Asia Pacific Economic Outlook - Deloitte US

Asia Pacific Economic Outlook3rd Quarter 2015

IndonesiaSingaporeSouth KoreaVietnamSpecial topic

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]

Economic growth has slowed, investors appear wary, and the compulsions of politics are casting a shadow over reforms.

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IndonesiaJokowi finds the going tough

By Akrur Barua

A POLITICAL honeymoon rarely lasts long. No wonder then that President Joko Widodo (Jokowi), who came to power last year amid high hopes, is

finding the going tough. Economic growth has slowed, investors appear wary, and the compulsions of politics are casting a shadow over reforms. To be fair to Jokowi, he made a good start by cutting fuel subsidies. He is correctly focusing on infrastructure while expanding measures to promote education and health. But, to address problems ranging from investments to skills, the government needs private capital, especially from abroad. And for this, Jokowi needs to, among other things, ease regulations, free the labor market, and rejuvenate institutions. It is a tall order for the president. But, he would do well to try. Today’s electorate is impatient. A young population might not be shy to voice its displeasure soon.

Growth slips in Q1 2015

Economic growth fell to 4.7 percent year-over-year in Q1 2015 from 5.0 percent in Q4 2014. This was the weakest pace of expansion since Q3 2009. Exports fell 0.5 percent in Q1 2015, although this was an improvement from the previous quarter’s 4.5 percent decline. Slowing growth in China has

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dented demand for Indonesia’s commodity exports, which have also been affected by a ban on the export of some non-processed minerals. Although the ban’s intent is to drive growth in domestic mineral processing—a higher value-added activity—the benefits will likely not filter in soon.

GDP growth in Q1 was also hit by slow-ing government spending; spending grew 2.2 percent, down from 2.8 percent in Q4 2014. Worryingly, the government has fallen short of its infrastructure spending targets so far this year. As of April 27, only IDR 7 trillion of the budgeted infrastructure spending of IDR 290 trillion for 2015 had been used.1 In fact, capital expenditure may fall short of budget provisions this year due to disbursement inefficiencies and a shortfall in revenues due to slower-than-expected GDP growth.

This is expected to add to pressures on investments. Although fixed investment growth edged up to 4.4 percent in Q1 2015 from 4.3 percent in Q4 2014, the figure is much below 2011–12 levels as well as what is required to prop up GDP growth to President Widodo’s ambitious target of 7 percent by 2017. Arguably, private consumption was the only bright spot in Q1, growing at 4.7 percent. However, the pace has been slowing as households adjust to high inflation and tight monetary policy.

Bank Indonesia on the right track

In May, Bank Indonesia (BI) kept its key policy rate unchanged despite slowing growth in Q1. Rightly, BI has kept its focus on infla-tion, which remains elevated after the removal of fuel subsidies. In April, headline inflation went up to 6.8 percent from 6.4 percent in March (figure 2) and is not likely to go down to BI’s target range of 3–5 percent this year. While

a slowdown in global oil prices since 2014 has softened some of the impact of subsidy cuts, a significant base effect will still be in place this year. Moreover, in the coming months, the pres-sure on prices (food in particular) is likely to rise due to the holy month of Ramadan. This will weigh on BI’s near-term policy action.

BI’s cautious approach has come in for pressure from the government. Days before the latest rate decision, the country’s vice president

Figure 1. GDP growth (percent, year-over-year) slowed down in Q1 2015

Source: Oxford Economics; Deloitte Services LP economic analysis. Graphic: Deloitte University Press | DUPress.com

Government consumption

GDP (right axis)

Private consumption

Fixed investmentExports

0

5

10

15

25

Q1 2011 Q1 2014 Q4 2014-5

Q4 2011 Q3 2012 Q2 2013

20

4.5

5.0

5.5

6.5

6.0

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and the BI governor gave diverse opinions on the current monetary stance.2 BI, however, acknowledges that credit growth is slow. In March, loan growth fell to 11.3 percent year-over-year from 12.2 percent in February, much below BI’s outlook of 15–17 percent growth for 2015.3 Consequently, while announcing its decision to keep the policy rate unchanged, BI promised to ease lending rules, including those related to loan-to-deposit ratios, reserve requirements, and loan-to-value ratio.4

Interestingly, inflation is not BI’s only con-cern; the bank is also wary about the rupiah’s weakness. The currency has slipped by about 6 percent against the US dollar this year. Although an improving current account will help the rupiah, it will face pressures due to slowing economic growth and a possible rate hike by the US Federal Reserve. In this sce-nario, BI is expected to keep monetary policy tight in the near term.

Figure 2. Trends in headline inflation (percent) and key components

Source: Haver Analytics; Deloitte Services LP economic analysis. Graphic: Deloitte University Press | DUPress.com

Headline Foodstuff

CoreHousing, water, electricity, fuel, and gas

16%

4%

8%

12%

Jan 2013 Jan 20150

Jul 2013 Jan 2014 Jul 2014

Interestingly, inflation is not BI’s only concern; the bank is also wary about the rupiah’s weakness. The currency has slipped by about 6 percent against the US dollar this year.

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A tough task ahead for the president

Jokowi came to power in 2014 on the back of promises to tackle corruption, spruce up growth, and initiate tough economic reforms. After assuming office, Jokowi has cut subsi-dies, increased budgeted capital expenditure, and courted foreign investors. However, there’s still much more to do. He could benefit from tackling structural challenges, including infrastructure, education, the labor market, and institutions.

Indonesia lags far behind key Association of South East Asian Nations (ASEAN) peers

Figure 3. Per-capita income comparisons between Indonesia and key ASEAN peers

Source: Oxford Economics, Deloitte Services LP economic analysis. Graphic: Deloitte University Press | DUPress.com

0

80,000

Indonesia Philippines ThailandMalaysia Singapore

US$ in terms of purchasing power parity US$

60,000

40,000

20,000

2010 prices

9,883

3,726

23,063

10,0986,455

2,504

77,327

51,007

13,914

5,688

Figure 4. Infrastructure rankings for Indonesia and key peers

Source: World Economic Forum; World Bank; Deloitte Services LP economic analysis.

0

100

80

60

40

20

2.5

4.5

4.0

3.5

3.0

Brazil India

South Africa

Russia ChinaTurke

y

Indonesia

Malaysia

Thailand

Philippines

Singapore

World Economic Forum’s global competitiveness index infrastructure ranking (out of 144 countries)

Logistics performance index: Quality of trade- and transport-related infrastructure (1=low, 5=high, right axis)

Graphic: Deloitte University Press | DUPress.com

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in terms of economic prosperity (figure 3). If it wants to be at the average per-capita income levels of Singapore, Malaysia, and Thailand by 2040, Indonesia’s GDP will have to grow by 6.0–7.0 percent every year until then. Estimates by Oxford Economics, however, put Indonesia’s potential GDP growth for 2014–23 at 5.3 percent.5 Clearly, this is not enough to catch up with leading Asian economies in the next 25 years if the current trends continue.

To spruce up potential GDP growth, among other things, Indonesia should increase invest-ments and productivity. Jokowi appears to realize this considering that he has picked infra-structure as a focus area. Poor transport- and trade-related infrastructure (figure 4) is a big impediment to high-value manufacturing and services in Indonesia. To upgrade infrastruc-ture, the country will likely need large inflows of private capital; the government estimates that it can fulfill only 30 percent of the country’s infrastructure needs. To bridge this gap and also boost key sectors, Jokowi is eager to attract foreign direct investments (FDI). But, that won’t be easy. Indonesia ranks low on the World Bank’s ease of doing business index.6 And even though the country fares better in the World Economic Forum’s competitiveness rankings, it is not as competitive as its ASEAN neighbors like Singapore, Malaysia, and Thailand (figure 5).7

Figure 5. Ease of doing business and global competitiveness rankings for Indonesia and key peers


World Bank ease of doing business ranking (out of 189 countries)

Global competitiveness ranking (out of 144 countries)


0

160

120

80

40

Brazil India

South Africa

Russia ChinaTurke

y

Indonesia

Malaysia

Thailand

Philippines

Singapore

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It may be possible to improve global rank-ings, attract investments, and improve produc-tivity by focusing on regulations, innovation, and labor market flexibility (figure 6). The last in particular is a major worry for investors. However, any labor market improvements are meaningless without strong institutions. And strengthening institutions is not easy, as Jokowi is finding out. A good example of this is the outcry over the nomination of a tainted official as a police chief.8

As investors look beyond the initial eupho-ria of the new government, Jokowi may be

well-advised to focus on Indonesia’s long-term fundamentals.9 He should consider actions such as easing regulations, opening up education to the private sector and to foreign investors, and reforming debt and equity markets. Savings and higher revenue, as a result, could be invested in social welfare similar to how the govern-ment transferred some of the savings from the removal of fuel subsidies to poor households.10

Investors would also want the government to hold its ground on current reforms in the face of political opposition or a change in the economic environment. For example, the rise

in global oil prices will be a challenge for the government’s fuel subsidy reforms. No doubt, Jokowi faces tough times over the next few years. But, he would do well to keep on the right side of economic and structural reforms. It is likely the only way to lift Indonesia to the level of economic progress of more prosperous neighbors in the region.

Figure 6. Rankings on notable metrics for Indonesia and key peers*


*Rank out of 144 countries on the World Economic Forum's global competitiveness index components.

Higher education and training Institutions Labor market efficiency


0

140

100

60

20

Brazil India

South Africa

Russia ChinaTurke

y

Indonesia

Malaysia

Thailand

Philippines

Singapore

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Endnotes1. Chris Brummitt and Rieka Rahadiana, “Indonesian economy shrinks a second quarter; rupiah declines,” Bloomberg, May 5, 2015, http://www.bloomberg.com/news/articles/2015-05-05/

indonesian-economy-shrinks-raising-risk-for-widodo-growth-goal.

2. Herdaru Purnomo and Rieka Rahadiana, “Indonesia policy makers clash on rate moves as economy slows,” Bloomberg, May 7, 2015, http://www.bloomberg.com/news/articles/2015-05-07/indonesia-policy-makers-clash-on-interest-rates-as-economy-slows.

3. Hidayat Setiaji, Nilufar Rizk, and Gayatri Suroyo, “Indonesia’s loan growth falls to 11.3 pct y/y in March,” Reuters, May 19, 2015, http://www.reuters.com/article/2015/05/19/indonesia-economy-loans-idUSJ9N0WD00U20150519.

4. Rieka Rahadiana, Chris Brummitt, and Herdaru Purnomo, “Bank Indonesia plans easier lending rules as key rate held,” Bloomberg, May 19, 2015, http://www.bloomberg.com/news/articles/2015-05-19/bank-indonesia-keeps-rate-unchanged-resisting-pressure-to-cut.

5. Oxford Economics, Country Economic Forecasts, May 27, 2015.

6. World Bank, “Doing business rankings,” June 1, 2015, http://www.doingbusiness.org/rankings.

7. World Economic Forum, “Global competitiveness rankings,” June 1, 2015, http://reports.weforum.org/global-competitiveness-report-2014-2015/rankings/.

8. Kanupriya Kapoor, “Indonesia’s president drops police chief candidate after weeks of indecision,” Reuters, February 18, 2015, (http://www.reuters.com/article/2015/02/18/us-indonesia-police-idUSKBN0LM0EG20150218).

9. Andrew Janes and Y-Sing Liau, “Jokowi premium vanishes from Indonesia assets as foreigners exit,” , April 29, 2015, http://www.bloomberg.com/news/articles/2015-04-29/jokowi-premium-vanishes-from-indonesia-assets-as-foreigners-exit.

10. The Economist, “Indonesia’s economy: A good scrap,” January 10, 2015, http://www.economist.com/news/asia/21638179-jokowi-abandons-wasteful-fuel-subsidies-fiscal-prospects-brighten-good-scrap.

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Over the long term, current policies are likely to support Singapore’s focus on high-value addition, thereby helping it remain one of the world’s most competitive nations.

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SingaporeAn economy in transition

By Lester Gunnion

SINGAPORE has made a stronger start to the year than was initially estimated. Economic activity gathered pace in Q1 2015, and the economy is on track to

achieve the target growth range of 2.0–4.0 percent this year. 2015 is of par-ticular significance to the city-state, as it marks 50 years of its existence as an independent nation, as well as the halfway point of a 10-year economic restruc-turing plan launched in 2010. The plan focuses on increasing productivity in the economy and on moving up the value chain across all sectors, thereby set-ting the stage for strong and sustainable growth in the long term. The 10-year plan also aims to curb the inflow of low-skilled foreign workers, while trying to improve social welfare for Singapore’s citizens. Consequently, sectors that have depended on low-skilled foreign workers are likely to face near-term chal-lenges. Complicating matters is the unevenness in the global economic recovery. However, over the long term, current policies are likely to support Singapore’s focus on high-value addition, thereby helping it remain one of the world’s most competitive nations.

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GDP growth on its way up in Q1 2015

Singapore’s economy grew 2.6 percent year over year in Q1 2015, up from 2.1 percent in Q4 2014, faster than the advance estimate of 2.1 percent. The economy gained from strong contributions by two key sectors in Q1—finance and insurance (7.9 percent) and wholesale and retail trade (4.1 percent). While

the former contributed 0.9 percentage points to GDP growth in Q1, the latter’s contribution was 0.7. Within finance and insurance, bank-ing was the dominant sector, thanks to factors such as growth in loans and gains from higher net interest margins. Consumer loans (up by 4.6 percent) contributed most to the growth in loans, while loans to businesses remained subdued (0.8 percent).1 For the wholesale and retail trade sector, strong growth in Q1 was a

welcome relief from the previous quarter’s meek 0.6 percent rise. According to the Ministry of Trade and Industry, Singapore, wholesale trade benefited from a 5.2 percent rise in non-oil re-exports in Q1, up from 1.8 percent in the previous quarter.2

There was, however, some disappointment in Q1 from manufacturing, which was dragged down by declines in output in the transport, engineering, electronics, and biomedical clus-ters.3 Manufacturing contracted by 2.7 percent, thereby shaving off 0.5 percentage points from GDP growth in Q1. This follows a 1.3 percent decline in Q4 2014.

Immigration policy burdens manufacturers

An important factor burdening Singapore’s manufacturers is the upward pressure on wages. Overall unit labor cost in the country climbed 5.3 percent year-over-year in Q1. The unit labor cost of manufacturing increased by 7.2 percent in Q1, up from 5.5 percent in the previous quarter. Consequently, the overall unit business cost of manufacturing edged up in Q1, rising by 0.9 percent and continuing from a 0.7 percent increase in 2014.4

The rise in cost of manufacturing is closely linked to the administration’s policy on foreign workers. The quota and levy system used to


Source: Haver Analytics; Deloitte Services LP economic analysis.

*These sub-sectors are part of the wider services sector.


GDP

Financial services*

Manufacturing

ServicesConstructionWholesale and retail trade*

-3.5

0.0

3.5

7.0

14.0

Q1 2012 Q1 2015-7.0

Q4 2012 Q3 2013 Q2 2014

10.5

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regulate the size of the foreign workforce has been tightened in recent years to discourage firms from hiring low-skilled, low-wage foreign workers. The measures are aimed at boosting employment, wages, and productivity among citizens while restructuring all sectors toward high-value economic activity. However, this transition is likely to be painful in the near term as Singapore has so far relied heavily on foreign labor, particularly in sectors such as manufac-turing, where up to half the workforce com-prises of foreigners.5 In 2003–2008, when the foreign worker policy was liberalized, manu-facturing firms substituted low-skilled foreign workers for machinery,6 stifling productivity growth in the sector. At present the attempt to shift from labor-intensive to skill- and knowl-edge-intensive manufacturing has affected output growth, not least because of an already tight labor market.

At present the attempt to shift from labor-intensive to skill- and knowledge-intensive manufacturing has affected output growth, not least because of an already tight labor market.

Figure 2. Manufacturing activity has been suffering of late


Growth in industrial production (percent, year-over year, right axis)

Manufacturing purchasing managers’ index (above 50 indicates expansion, below 50 indicates contraction)

52.0

49.0

50.0

51.0

Jan 2014 Apr 201548.0

Apr 2014 Jul 2014 Oct 2014 Jan 2015-10

-5

0

15

5

48.5

49.5

50.5

51.5

10

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Tight labor market and muted growth in productivity

Singapore’s already tight labor market is tightening further. Unemployment dipped to 1.8 percent in Q1 from 1.9 percent in the previ-ous quarter.7 Employment growth has slowed and labor force participation has been edging up steadily over the last three years, standing at 67.0 percent as of 2014.8 It is not surprising then that the curb on low-skilled foreign labor

has resulted in labor shortages and higher busi-ness costs, particularly in sectors such as manu-facturing. Additionally, while wages have been moving up, labor productivity has not kept pace; in fact, it declined in both goods-produc-ing, as well as services industries. In Q1 total labor productivity declined (by 0.6 percent) for the fourth straight quarter.9

Declines in labor productivity bring to light the fact that restricting inflows of low-skilled and low-wage foreign labor is not enough.

Figure 3. Declining labor productivity is a worry


Manufacturing ServicesConstruction

Change in labor productivity (percent, year-over-year)

-6

-2

0

4

10

Q1 2012 Q1 2015-10

Q4 2012 Q3 2013 Q2 2014

8

-8

-4

2

6

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Encouragingly, the government has announced the introduction of the SkillsFuture initiative in the budget for 2015.10 The initiative focuses on lifelong learning and skill development. Toward this end the average spending on continual education and training is set to double over the next five years. Furthermore, the govern-ment has deferred the increase in levies on the employment of low-skilled foreign workers by one year for all sectors, and by two years for the manufacturing sector.11

Facing an uneven global recovery

Singapore’s total services trade edged up by 1.2 percent in Q1 from a year ago but total merchandise trade dipped by 10.5 percent during the same period. Merchandise imports fell by 16.1 percent, while merchandise exports dropped 5.4 percent on account of low oil prices. However, the country’s non-oil domestic exports (NODX) grew by 4.8 percent in Q1, speeding up from a lackluster 0.5 percent in Q4 2014. The electronics and non-electronic goods segment fared well in Q1. Notably, there was strong growth in exports to the United States (10.2 percent) and the European Union (22.2 percent) in Q1 after a decline in the previous quarter. However, slowing economic growth in China, Singapore’s largest trading partner, is a concern for the city-state’s exporters. In Q1, exports to China fell 5.6 percent, deteriorating

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from a decline of 4.9 percent in Q4 2014. Given the supply chain links between the West, China, and other key Asian exporters, it was not surprising that Singapore’s trade performance with regional partners was mixed in Q1. While exports to Malaysia, Hong Kong, Thailand, and South Korea grew during the quarter, exports to Japan, Indonesia and Taiwan declined.12

Risks to Singapore’s exports and, hence, GDP growth, are not likely to go away any time soon given that global growth continues to be uneven.13 China’s economy is likely to remain under pressure this year, and weakness in the Eurozone is expected to continue. Growth in the United States, however, is likely to rebound in the second half of the year after a weak first quarter. According to International Enterprise Singapore, non-oil domestic exports will grow

1.0–3.0 percent in 2015.14 This is encouraging given that NODX contracted by 0.7 percent in 2014 and by 6.0 percent in 2013. Nevertheless, expectations of export growth are modest at best.

Still a long road ahead

In the short term, given the better-than-anticipated performance in Q1, Singapore is likely to achieve its target growth range. However, for growth to continue in the long term, the country will have to continue on the track of economic restructuring with a focus on high-value addition and improvement in productivity. The latter assumes importance in the context of Singapore’s aging population, dependence on foreign workers, and tight labor

market. Far-reaching policy measures such as the SkillsFuture initiative are likely to play a critical role in determining the long-term performance of the economy. The administra-tion must remain focused on implementing such policies in order to build a highly skilled, knowledge-driven workforce, particularly in the clusters identified for future growth. Given that the country is one of the richest economies in the world, the current path is likely to help Singapore retain its competitiveness in the global economic arena.

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Endnotes

1. Ministry of Trade and Industry, “Economic survey of Singapore: First quarter 2015,” http://www.mti.gov.sg/ResearchRoom/SiteAssets/Pages/Economic-Survey-of-Singapore-First-Quarter-2015/FullReport_1Q15.pdf.

2. Ministry of Trade and Industry, “MTI maintains 2015 GDP growth forecast at 2.0 to 4.0 per cent,” May 26, 2015, http://www.singstat.gov.sg/docs/default-source/default-document-library/news/press_releases/gdp1q2015.pdf.

3. Ibid.

4. Ibid.

5. Kari Chu, “Foreign manpower policy in Singapore,” Legislative Council of the Hong Kong Special Administrative Region of the People’s Republic of China, January 9, 2015, http://www.legco.gov.hk/research-publications/english/essentials-1415ise02-foreign-manpower-policy-in-singapore.htm.

6. Alphonsus Gomez and Tan Di Song, “Singapore’s missing capital: Are low-skilled foreign workers substitutes for machinery?,” Economic Survey of Singapore, Second quarter 2013, August 12, 2013, http://www.mti.gov.sg/MTIInsights/Documents/FA_2Q13.pdf.

7. Ministry of Trade and Industry, “Economic survey of Singapore: First quarter 2015.”

8. Ministry of Manpower, “Labour market statistical information,” http://stats.mom.gov.sg/Pages/Home.aspx.

9. Ministry of Trade and Industry, “MTI maintains 2015 GDP growth gorecast at 2.0 to 4.0 per cent.”

10. Ministry of Finance, “Annex A-2: Summary of SkillsFuture initiatives,” February 23, 2015, http://www.singaporebudget.gov.sg/data/budget_2015/download/annexa2.pdf.

11. Ministry of Finance, “Annex A-5: Changes to foreign worker levies,” February 23, 2015, http://www.singaporebudget.gov.sg/data/budget_2015/download/annexa5.pdf.

12. Ministry of Trade and Industry, “Economic survey of Singapore: First quarter 2015.”

13. International Monetary Fund, “World Economic Outlook: Uneven growth, short- and long-term factors,” April 2015, http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/text.pdf.

14. Ann Williams, “Singapore’s non-oil domestic exports up 4.8% in Q1 for best quarterly performance in 3 years,” The Straits Times, May 26, 2015, http://www.straitstimes.com/news/business/economy/story/singapores-non-oil-domestic-exports-48-q1-best-quarterly-performance-3-y.

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New export orders have been declining, boding poorly for future growth of exports.

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South KoreaExport troubles

By Dr. Ira Kalish

THE South Korean economy is currently under stress due, in large part, to weakness of exports. Indeed exports declined every month so far in 2015.

The US dollar value of exports was down 7.8 percent in May versus a year ear-lier.1 Moreover, the outlook for exports appears weak. New export orders have been declining, boding poorly for future growth of exports. This is important given that exports account for roughly half of GDP and have traditionally been an important source of growth for the Korean economy. In fact, for the past decade consumer spending has consistently grown more slowly than over-all GDP.2 Instead, the economy has relied on the strength of exports to drive economic growth. Exports have driven the industrial sector. Notably, indus-trial inventories continue to rise relative to sales, thus boding poorly for future increases in production.

The weakness of exports is related to two important factors: First, the slowdown in China’s economy has had a negative impact on demand for Korean goods, second, the decline in the value of the Japanese yen has boosted the competitiveness of Japanese exports at the expense of those from Korea. Exports have an important impact on the willingness of Korean businesses to invest in new capacity. A weak export environment is likely to suppress business investment. On the other hand, if

If the price of oil remains low or moves even lower in the coming year, this will be especially beneficial to consumer spending—and vice versa.

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Q3 2015

Korean companies perceive a permanent loss of competitiveness due to exchange rate move-ments, they may choose to invest in order to boost efficiency and drive more innovation.

Consumer spending

Given the weakness of exports, the strength of the domestic side of the economy becomes of paramount importance. On this, there is some good news. A combination of lower oil prices, expansionary monetary policy, and increases in government spending are having a positive impact on consumer finances. Real personal income is increasing and it is leading to acceler-ated growth of retail spending. On the other hand, household debt is now about 150 percent of disposable income, a relatively high level. This is likely to be an impediment to further growth of consumer spending.

Outlook

While it appears likely that growth in 2015 will be slower than in 2014, the outlook beyond will depend on a number of factors. First, the slowdown in China has already taken a toll on Korean exports and investment. What hap-pens in China will influence the path of Korea’s economy. Korean manufacturers play a role in China’s export-oriented supply chain. They also supply China’s domestic market. The outlook for both remains somewhat uncertain.

Second, the price of oil will make an impor-tant difference as well. If the price of oil remains low or moves even lower in the coming year, this will be especially beneficial to consumer spending—and vice versa.

Third, Korea exports a great deal to Europe and the United States. The trajectory of both economies will play a role in the outlook for Korean exports and, consequently, Korean GDP.

On the other hand, the growth of the con-sumer sector will likely play a more modest role in the outlook for Korea. In recent years, con-sumer spending has grown more slowly than GDP. This is likely to continue, especially due to debt constraints on consumers. Nonetheless, a tight labor market with rising wages should be beneficial to the consumer sector.

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Endnotes1. Ministry of Trade, Industry & Energy, “Exports: $42.4 billion, imports: $36.1 billion, trade surplus: $6.3 billion,” http://english.motie.go.kr/?p=5710.

2. Oxford Economics, “Country economic forecast,” South Korea, June 2015.

Other issues

On the positive side, government debt as a share of GDP is modest, and the budget is nearly in balance, thus providing ample room for more fiscal stimulus if needed. External debt is low and the country runs a current account surplus. The latter is important as it means less vulnerability to volatile capital flows. It also means greater ability to absorb the impact of rising debt should the government engage in more fiscal stimulus.

Monetary policy has been relatively easy in the past year, with the central bank having

cut interest rates several times. The benchmark rate, at 1.75 percent, is now at an historic low. Further easing is unlikely in the short term unless the economy slows further. Inflation is under control, at a little more than 1.0 percent, so there is certainly no need for tightening anytime soon. Moreover, the currency, although having risen against the yen, remains relatively low valued. When the US Federal Reserve tightens policy later this year or early next year, it is likely that the US dollar will rise, putting downward pressure on the Korean won.

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Q3 2015

The economy is benefitting from a recovery in domestic demand and foreign direct investment (FDI) inflows that continue to support investments and exports.

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Q3 2015

23


VietnamPushing the tempo

By Lester Gunnion

THE year began on a positive note for Vietnam. Economic activity was strong in Q1, setting the stage for acceleration in annual GDP growth. The economy

is benefitting from a recovery in domestic demand and foreign direct invest-ment (FDI) inflows that continue to support investments and exports. Besides, low global oil prices have pushed consumer price pressures lower. With inflation below the central bank’s target, monetary policy is likely to remain accommoda-tive. The economy will also benefit from reforms aimed at improving the health and efficiency of banks and state-owned enterprises (SOEs). Policymakers are also trying to deepen economic engagement with key trading partners, a move that is likely to reap dividends in the medium to long term.

A quick start to 2015

Vietnam’s economy has been quick off the blocks in 2015, growing 6.0 percent year-over-year in Q1 2015. This is the fastest pace of growth for the first quarter in the last five years. Usually GDP growth in Vietnam accelerates through the year. Consequently, strong growth in Q1 2015 augurs well

24

Q3 2015

for the coming quarters. In Q1, industry and construction had the largest impact on GDP growth, contributing 2.8 percentage points. Services and agriculture contributed 2.4 and 0.3 percentage points, respectively.1

Data on a number of indicators for the first five months of 2015 reiterate the strength of economic activity in Q1 and its likely continua-tion in the next quarter. For example, industrial production grew 9.2 percent year-over-year during January to May while retail sales went up 9.1 percent. Strong growth in retail sales and a surge in imports (15.8 percent) during this period point to strong domestic demand.2 Imports often include large shipments of machinery, an indicator of FDI inflows and overall investment activity. Interestingly, FDI sector imports also include materials that are assembled or processed and subsequently exported. The FDI sector accounts for a large share of Vietnam’s international trade. In 2014, for example, the contribution of the FDI sector to total exports was about 68 percent, while imports by the sector accounted for 57 percent of total imports.3

The surge in FDI over the past few years also points to Vietnam’s increasing market share in low-wage manufacturing as businesses in the segment relocate from China due to rising wages and gains in the yuan. As foreign

businesses invest more, Vietnam’s exports continue to flourish. In the first five months of 2015, exports grew by 7.3 percent, continuing from a stellar 13 percent rise in 2014 and con-tributing heavily to the manufacturing sector. Latest data indicate that this trend is likely to continue. For example, in May, Vietnam’s pur-chasing managers’ index (PMI) for manufactur-ing touched a record high of 54.8.4

Monetary policy to remain accommodative in 2015

In May, the State Bank of Vietnam (SBV) devalued the dong by 1 percent against the US dollar. This is the second such devaluation this year; in January the SBV had devalued the currency by 1 percent. The devaluation is pri-marily aimed at reining in the country’s rising



GDP Agriculture, forestry, and fishing

ServicesIndustry and construction

3

5

7

9

Q1 2013 Q1 20151

Q3 2013 Q1 2014 Q3 2014

25


import bill and aiding exporters. Additionally, Vietnam’s trade balance is back in deficit by approximately US$ 3 billion as of May 2015 after three consecutive years of surpluses;5 a further devaluation cannot be ruled out this year if the deficit widens. This is despite the SBV governor’s announcement in December 2014 that the central bank will not weaken the dong by more than 2 percent in 2015.6

The dong’s devaluation is synonymous with a domestic liquidity boost as the central bank buys dollars to enact the change. The

accommodative policy stance is expected, given that inflation (less than 1 percent in May) is currently well below SBV’s target of 5 percent. SBV has held policy rates constant since March 2014, when it last cut rates. However, with real interest rates rising due to low inflation, it is possible that the SBV will follow the dong’s devaluation with a rate cut this year, thereby attempting to boost lending to and above the targeted 13 to 15 percent expansion for 2015. However, the country’s troubled banking sector could play spoilsport by preventing an efficient

transmission of monetary and exchange rate policies to the real economy.

Reforms in banking and SOEs a step in the right direction

Policymakers have been taking steps to improve banks’ asset quality, Vietnam’s Achilles heel for long. Since Vietnam created the Vietnam Asset Management Company (VAMC), a state-owned enterprise to buy and rehabilitate bad debt, in 2013, the ratio of non-performing loans to total outstanding loans has dropped. In February 2015 it stood at 3.6 per-cent, down from above 8 percent at the end of 2012.7 The SBV aims to bring it down to below 3 percent in 2015. Toward this goal the VAMC has been issuing special bonds to commercial banks in exchange for bad debt. However, while buying bad debt might be relatively easy, sell-ing the bad debt is expected to be a challenge for VAMC.

The government is also accelerating consoli-dation in the banking sector, aiming to shrink the number of banks from 40 to 15 by 2017.8 Rating agencies have reacted positively to these efforts, which, they believe, will improve effi-ciency through better economies of scale.9

The government is also trying to reform SOEs to reduce bad debt and improve effi-ciency. SOEs contribute less than a third of

Figure 2. Dong devaluation amidst low inflation and credit uptick

Source: Haver Analytics; Bloomberg; Deloitte Services LP economic analysis. Graphic: Deloitte University Press | DUPress.com

Credit growth (percent, year-over-year

Exchange rate (USD/VND, end of period value, right axis)

Headline inflation (percent, year-over-year)

18

4

8

12

Jan 2014 Apr 20150

Apr 2014 Jul 2014 Oct 2014 Jan 201521,000

21,200

21,400

22,000

12,600

2

6

10

14 21,800

16

The government is also accelerating consolidation in the banking sector, aiming to shrink the number of banks from 40 to 15 by 2017.

26

Q3 2015

Vietnam’s GDP, but account for nearly half of public investment and 60 percent of bank lending.10 Worryingly, they account for more than half of Vietnam’s bad debt.11 The govern-ment aims to “equitise” or partially privatize more than 300 SOEs before the end of 2015.12 However, the stake on offer to the private sec-tor is miniscule, thereby raising doubts about radical changes in the way large SOEs are run. Nevertheless, the push to clean up SOEs is a step in the right direction as the country tries

to liberalize the economy and seeks deeper engagement with the developed world.

Seeking to accelerate on the trade route to prosperity

Vietnam’s reforms to boost domestic effi-ciency are also geared toward trade liberaliza-tion. In focus is the Trans-Pacific Partnership (TPP), a proposed free trade agreement (FTA) between the United States, Japan, and ten other

countries along the Pacific Rim, including Vietnam. As understood, TPP member-ship is intended to boost exports, including those to the United States, Vietnam’s largest export destination. Trade between the two nations was US$ 36.3 bil-lion in 2014.13

Vietnam has also reached the final stages of FTA discussions with the European Union (as of May). This comes on the back of successful FTA discussions with South Korea and with the Eurasian Economic Union led by Russia in December 2014. Additionally, Vietnam also stands to gain from closer economic integra-tion within the Association of Southeast Asian Nations (ASEAN), especially with the advent of the ASEAN Economic Community by the end of 2015.

On the global stage, the trick for Vietnam is to manage relations with China, even as it expands its economic and strategic relation-ship with the United States. Currently, China is Vietnam’s largest trading partner, with bilateral trade touching US$ 58.8 billion in 2014 and expected to reach US$ 60 billion in 2015.14 Relations between the two countries have been less than cordial of late due to a dispute over the Paracel Islands in the South China Sea in 2014.

26

27


Endnotes1. General Statistics Office of Vietnam, “Social and economic situation in the first quarter Of 2015,” April 2, 2015, http://www.gso.gov.vn/default_en.aspx?tabid=508&ItemID=14251.

2. Ibid.

3. Ministry of Planning and Investment, “Brief on foreign direct investment in 12 months of 2014,” January 16, 2015, http://www.mpi.gov.vn/en/Pages/tinbai.aspx?idTin=26445.

4. Markit, “HSBC Vietnam Manufacturing PMI,” June 1, 2015, http://www.markiteconomics.com/Survey/PressRelease.mvc/ecd72cbc3cc94fc0802f7c36ec16c4c0.

5. VietNam News, “Trade deficit reaches $3 billion,” June 1, 2015, http://vietnamnews.vn/economy/271103/trade-deficit-reaches-3-billion.html.

6. Uyen Nguyen, Diep Pham, and Y-Sing Liau, “Vietnam devalues dong for second time in 2015 to aid exports,” Bloomberg, May 7, 2015, http://www.bloomberg.com/news/articles/2015-05-07/vietnam-devalues-dong-for-second-time-this-year-to-aid-exports

7. Ho Binh Minh, “Vietnam’s bad debt ratio eases to 3.59 pct in Feb,” Reuters, May 19, 2015, http://www.reuters.com/article/2015/05/20/vietnam-economy-debt-idUSL3N0YB1OS20150520 Reuters, “Vietnam to halve bad debt amount in 2013 –govt.,” December 26, 2012, http://www.reuters.com/article/2012/12/26/vietnam-economy-loan-idUSL4N0A00W520121226.

8. Giang Nguyen, “Vietnam banks say ‘I do’ as Government forces arranged marriages,” Bloomberg, May 5, 2015, http://www.bloomberg.com/news/articles/2015-05-05/vietnam-banks-say-i-do-as-government-forces-arranged-marriages.

9. Fitch Ratings, “Proposed Vietnam bank consolidation positive for sector,” March 10, 2015, https://www.fitchratings.com/gws/en/fitchwire/fitchwirearticle/Proposed-Vietnam-Bank?pr_id=981031.

10. Uyen Nguyen, “Rage against the state: Discontent grows in Vietnam,” Bloomberg, May 15, 2015, http://www.bloomberg.com/news/articles/2015-05-14/in-communist-vietnam-rising-discontent-with-state-driven-system.

11. Ibid.

12. Vietnam.net, “Foreign firms eye M&A deals as SOEs equitise,” March 5, 2015, http://english.vietnamnet.vn/fms/business/124589/foreign-firms-eye-m-a-deals-as-soes-equitise.html.

13. Murray Hiebert, “40 Years After Exit From Saigon: Vietnam and US Find Strategic Common Ground,” YaleGlobal Online, April 30, 2015, http://yaleglobal.yale.edu/content/40-years-after-exit-saigon-vietnam-and-us-find-strategic-common-ground.

14. Ibid.

The dispute resulted in tensions in Vietnam, where protestors vented their ire on businesses from China.

In addition to addressing prickly relations with China, the country also has to deal with internal economic reforms. A key challenge to the continuation of economic reforms is

the upcoming leadership change in 2016. For the time being, though, there appears to be no uncertainty. Policymakers seem focused on near- term economic management. They have targeted GDP growth of 6.2 percent this year. And judging by current trends, they are likely to get there.

28

Q3 2015

In many countries in the region, households have gone on a credit binge, aided by loose monetary policy and fiscal sops.

28

Q3 2015

Special topic

29


Prudent no moreHousehold debt piles up in Asia

By Akrur Barua

THE global financial downturn of 2008–09 was a watershed in the evolution of economic theory and policy. It spurred central banks to innovate and led

to greater oversight of banking and financial services. It also sparked discussion on the sustainability of growth models driven by debt-fueled consumer spend-ing as in the United States and the United Kingdom. Not only did high house-hold leverage add to the vulnerabilities in these countries, it also aggravated the resulting economic downturn. In contrast, Asia and some parts of Europe escaped the worst of the crisis, arguably due to lower leverage and higher sav-ings. Not surprisingly, criticism from Asian commentators was harsh.1 And they have been quick to suggest improvements to Western capitalism.2 In particular, they showcased the prudent Asian consumer as an ideal alternative to leveraged households in the West.

30

Q3 2015

A twist in the tale

However, as the world economy chugs along, (albeit in fits and starts) there appears to be an unravelling of the myth of Asian prudence.3 In many countries in the region, households have gone on a credit binge, aided by loose monetary policy and fiscal sops. Although GDP growth benefited as a result, economic risks have increased. Household debt is now at a record high in many Asian economies. For example, as a share of personal disposable income,

household debt in Singapore, South Korea, and Malaysia is higher than in the United States before the global credit crisis (figure 1).

The fuel that fed the fire

The immediate cause of this rising house-hold indebtedness is loose monetary policy post the outbreak of the global credit crisis of 2008-09. The sharp economic downturn in the West forced Asian economies, especially export-driven ones, to turn to their domestic markets for growth. In addition to fiscal stimu-lus, policymakers unleashed monetary easing and increased sops for consumer spending. While this led to greater contribution of private consumption to GDP growth during 2010–14 (figure 2), it also pushed household debt up sharply (figure 3) in many countries. For

Figure 1. Ratio of household debt to personal disposable income (percent) has gone up in Asia

Source: Oxford Economics; Haver Analytics; Deloitte Services LP economic analysis.

*For Thailand, the figure is for 2003 instead of 2002Estimates by Oxford Economics for China (2013–14) and India (2010–14)

2002 2007 2014


0%

180%

150%

120%

90%

US

60%

30%

UK Malaysia Singapore South Korea

Taiwan Thailand* China India

Household debt burden in Malaysia, Singapore, South Korea, Taiwan, and Thailand are either higher or as high as the U.S. in 2007; China and India fare better.

137%

31


example, in Thailand, the ratio of household debt to personal disposable income jumped by an astounding 56 percentage points during 2007–14.

A number of other factors have likely led to soaring household debt in parts of Asia over the years.

• Rising incomes contributing to higher consumption in Asia. Economic fortunes in Asia have improved remarkably in the past few decades. Over 1990–2014, per-capita income in current international dollar of purchasing power parity (PPP) grew by 8.4 percent a year on an average in emerg-ing Asia; in more advanced economies, the figure was 3.5 percent.4 Strong income growth, in turn, helped alleviate poverty and added to the legions of the middle class. This has fueled consumption, with households increasingly using debt for spending. This trend is expected to continue, given that the size of the middle class in the Asia-Pacific region is expected to rise to 3228 million by 2030 from 525 million in 2009.5

• Greater access to credit. Buoyed by the fast-growing Asian market, banks and financial institutions have expanded their services. These include housing loans, personal loans, credit cards, investment accounts, and insur-ance products.6 Economic liberalization has


Figure 2. Share of private consumption in real GDP growth went up for Asian exporters during 2010–14

2003–07 2010–14


15%

55%

50%

45%

40%

China

30%

25%

Singapore South Korea

Taiwan Thailand

35%

20%

30%

38%

19%

26%

30%

35%37%

43%45%

49%


Figure 3. Sharp rise in household debt (in percentage points) in many Asian economies after 2007

2002–07 2007–14


-40

60

Malaysia

20

0

Singapore South Korea

Thailand

40

-20

5

Malaysia Singapore South Korea

Thailand

44

-30

1316

24

14

56

24

0

28

9117

12

-29

Change in the ratio of household debt to personal disposable income

Change in the ratio of household debt to GDP


Figure 4. Rising exposure to housing credit for households in Asia over 2000–14

*For Malaysia, the change in ratio of mortgage liabilities to total household liabilities is for the period 2003–14.Estimates by Oxford Economics for China (2013–14) and India (2010–14) for household liabilities.

Compound annual growth rate of mortgage liabilities

Change in ratio of mortage liabilities to total household liabilities*


0%

35%

30%

25%

US

15%

10%

China India Singapore Taiwan

20%

5% 5%

1%

29%

4%

25%

13%16%

12%

6%

12%

Malaysia*

33%

12%

32

Q3 2015

also made access to financial services easier.7 Moreover, a young population, attracted to new products and aware of global trends, has also pushed up credit-driven spending in many parts of Asia.8

• The lure of home ownership. In Asia, the share of housing in household liabilities has been going up (figure 4). A key factor behind rising housing demand is grow-ing prosperity.9 Home ownership is also ingrained in the cultural psyche; India is

a good example of this.10 However, first-time home buyers are not the only ones driving demand and, hence, credit to the sector. Housing is an important invest-ment option as well, given limited financial savings instruments. Real assets, includ-ing housing, constitute about 86 percent of household wealth in India and Indonesia, and 50 percent in China; for the United States, it is 30–38 percent based on the inclusion of unincorporated enterprises in the calculation.11

Strong income growth, in turn, helped alleviate poverty and added to the legions of the middle class. This has fueled consumption, with households increasingly using debt for spending.

33


The pitfalls of surging household debt

The rise in household debt in Asia has led to a number of complications, including fears of property bubbles, risks to the banking sector, and complications for monetary policy.12

• Concerns about housing bubbles. As consumers directed credit to housing, house prices shot up between 2009 and 2013 (fig-ure 5). The trend was similar in the United States prior to the credit crisis. The price

spikes in Asia, therefore, led to suspicions of bubbles, leading authorities to intervene. Thankfully, the rise in house prices has slowed. But, this has hit household wealth, thereby posing risks for consumer spend-ing in the near term. In addition to housing, consumers in many parts of Asia also spent heavily on durables (mainly automobiles) due to greater credit access and fiscal incen-tives. Now, the story has turned sour in some countries. For example, in Thailand,

high household debt and slowing economic activity has dented auto sales and resulted in higher non-performing auto loans.13

• Complications for central bankers. The surge in house prices added to inflation, which was already moving up due to strong credit growth and abundant global liquid-ity during 2010–12 (figure 6). This created a big dilemma for central banks. They had to tighten policy to prevent bubbles and dent


Figure 5. Compound annual growth rate (CAGR) in house prices for key Asian economies and the U.S.

The calculation of CAGR in house prices is based on key house price indices for each economy. For each year, the index value is the average for the year.

2003–07 2009–13


0%

20%

US

12%

8%

Indonesia Malaysia Taiwan Thailand

16%

4%

7%

1%

19%

8%

4%

6% 6%

10%

4%

3%

Singapore

14%

9%

Hong Kong

10%

4%

34

Q3 2015

inflation, but had to be mindful of conse-quent rises in households’ debt-servicing costs. This was particularly true of countries like South Korea and Malaysia, given their high levels of household debt. In contrast, India and the Philippines—both with relatively lower household debt—were able to tighten policy more easily. Fortunately for many Asian economies, inflation has gone down due to low global energy prices, thereby aiding real incomes and reducing the burden on monetary authorities.

• Banks have been impacted. The share of household debt in total debt outstanding in Asia has gone up over the years, espe-cially during 2008–14 (figure 7); similarly, the share of housing has also increased. Unsecured credit has also gone up during this period. For example, the volume of credit card transactions per person in South Korea more than doubled during 2008–14.14 In fact, South Korea is a worrying example of a country with a population that has high unsecured credit usage; per-capita credit card ownership is about five in the country,

nearly double the figure for the United States (2.6 in April 2014).15 This surge in unsecured credit in South Korea and other parts of Asia could dent the asset quality of commercial banks, especially when economic activity is slowing. This could potentially reverse the trend of falling non-performing loan ratios in Malaysia, Singapore, South Korea, and Thailand.16 It could also impact the banking sector’s performance. For example, return on assets for commercial banks has already gone down (albeit moderately) in Singapore (1.1 to 1) and Malaysia (1.6 to 1.5) over 2012–14.

The rise in household debt does not come at a good time for Asian economies. With the Fed likely to raise rates in the near term, Asian currencies could be hit, thereby stoking infla-tion. Additionally, the rising debt burden of households has come at a time of greater fiscal consolidation in some economies. In Malaysia, for example, the removal of subsidies has forced up inflation. Overall, high household debt, slowing house prices, and higher debt servicing costs (however delayed) will weigh on personal consumption growth in key Asian economies in the near term. In contrast to a few years before, consumers in Asia are slowly waking up to reduced credit access amid slow real income growth. Declining global liquidity due to the September 2014 closure of the Fed’s

Figure 6. High household debt has made it difficult for some Asian central banks to tackle inflation


Hong Kong Malaysia Thailand PhilippinesSouth Korea

-1%

0%

1%

5%

7%

-2%

6%

4%

3%

2%

Jan 2010 Jan 2015Jan 2011 Jan 2014 Jul 2014Jul 2010 Jul 2012 Jul 2013Jan 2013Jan 2012Jul 2011

35


assets purchases program and a probable rise in interest rates in the United States will add to the discomfort.

Are the risks from high household debt severe enough?

Despite challenges, high household debt in Asia does not pose immediate risks for

economies. Governments are well-placed to aid households and inject capital into banks should the need arise (table 1). In countries like Indonesia and Malaysia, current fiscal consoli-dation efforts will help governments to react more decisively to a financial crisis.17 External balances in the region are also healthy, with sizeable reserves in place (table 1) to support currencies in the event of any sharp capital

outflow. Also, financial regulations have been beefed up post the Asian financial crisis and the global financial crisis.

So far, policymakers’ response to high household debt and likely property bubbles has been innovative. In addition to tightening credit, policymakers have targeted loan-to-value ratios, put restrictions on the value of loans relative to income, and introduced greater scrutiny of loan applications. On the fiscal side, taxes related to property have been increased

Figure 7. Share of households in total credit has gone up in many parts of Asia in 2008–14


Malaysia (loands to households/total loans)

Taiwan (bank loans and discounts to individuals/total bank loans and discounts)

South Korea (loans to households/total loans; right axis)

Thailand (loans to households by commercial banks/total commercial bank loans; right axis)

57%

49%

53%

55%

2008 201445%

2010 2011 2012

51%

47%

35%

30%

33%

34%

28%

32%

29%

31%

20132009

35

36

Q3 2015

and the bar on foreign investors in real estate has been raised (as in Malaysia). Overall, gov-ernments are keen to prevent a hard landing in real estate. Trends in Malaysia and Singapore suggest that authorities have so far been suc-cessful (figure 8).

The calculation of change in house prices is based on key house price indices for each economy; 2015 figures are forecasts by Oxford Economics.

An eye opener

Problems related to high household debt should be an eye opener for Asian policymak-ers. Overreliance on credit-driven consumption and its links to the housing market have been demonstrated to be imprudent. Hence, greater oversight is one of the key factors required to

Table 1: Government balance and debt, current account, and reserves

ChinaHong Kong,

ChinaIndia Indonisia Malaysia

South Korea

Taiwan Thailand

Budget balance (% of GDP) -1.2 1.5 -4.3 -2.1 -3.5 0.6 -1.5 -2.2

Current account (% of GDP) 2.1 N/A -1.4 -2.8 4.7 6.3 12.3 3.2

Gross government debt (% of GDP) N/A 6.8 46.7 26.3 54.5 37.1 33.9 30.1

Reserves, including gold ($ billion) 3,869 329 323 112 116 364 424 157


36

37


keep banks healthy enough to handle a crisis. Monetary authorities in Asia may wish to take a leaf out of the Fed’s book and introduce regular stress tests for banks. Publication of the results and the methodology could enhance the cred-ibility of the process.

Also, policymakers need to note that the success of any shift in the growth model from an export-driven economy to a domestic demand-led one is dependent on a strong domestic private sector, having at its core a

vibrant banking and financial services sector that offers a range of savings and investment options. In many Asian economies, house-holds are often caught between low-yielding fixed income deposits and real estate; naturally, many opt for the latter. A more balanced mix of investment in fixed income deposits and real estate could lead to greater efficiency in savings and investment, but it will also enable banks and households to diversify their portfolios.


Figure 8. Annual house price changes for key Asian economies (2014–15)

The calculation of change in house prices is based on key house price indices for each economy; 2015 figures are forecasts by Oxford Economics.

2014 2015


3%

18%

Hong Kong

12%

9%

Indonesia Malaysia Singapore

15%

6%6%

Taiwan Thailand

17%

7%

-6%

0%

-3%

6%

8%

4%

6%

1%

5%

6%

-3%

-4%

37

38

Q3 2015

In many developing and emerging econo-mies in Asia, the calculation of household debt itself is a problem, given low banking penetra-tion and large-scale non-formal lending. For example, although household debt-to-GDP ratio is low at 22 percent in India, limited bank-ing penetration means that a small set of people owes the entire debt. Moreover, not included in the debt-to-GDP ratio is non-formal lend-ing, predominant in rural areas, where the debt burden and servicing costs are higher than in the formal economy.18

Given its large population and an expected spike in middle class numbers in the next few

decades, Asian governments also need to take a closer look at their social security systems. Currently, what exists appears to be inadequate and trails social safety nets in advanced econo-mies. A few steps have recently been taken. For example, India is trying to improve banking penetration and channel aid and insurance to low income earners. Singapore is seeking ways to better support low income households, while South Korea is attempting to help highly indebted households. But much more needs to be done. Without a sustainable safety net in place, dealing with indebted households will become more difficult with time.

39


Endnotes1. Kishore Mahbubani, “Time to visit Asian factories for capitalist lessons,” Financial Times (Opinion), February 7, 2012, http://www.ft.com/intl/cms/s/0/6ccb2418-51c0-11e1-a30c-00144feabdc0.

html#axzz3Xq0CpfsU.

2. Mahathir Mohamad, “West needs to go back to capitalist basics,” Financial Times (Opinion), January 11, 2012, http://www.ft.com/intl/cms/s/0/9f60aff2-3ba8-11e1-bb39-00144feabdc0.html#axzz3Whtge2v0.

3. The focus is on key economies in East Asia, South East Asia, and South Asia; Japan is not included in the analysis.

4. International Monetary Fund, World Economic Outlook Database, May 30, 2015.

5. Homi Kharas, The emerging middle class in developing countries, OECD Development Centre, January 2010, http://www.oecd.org/dev/44457738.pdf.

6. World Bank, World Development Indicators, May 5, 2015, http://data.worldbank.org/data-catalog/world-development-indicators.

7. United Nations, “Rethinking Poverty: Report on the world social situation 2010,” http://www.un.org/esa/socdev/rwss/docs/2010/fullreport.pdf; International Monetary Fund, Household credit growth in emerging market countries, 2012, https://www.imf.org/External/Pubs/FT/GFSR/2006/02/pdf/chap2.pdf.

8. Song Jung-a, “South Korean households pile up debt,” Financial Times, January 5, 2015, http://www.ft.com/intl/cms/s/0/ed974c7a-8fe8-11e4-a0e5-00144feabdc0.html#axzz3Xqi2tZrl; Gary Coleman, Ira Kalish, Dan Konigsburg, Rumki Majumdar, and Akrur Barua, “Competitiveness: Catching the next wave – India,” Deloitte, November 2014, http://www2.deloitte.com/content/dam/Deloitte/in/Documents/about-deloitte/in-about-tndia-competitiveness-report-WEB-noexp.PDF.

9. Edward M. Kerschner and Naeema Huq, “Asian affluence: The emerging 21st century middle class,” Morgan Stanley Smith Barney, http://www.morganstanleyfa.com/public/projectfiles/35257b34-b160-45e4-980d-8bca327db92b.pdf.

10. Anuj Puri, “Residential property: A lateral look at home ownership in India,” Jones Lang LaSalle (JLL Blog), October 24, 2011, http://www.joneslanglasalleblog.com/realestatecompass/real-estate/2011/10/residential-property-ownership-in-india/.

11. Credit Suisse, “Global Wealth Report 2014,” October 2014, http://economics.uwo.ca/people/davies_docs/credit-suisse-global-wealth-report-2014.pdf.

12. Credit Suisse, “Global Wealth Report 2014,” October 2014, http://economics.uwo.ca/people/davies_docs/credit-suisse-global-wealth-report-2014.pdf; Matt O’Brien, “Asia’s housing bubbles look a lot like the U.S. housing bubble did,” March 6, 2015, http://www.washingtonpost.com/blogs/wonkblog/wp/2015/03/06/asias-housing-bubbles-look-a-lot-like-the-u-s-housing-bubble-did/.

13. Khettiya Jittapong and Manunphattr Dhanananphorn, “Bad car loans pile up in Thailand as consumers bear more debt,” Reuters, October 2, 2014, http://www.reuters.com/article/2014/10/02/thailand-autos-loans-idUSL3N0RO1KF20141002.

14. Bank of Korea, Economic Statistics System, June 12, 2015.

15. Timothy Lee, “How Asia Pacific is serving consumers without credit cards,” SP eCommerce, January 30, 2015, http://www.specommerce.com/asia-pacific-serving-consumers-without-credit-cards/; Art Swift, “Americans rely less on credit cards than in previous years,” Gallup, April 25, 2014, http://www.gallup.com/poll/168668/americans-rely-less-credit-cards-previous-years.aspx; Economist, “A swipe at profits,” November 9, 2013, http://www.economist.com/news/finance-and-economics/21589470-it-getting-harder-make-money-worlds-most-prolific-card-users-swipe.

16. World Bank, World Development Indicators, June 1, 2015, http://data.worldbank.org/indicator/fb.ast.nper.zs/countries.

17. Jake Maxwell Watts, “Markets rally as Indonesia cuts fuel subsidy,” The Wall Street Journal, November 18, 2014, http://blogs.wsj.com/moneybeat/2014/11/18/markets-rally-as-indonesia-cuts-fuel-subsidy/; Yantoultra Ngui and Anuradha Raghu, “Malaysia to cut fuel subsidies to shore up finances,” Reuters, November 21, 2014, http://www.reuters.com/article/2014/11/21/malaysia-government-subsidies-idUSL3N0TB3DO20141121; Melissa Goh, “Teething pains as new goods and services tax in Malaysia starts today,” Channel NewsAsia, April 1, 2015, http://www.channelnewsasia.com/news/asiapacific/teething-pains-as-new/1760724.html.

18. Nimal A. Fernando, “Understanding and dealing with high interest rates on microcredit,” Asian Development Bank, May 2006, http://www.ruralfinance.org/fileadmin/templates/rflc/docu-ments/1153144135194_Microcredit_interest_rates_ADB.pdf; Mamata Swain, “Rural indebtedness and usurious interest rates in eastern India: Some micro evidence,” Journal of Social and Economic Development, June 2001, http://www.isec.ac.in/JSED/JSED_V3_I1_121-143.pdf.

Additional resourcesDeloitte Research thought leadershipGlobal Economic Outlook, Q1 2015: China, United States, Eurozone, Japan, India, Russia, United Kingdom, Brazil

United States Economic Forecast, Volume 3, Issue 2

Issues by the Numbers, January 2015: The geography of jobs, part 3: Mapping the effects of international investment flows

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].

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Q3 2015

http://dupress.com/periodical/global-economic-outlook/q1-2015/

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

http://dupress.com/periodical/u-s-economic-forecast/volume-3-issue-2/?per=6220

http://dupress.com/periodical/global-economic-outlook/q1-2015/

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

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

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.

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