East Asia’s Testy Maturity Markers

Korea’s bid for developed market inclusion was indefinitely shelved by MSCI on marginal gains through June, while the Philippines got a BBB S&P upgrade accompanying a near 20 percent advance, ahead of coup-prone Thailand where a special economic cabinet was convened but just behind election-seized Indonesia where the young presidential favorite began to campaign with a trusted business and policy veteran. The Korean central bank has reportedly resumed intervention with the won’s 10 percent appreciation hitting monthly exports, as the sovereign proved its fixed-income popularity with an oversubscribed $2 billion multi-currency 30-year bond. GDP rose almost 4 percent in Q1 on 1.5 percent inflation, but after the new President’s fiscal stimulus consumption has retreated under the weight of a $1 trillion household debt burden which may be alleviated under expanded official programs. The Philippines now has scope for such support after the Aquino government improved the chronic deficit and introduced tax reforms, and it has underwritten post-Typhoon Haiyan reconstruction as growth stayed at 5 percent in the first quarter and should again lead ASEAN. Portfolio inflows and remittances continue to bolster the peso against the dollar as monetary policy was tightened incrementally through consecutive 100 basis point bank reserve ratio hikes. In Thailand domestic investors remained committed despite the foreign pullout in May on formal military takeover until potential elections next year, as political activists are rounded up for questioning and former ministers oversee scheduled infrastructure spending plans blocked by the previous impasse between Prime Minister Yingluck and the opposition. She still faces charges of abuse in the rice subsidy scheme which abruptly ended several months ago as farmers begin to receive back payments from the army council in charge. Recession will last through the first half, and  baht weakness may limit future rate reduction as overseas ownership of local bonds is still sizable at 15 percent.

Indonesia held its first presidential debate for the July contest and Widojo mostly passed substantive economic questions to running-mate Kalla but kept his front-runner position on confident appearance. The pre-election budget stipulated a deficit jump to 2.5 percent of GDP as fuel subsidy adjustments were postponed and missing from campaign platforms. The trade gap will be hard to ease on commodity export suspension, as multinational firms have come under scrutiny for domestic value-added contributions. On the budget front Malaysia in contrast with a modest share uptick through June abolished sugar support and raised property taxes in an attempt to lower the shortfall to 3.5 percent of GDP. Public debt is near the 55 percent statutory ceiling and foreigners control almost half of the domestic debt market. The government is also struggling to regain credibility after the unsolved Malaysian Airlines disappearance months after delaying and divulging inaccurate information resulting in lawsuits under consideration by passenger families. Ambitious infrastructure outlays are in the pipeline to aid domestic demand which also applies to the mystery’s fate.