Uneven Economic Growth, But With Improving Prospects
¨ The five major ASEAN economies are not expected to have a strong showing in economic growth in 2014, partly because export recovery remains modest and partly bogged down by internal problems. As a result, we envisage the ASEAN-5 to grow at a more moderate pace of 4.7% in 2014, compared with +4.9% recorded in 2013. However, investors should look beyond the moderation in growth, as it will likely be temporary and it is envisaged to bounce back and chart a stronger growth of 5.2% in 2015.
¨ Thailand will likely suffer the most due to its prolong political impasse, which prompted us to downgrade the country’s economic outlook. At another extreme, Philippines’ economic growth is projected to remain relatively strong in 2014, as the Aquino administration has instituted wide-ranging economic and social reforms, leading to a new investment cycle that is still in its early stage of development.
¨ Economic growth in Indonesia and Singapore are projected to hold up, albeit expanding at a more moderate pace in 2014. The former will likely be dragged by higher borrowing costs and the general election overhang and the latter will likely be capped by tight labour condition and a gradual appreciation of the exchange rate.
¨ Malaysia, on the other hand, stands out among the ASEAN-5, as it is the only economy that will likely experience a faster growth in 2014. Although there are challenges due to rising costs, domestic demand led by private investment will continue to be a key driver of growth, albeit expanding at a more moderate pace. This will likely be aided by an improvement in external demand for the country’s exports.
¨ Inflation is envisaged to trend up in Philippines, Malaysia and Singapore but will likely be manageable. Inflation is benign in Thailand and is projected to moderate in Indonesia. Nevertheless, countries in the region will likely be on a tightening bias, particularly in 2H 2014, with the exception of Thailand. Meanwhile, the persistently strong money supply growth in the Philippines that is not consistent with economic growth is a cause for concern, as it could fuel inflation expectations and asset prices.
¨ ASEAN-5 have weathered the US QE tapering relatively well by allowing their currencies to weaken. Given that the US Federal Reserve is on track to exit its quantitative easing by the end of this year, the next question to ask is when will it start to raise interest rates? Our G3 economist believes the Fed’s first rate hike will likely commence around the summer of 2015. Judging from how investors reacted to the QE tapering, we believe they will likely react strongly at the initial stage of interest rate hikes given the uncertainty and fear. However, we expect ASEAN-5 to adjust well to a major shift in monetary policy stance by the US even though currencies in the region will likely be volatile and suffer some temporary weakness. The weakness in ASEAN-5’s currencies, however, will likely be manageable, in our view.
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