with unemployment (non-seasonally adjusted) at less than 1 percent in January 2016. But, despite a tight labor mar-ket, wage gains have slowed down (see figure 8). Instead, consumers are benefitting from real income gains due to declining prices. Headline inflation has been negative since December 2014, primarily due to declining prices of energy and raw food (see figure 9).

Despite negative inflation, it isn’t deflation

One might worry that the current trend of declining consumer prices is deflationary. However, demand and GDP growth trends reject that notion. The labor market is also firm. And although capacity utilization is down since 2012–13, the figures are still enough to quash any concerns of deflation. Most impor-tantly, core inflation has remained positive during this period. No wonder then that the Bank of Thailand (BOT) kept interest rates on hold in its latest meeting, continuing with its accommodative stance, but not cutting rates further. The central bank expects consumer

Figure 6. Growth in cement consumption and house prices indicates incipient growth in the housing sector

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Figure 7. Households are still grappling with high debt

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Q2 2016

prices to firm up in 2016 as energy prices bot-tom out. However, it is unlikely that inflation will hit BOT’s target of 2.5 percent this year. The BOT’s greater worries stem from external factors, including the impact of any further weakening in China and the interest rate path in the United States. The BOT will be hop-ing that the rest of the year will be better than the beginning.

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Figure 8. Average wage growth for both government and public sector employees slowed down in 2015


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Figure 9. Low inflation will aid consumers through real income gains


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Q2 2016

Vietnam’s growth is powered by foreign direct investment, and free trade agreements as well as the prospects offered by the Trans-Pacific Partnership are likely to keep foreign investors interested in the country.

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VietnamIn the fast lane

By Lester Gunnion

VIETNAM is experiencing the quickest rate of growth in real GDP since the onset of the global financial crisis. Domestic demand has recovered in a

favorable environment of low inflation, accommodative monetary policy, and consumer confidence, and is likely to stay robust. Furthermore, overall growth has been driven by strength in export-oriented manufacturing, which contin-ues to be powered by foreign direct investment (FDI). Recently signed free trade agreements (FTAs) as well as the prospects offered by the Trans-Pacific Partnership (TPP) are likely to keep Vietnam an attractive destination for FDI in the medium term. This is likely to further augment the manufacturing sector. These factors are expected to keep Vietnam growing at a quick pace in the near to medium term despite challenges such as lack of industrial depth and distress in the banking sector.

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Source: General Statistics Office of Vietnam/Haver Analytics, Deloitte Services LP economic analysis. Graphic: Deloitte University Press | DUPress.com

Figure 2. Growth in total demand has been driven primarily by private consumption and gross fixed capital formation

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Note: The sector has been driven by buoyant manufacturing. Services have also grown at a healthy pace. Agriculture has been less impressive. Though the agriculture sector contributes only 17 percent of GDP, it employs 46 percent of the workforce.

Agriculture Industry & construftion Services

Figure 1. Industry and construction has been a key driver of growth in the previous couple of years5

Sector-wise growth (% change y-o-y)

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Q2 2016

Vietnam’s economic performance in 2015 was robust

Vietnam’s real GDP grew 6.7 percent in 2015, surpassing the target growth rate of 6.2 percent. The industry and construction sector was the primary driving force behind real GDP growth in 2015—it grew 9.6 percent, contrib-uting 3.2 percentage points to overall growth. Industry was bolstered by manufacturing, which grew 10.6 percent from a year ago, while construction grew 10.8 percent, the highest rate of growth in the last five years.1 Both manufac-turing and construction in Vietnam have been buoyed by the continued inflow of FDI.

Services also registered a healthy growth rate of 6.3 percent, contributing 2.4 percentage points to overall growth. Within the services sector, wholesale, retail, and repair of motor vehicles grew 9.0 percent while finance, bank-ing, and insurance grew 7.4 percent.2 Services, along with industry and construction, con-stitute a majority of Vietnam’s economy—approximately 40 percent and 33 percent of GDP respectively in 2015.3 Agriculture, which forms 17 percent of GDP, grew 2.4 percent in 2015 and contributed 0.4 percentage points to overall growth.4

From an expenditure point of view, final consumption, both public and private, reg-istered robust growth in 2015 (9.1 percent

Malaysia PhilippinesThailand VietnamIndonesia

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Figure 3. The manufacturing sector in Vietnam has gown quicker than its South East Asian peers

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Figure 4. Vietnam’s major export-oriented manufacturing sub-sectors have experienced strong growth

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compared to 2014). Gross capital formation was up 9.0 percent from the previous year but net exports continued to be a drag on overall growth for a second consecutive year.6

Total demand—final consumption plus gross capital formation—has picked up pace amid low inflation (below 1 percent in 2015) and an accommodative monetary policy. This trend is likely to continue through the near term.

Vietnam’s manufacturing sector has been a shining star

Vietnam is steadily emerging as a hub for manufacturing. Over the last decade, large global manufacturing companies have set up production centers in Vietnam, and since then, have built upon their initial investment. Indeed, the Vietnamese economy has continued to attract a steady inflow of foreign direct invest-ment (FDI)—$14.5 billion was disbursed in 2015, a 17.4 percent increase over the previ-ous year.7 Much of the investment in Vietnam has been in the processing and manufacturing sector (accounting for 67 percent of the total capital for investment in 2015).8 This comes at a time when manufacturing in competitor econo-mies in South East Asia are under duress due to a slowdown in China and weakness in global demand. However, the manufacturing sector in

Figure 5. Vietnam’s primary export destinations are the United States and the European Union, while China and Korea are Vietnam’s primary sources of imports

Source: General Statistics Office of Vietnam/Haver Analytics, Deloitte Services LP economic analysis.

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Graphic: Deloitte University Press | DUPress.com

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Q2 2016

Vietnam has been an exception—registering an average monthly year-over-year growth rate of almost 10 percent over the last four years.9

The performance of major sub-sectors—electronics and apparel—has been notable. The average year-over-year growth in the index for apparel manufacturing over the last 12 months is 8.7 percent.10 For computers, electronics, and optical products manufacturing, it stands at 23.9 percent.11

One significant factor that makes Vietnam a bright prospect for foreign investment is its lower wages. In 2013, the average monthly wage in Vietnam was $197, approximately half that in Thailand ($391) and less than a third of the wages in China ($613).12 This factor, along with the fact that China is moving away from large-volume manufacturing, makes Vietnam an attractive destination for low-cost, high-volume manufacturers. Moreover, Vietnam’s relatively stable political environment and demographic structure (70 percent of the population is of working age and 58 percent of the population is below the age of 35 years) adds to its appeal.

Potential gains from trade agreements are likely to keep FDI flowing in

Another reason for foreign investors flock-ing to Vietnam are the recent FTAs that the

country has inked. These include the success-fully concluded FTAs with the European Union, South Korea, and the Eurasian Economic Union led by Russia, and closer integration with the Association of South East Asian Nations (ASEAN) through the ASEAN Economic Community. In addition to these agreements is the TPP, which is probably the biggest draw. The TPP is a proposed FTA between the United States, Japan, and 10 other Pacific Rim nations—Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. Together, these countries represent 40 percent of the global GDP. The TPP was signed in February, but much negotiation lies ahead before the deal is ratified by each of the member nations. Given Vietnam’s comparative advantage (due to lower labor costs), its export-oriented manufactur-ing sector stands to gain if and when the TPP comes to fruition. At present, the United States is Vietnam’s largest export destination—hav-ing accounted for 21 percent of Vietnam’s total exports in 201513—followed by the European Union, which accounted for 19 percent of Vietnam’s exports in 2015; ASEAN countries accounted for 11 percent and China for just 10 percent.14 Given that the TPP will bring down tariffs for trade between Vietnam and the United Sates to near zero, Vietnam’s exports to the United States are likely to surge.

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Though China accounts for just 10 percent of Vietnam’s exports, 30 percent of Vietnam’s total imports in 2015 came from China.15 In fact, nearly half of Vietnam’s total imports in 2015 were sourced from China and Korea (but the two countries accounted for just a sixth of total exports in 2015).16 This is because Vietnam’s export-oriented manufacturers are still dependent on China and Korea for machinery and intermediate goods necessary for finished products, particularly in electronics and textiles and garments. Under the TPP, parts used to produce electronic exports will likely be sourced under ASEAN-China or ASEAN-Korea FTAs, and finished products will likely be exported under reduced tariffs to the United States and other TPP members. However, the liberal “rules of origin” applied to electron-ics does not hold true for Vietnam’s booming textiles and garments sector. The TPP’s “yarn forward” rule implies that everything, from the yarn to the finished garment, must be sourced from a TPP member country.

Vietnam’s textiles, garments, and footwear exports to the United States accounted for approximately 45 percent of total exports to the United States in 2015, constituting 10 percent of Vietnam’s overall exports last year.17 However, much of the fiber and textiles used to produce garments that are exported to the United States are imported from China and Korea. In fact,

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Figure 6. Vietnam’s imports related to textiles, garments, and footwear from China and Korea covered 67 percent of the export value of finished goods sold to the United States in 2015

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Figure 7. Imports grew quicker then exports in 2015—Vietnam registered a trade deficit in 2015 following three consecutive years of surplus. A lack of industrial depth in Vietnam means that manufacturers have to import necessary components in order to produce a final product for export

Exports/imports, percentage change year over year

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imports of fiber and textiles from China and Korea amounted to 67 percent of Vietnam’s textiles, garments, and footwear exports to the United States in 2015.18 Under the TPP’s “yarn forward” rule, textile and apparel manufactur-ers would have to import yarn fiber and textiles from either the United States or Japan (more expensive than China and Korea) if they are to gain from favorable tariffs. An alternative solu-tion would be yarn and fabric weavers relocat-ing to Vietnam, which implies greater FDI in the future.

But there are challenges to Vietnam’s growth story

Although Vietnam’s economy boasts impres-sive numbers, there are challenges to sustain-able growth. While investors in Vietnam’s manufacturing sector have boosted exports, there has also been a surge in imports. On the one hand, the quick uptick in imports indicates strength in domestic demand but on the other, it also indicates a lack of industrial depth, as local Vietnamese firms do not produce any of the components necessary for the production of exported products. In 2015, Vietnam registered a trade deficit of $3.5 billion after three con-secutive years of surplus.19

Another potential challenge is Vietnam’s strong dependence on FDI; it accounted for

71 percent of total export turnover and 59 percent of total import turnover in 2015.20 While it is expected that FDI will continue to flow into Vietnam in the near to medium term, it would be wise to tend to the domestic sector as well. In particular, Vietnam’s small and medium enterprises should be integrated into the growth story, especially since there is capacity for building industrial depth. A focus on upgrading the education system would also address the challenges that firms face in sourcing highly skilled labor, while vocational training will likely boost productivity. And as always, improved infrastructure will likely drive efficiency. But Vietnam should consider spending wisely, keeping in mind its public debt is to the tune of 62.5 percent of GDP, up rather quickly from 51 percent in 2012 and just shy of the debt ceiling set at 65 percent of GDP.21

Further challenges exist in the banking sector, which has been plagued by bad loans. Though measures have been taken to mop up bad debt, they still fall short of addressing the root of the problem: Vietnam’s large and inefficient state-owned enterprises (SOEs). The process of partially privatizing SOEs in order to drive efficiency needs to be expanded and expedited, particularly since they account for 60 to 70 percent of outstanding credit.22

As things stand, Vietnam is striking while the iron is hot. Domestic demand is likely to

remain strong under the favorable conditions of low inflation and accommodative monetary policy. FDI inflow is likely to increase over the near to medium term and, as a result, the manufacturing sector will likely continue to shine. GDP growth in 2016 could edge closer to 7 percent. Additionally, if Vietnam manages to fuel its engines of growth while ensuring that challenges to growth do not develop into roadblocks, then it could well be embarking on a journey to improved prosperity in the long term.

25


Endnotes1. General Statistics Office of Vietnam, “Socio-economic situation in 2015,” https://www.gso.gov.vn/default_en.aspx?tabid=622&ItemID=15515.

2. Ibid.

3. Ibid.

4. Ibid.

5. International Labor Organization, “Global wage database, country profiles,” http://www.ilo.org/ilostat/GWR , accessed March 8, 2016.

6. Ibid.

7. Ministry of Planning and Investment, “Brief on foreign direct investment of the whole year 2015,” January 26, 2016, http://www.mpi.gov.vn/en/Pages/tinbai.aspx?idTin=31910&idcm=122.

8. Ibid.

9. General Statistics Office of Vietnam/Haver Analytics, “Vietnam: Industrial production: Manufacturing, NSA, 2010=100, year-over-year % change,” accessed March 8, 2016; Deloitte Services LP economic analysis.

10. General Statistics Office of Vietnam/Haver Analytics, “Vietnam: Industrial production: Manufacturing of wearing apparel, NSA, 2010=100, year-over-year % change,” accessed March 8, 2016; Deloitte Services LP economic analysis.

11. General Statistics Office of Vietnam/Haver Analytics, Vietnam: Industrial production: Manufacturing of computer, electronic and optical products, NSA, 2010=100, year-over-year % change,” accessed March 8, 2016; Deloitte Services LP economic analysis.

12. International Labor Organization, “Global wage database, Country profiles”.

13. General Statistics Office of Vietnam/Haver Analytics, “Vietnam: Trade by country, thousands of US$, monthly, NSA,” accessed March 8, 2016; Deloitte Services LP economic analysis.

14. Ibid.

15. Ibid.

16. Ibid.

17. General Statistics Office of Vietnam/Haver Analytics, “Vietnam: Trade by country, trade in goods by country by commodity, thousands of US$, monthly, NSA, accessed March 8, 2016; Deloitte Services LP economic analysis.

18. Ibid.

19. General Statistics Office of Vietnam, General Department of Vietnam Customs/Haver Analytics, “Vietnam: Value of exports and imports of goods, millions of US$, monthly, NSA,” accessed March 8, 2016; Deloitte Services LP economic analysis.

20. Ministry of Planning and Investment, “Brief on foreign direct investment of the whole year 2015.”

21. Ministry of Finance/Haver Analytics, “Vietnam: Financial debt, public debt/GDP, %,” accessed March 8, 2016; Lien Hoang, “Old age, debt threaten Vietnam economy,” Voice of America, February 1, 2016, http://www.voanews.com/content/old-age-debt-threaten-vietnam-economy/3171359.html.

22. David Robinson, “Bad debts bedevil Vietnam’s banks,” Financial Times, November 16, 2015, http://www.ft.com/intl/cms/s/3/09a705bc-8c74-11e5-8be4-3506bf20cc2b.html#axzz42JV0ffnn.

26

Q2 2016

26

As housing runs into rough weather in Asia, various economies in the region are considering different approaches to spruce it up, while some, such as Singapore, are trying to put curbs on demand itself. All in all, every effort points in one direction: preventing a housing bubble.

26

27


Realty check in AsiaThe heat is on

By Akrur Barua

A HOUSE—OR more modestly put, a shelter—is among the most basic needs of any human being after food and clothing. So, as economies develop

over time, housing demand—for residential purposes and as an asset class—increases, thereby aiding growth of the sector. Surprising then that in fast-growing Asia, where incomes are rising and millions are coming out of poverty, the housing story is getting a little sour. In many economies, housing has run into rough weather after a few years of stellar growth, raising fresh concerns for policymakers who are already grappling with financial market volatility, slower economic growth, and rising household debt. Some policymakers are calling for a correction to increase affordability (as in India) and hence, restore demand.1 Others are trying to put curbs on demand itself (as in Singapore).2 But, all of them will be hoping to prevent a housing bubble. Worse, if a bubble indeed emerges, policymakers will be eager to prevent a hard landing with its detrimen-tal impact on other parts of the economy, especially banks and households.

310

102

206

50

-4.0

12.0

-12.0

-8.0

0.0

4.0

8.0258

154

Property market price index: Private, domestic all classes (SA, 1990 = 100; left axis)

Growth (percent, month on month, right axis)

Jan 93 Jan 96 Jan 99 Jan 02 Jan 08Jan 05 Jan 11 Jan 14


Figure 1. Property prices in Hong Kong peaked in September 2015, declining after that

The latest bout of decline in property prices is the largest since the downturn between

March 2008 and November 2008

310

102

206

50

258

154

Property market price index: Private, domestic all classes (SA, 1990 = 100; left axis)

Rental yield (rent index/price index, 1990 = 100)

Jan 93 Jan 97 Jan 01 Jan 05 Jan 09 Jan 13

Price and rental yield have diverged strongly since 2008. Worryingly, real estate as an asset has been depending

a lot more on capital gains


Figure 2. Rental yield and price have moved apart since the previous major downturn in 2008

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Q2 2016

All eyes on Hong Kong

Given its reputation as Asia’s premier finan-cial hub, the property market in Hong Kong has been the most sought after, in line with London and New York. Hong Kong’s property market also has a close correlation with the global economy. It’s a matter of concern then that after years of sharp growth, property prices in the city are declining just as global GDP growth and that of neighboring China are slow-ing. In January, property prices declined for the fourth straight month in Hong Kong (see figure 1). Prior to that, prices had gone up by an astounding 183.9 percent between November 2008 (the last major trough) and September 2015 (the latest peak). Arguably, some volatil-ity in property prices should not be a concern. But, the data tell us that both in the number of straight months of decline and the quantum of decline, the downturn so far is the largest since November 2008.

What makes the latest decline more wor-rying is the trend in property prices relative to rental yield (defined as rent divided by price). Since January 1993, price and rental yield have crossed paths at every property market down-turn until 2008 (see figure 2). After that, both have been travelling in opposite directions. This means housing as an asset is increasingly dependent on capital gains, a trend that is dis-concerting since it has continued for long. As

29


both prices and yields reverse course a bit, the question is not whether they will meet (it will be disastrous if they do) but how much they will edge closer.

A sharp increase in house prices over the last eight years has also hit affordability, a contentious issue in Hong Kong.3 While prop-erty prices went up by 183.9 percent between November 2008 and September 2015, nominal personal disposable income grew by just 44.7 percent in roughly the same period. This again casts doubts on whether this price increase is indeed sustainable.

There are two other data trends that add to the worries. First, the total number of agree-ments for sale and purchase of building units is now at the lowest for the period between January 1993 and January 2016. While the number of agreements might not be the best criteria to measure healthy real estate activ-ity, a look at the value of agreements shows us that the latest figure is the lowest since February 2009.

Second, the trend in outstanding mortgage loans also does not paint a strong picture. Between March 2008 and September 2015, out-standing mortgage loans went up by 82 percent. In the seven years prior to that, loans grew by a mere 10 percent. Worryingly, loans appear to be slowing down, indicating that the credit push behind the real estate boom in Hong Kong is waning.

It’s not just Hong Kong— there’s trouble brewing in other Asian cities as well

Singapore, the other major dollar hub in Asia, is already experiencing a slowdown in real estate. Prices are down by 2.7 percent since Q1 2015 after rising by 45.5 percent between Q1 2009 and Q1 2015 (see figure 3). Taipei City (in Taiwan) has fared worse. Between January 2009 and January 2015, property prices went up by 69.3 percent before correcting by 12.7 percent since then (see figure 4).

Delhi

Malaysia

Jakarta*

Mumbai

Singapore

Q1-15 to now Q1-09 to Q1-15 (Q2-10 to Q1-15 for the two Indian cities

-20 200

After unsustainable price growth, the housing market has cooled down in Mumbai and Delhi

0 20 40 60 80 100 120 140 160 180

Price growth has slowed down sharply in Malaysia and Jakarta; it is now negative for the past year in Singapore


Figure 3. Growth (percent) in real estate prices in key cities in Asia (based on quarterly data)

30

Q2 2016

Where prices are not going down, they are certainly slowing as in Jakarta, Mumbai, and Delhi. The only exceptions are China’s top five cities. But, even here, the figures throw up some concerns. For example, in Shanghai, Beijing, and Shenzhen, prices have been shooting up in the past year (see figure 4). The latest surge in property prices in these cities comes at a time when equities are taking a hammering (down by about 42 percent since mid-2015). So, if households in China shift focus to real estate, it might make a bubble out of the current market.

Banks in Asia will be hit hard by any real estate downturn

Slowing real estate in Asia, or worse, declin-ing house prices, have come at a challenging time for banks, which are already dealing with slow economic growth. As a result, overall credit creation and that for housing are likely to be slower this year than in the last few years (see figure 5).

Shenzen

Beijing

Taipei City

Tianjin

Seoul

Jan-15 to now Jan-09 to Jan-15 (Feb-10 to Jan-15 for the five Chinese cities)

-15 750 15 30 45 60

Guangzhou

Thailand

Shanghai


Figure 4. Growth (percent) in real estate prices in key cities in Asia (based on monthly data)

Growth rate within a year higher than the previous four together is a matter of concern especially when GDP growth is slowing

Price growth has slowed down in Thailand and has been negative for the past year in Taipei

250

100

0

150

50

Total loans Housing-related

Thailand IndiaTaiwan Singapore Malaysia Hong Kong South Korea

200

China Indonesia


Figure 5. Credit growth since December 2009 has been high in key Asian economies

31


Asset quality worriesFor countries like India and, to a lesser

extent, Indonesia, a troubled real estate sector could add to worsening asset quality in banks. For example, between Q1 2011 and Q3 2015, non-performing loans as a share of gross loans more than doubled in India’s banks.4 Indian banks, in particular, will also have to contend with declining housing affordability in big cities—and hence demand for credit—amid increasing exposure to troubled companies in real estate.5

Real estate problems at a time of declining trade finance income

In major trade hubs like Hong Kong and Singapore, banks are already witnessing a decline in a key asset—trade finance—due to slowing exports.6 For example, in Hong Kong, year-over-year growth in credit to finance imports, exports, and re-exports has been nega-tive since February 2015.7 Growth in export volumes in emerging Asia is at its slowest since 2009 and is unlikely to pick up this year.8 Any trouble in the housing market will hence make matters worse for banks.

32

Q2 2016

Demand for credit will likely also slow down as households deleverage

Banks will also likely have to contend with slower growth in loan demand from households than in the past few years due to high house-hold debt in the region.9 Households are likely to focus more on repairing their balance sheets, especially in many South East Asian economies (see figure 6).

Already battered, banks stocks will likely suffer more if housing falls

An unravelling housing market will likely hit bank valuations further. Already, banks are bracing themselves against declining global macro fundamentals, a rise in financial market volatility, and unorthodox monetary policy across the world.10 The FTSE Asian Banks index is down by about 27 percent since June 2015 (see figure 7), worse than the overall market performance (the MSCI Asia-Pacific Index excluding Japan is down 17.3 percent).

Households may also feel the pain

With equities hammered, any housing downturn will dent household wealth further. A fall in house prices will likely hit household wealth, especially at a time when equities are also declining (see figure 8). Equity markets

175

125

150

502019 2020

75

100

20182014 20172015 2016


China TaiwanMalaysia ThailandSouth Korea

Figure 6. Household financial liabilities as a share of disposable personal income (percent) will stay high

13500

9500

11500

7500

550

350

390

430

470

51012500

10500

FTSE Asian banks index (left axis) MSCI Asia-Pacific excluding Japan (right axis)

Jan 15 Mar 15 May 15 Jul 15 Nov 15Sep 15 Jan 16 Mar 16

8500


Figure 7. Equities are already under pressure; banks could suffer more from a real estate downturn

33


have been taking a hit since June 2015, when the tide started turning in Chinese equities. The CSI Shanghai-Shenzhen 300 stock index, for example, is down by 42.6 percent relative to its May 2015 peak. Declining equities in China, along with global growth concerns, created a domino effect across Asia. A fall in hous-ing will likely dent household wealth further, given the region’s large share of real estate in household assets.11

Consumer spending will likely also suffer

Slowing household wealth comes at a deli-cate time for Asian consumers. As economic growth slowed a bit, real income gains also slowed down. According to Oxford Economics, average annual growth in personal disposable income for many economies in Asia dur-ing 2013–15 was slower than in 2010–12 (see figure 9).12 Slower income gains amid declining household wealth will likely impact consumer

spending, thereby depriving key export-depen-dent economies of a major source of growth at a time of slowing trade growth.

Between a rock and a hard place

For now, policymakers are trying to prevent a hard landing. The problem is, in a scenario of flat or slow price growth, property price levels will still be high relative to affordability. If it stays that way, growth in housing will be slow

34

Q2 2016

until it becomes more affordable. This also shifts attention to affordable housing, where Singapore has fared better than others. In less affluent economies, however, the blueprint for affordable housing is still not clear. For example, India does not appear to have a strong implementation schedule in place despite a pledge of housing for all by 2022. In China, if restrictions on migration from villages to cities are relaxed, demand for housing will increase. But, if prices stay high, the key again would be affordable housing.

Will a drop in house prices help affordabil-ity in emerging economies in Asia and, hence, spruce up demand in the medium term? While some economists might prefer the markets to find their balance, the worry for policymakers will be the quantum of any drop in property prices. Authorities would prefer a calibrated correction in property prices. A hard landing will likely have strong repercussions for the wider economy, especially banks and house-holds. In the case of Hong Kong, the impact of any sharp correction could also spread beyond its borders. Economists will be desperately hop-ing against such a scenario. The question is, will Hong Kong oblige?

10

-20

-40

-10

-30

Returns this yearReturns since September 2, 2015 (The month in which Hong Kong property prices peaked)

Singapore:Straits Times

Malaysia:FTSE Bursa

Malaysia KLCI

0

South Korea:Korea

Composite Ex

Japan:Nikkei 225

average

Indonesia:Jakarta

Composite

India:BSE Sensex

China:Dow Jones China 88

Hong Kong:Hang Seng


Figure 8. The downturn in equities has already dented household wealth in Asia

12

4

0

8

2

2010–12 2013–15

China ThailandHong Kong India Indonesia South Korea Taiwan

10

Malaysis Singapore

6


Figure 9. Average annual growth in real personal disposable income has slowed down in key economies

35


Endnotes1. Times of India, “Real estate developers must lower prices: Rajan,” August 21, 2015, http://timesofindia.indiatimes.com/business/india-business/Real-estate-developers-must-lower-prices-Rajan/

articleshow/48566718.cms.

2. Lilian Karunungan and Pooja Thakur Mahrotri, “No end in sight for slide in Singapore home prices as rates rise,” Bloomberg, September 9, 2015, http://www.bloomberg.com/news/articles/2015-09-08/no-end-in-sight-for-slide-in-singapore-home-prices-as-rates-rise.

3. Kathy Chu, “Hong Kong protests as much about dollars as democracy,” Wall Street Journal, October 19, 2014, http://www.wsj.com/articles/hong-kong-protests-as-much-about-dollars-as-democracy-1413754381.

4. International Monetary Fund, International financial statistics, Haver Analytics, March 2016.

5. Indian Express, “Rising realty debt: Banking on rate cuts”, July 4, 2015, http://indianexpress.com/article/business/business-others/rising-realty-debt-banking-on-rate-cuts/.

6. Chanyaporn Chanjaroen, “Shrinking China trade drags on Hong Kong to Singapore banks,” Bloomberg, July 19, 2015, http://www.bloomberg.com/news/articles/2015-07-19/shrinking-china-trade-dragging-banks-from-hong-kong-to-singapore; Don Weinland, “Whither the global trade bank,” South China Morning Post, August 9, 2015, http://www.scmp.com/business/global-economy/article/1847732/whither-global-trade-bank-standard-chartered-hsbc-and-slow.

7. Haver Analytics, March 2016.

8. International Monetary Fund, World Economic Outlook Database, Haver Analytics, March 2016.

9. Akrur Barua, Prudent no more: Household debt piles up in Asia, Asia Pacific Economic Outlook, 3Q 2015, Deloitte University Press, July 1, 2015, http://dupress.com/articles/asia-household-debt-levels/#end-notes.

10. Marc Jones, “Faith in central banks’ healing powers faltering: BIS,” Reuters, March 6, 2016, http://www.reuters.com/article/us-bis-centralbanks-idUSKCN0W80E0.

11. Credit Suisse, “Global Wealth Report 2014,” October 2014, http://economics.uwo.ca/people/davies_docs/credit-suisse-global-wealth-report-2014.pdf; Gabriel Wildau, “Retail investors bear brunt of China’s stock rout,” Financial Times, July 7, 2015, http://www.ft.com/intl/cms/s/0/7a5341ce-2476-11e5-9c4e-a775d2b173ca.html#axzz426kepn6Z; Dhiraj Nayar, “India’s missing investors,” Bloomberg View, April 9, 2015, http://www.bloombergview.com/articles/2015-04-09/india-stock-rally-needs-more-domestic-retail-investors.

12. Oxford Economics, “Global Economic Databank,” March 2016.

About the authors

Akrur Barua is an economist and a manager at Deloitte Research, Deloitte Services LP.

Lester Gunnion is an economist and a senior analyst at Deloitte Research, Deloitte Services LP.

Dr. Ira Kalish is chief global economist of Deloitte Touche Tohmatsu Limited.

Dr. Rumki Majumdar is a macroeconomist and a manager at Deloitte Research, Deloitte Services LP.

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Q2 2016

Additional resourcesDeloitte Research thought leadershipGlobal Economic Outlook, Q1 2016: China, United States, Eurozone, Japan, India, Russia, United Kingdom, Brazil

United States Economic Forecast, Q1 2016

Issues by the Numbers, March 2016: The aging water infrastructure: Out of sight, out of mind?

Please visit www.deloitte.com/research for the latest Deloitte Research thought leadership or contact Deloitte Services LP at: [email protected].

For more information about Deloitte Research, please contact John Shumadine, Director, Deloitte Research, part of Deloitte Services LP, at +1 703.251.1800 or via e-mail at [email protected].

37


http://dupress.com/periodical/issues-by-the-numbers/march-2016/

http://dupress.com/periodical/global-economic-outlook/q4-2015/



http://dupress.com/periodical/u-s-economic-forecast/volume-3-issue-1/

http://dupress.com/periodical/issues-by-the-numbers/january-2015/

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