ASEAN’s Sleepy Stock-Taking Exercise
Among ASEAN stock markets, only frontier component Vietnam was up double-digits through February, as Indonesia, Malaysia, the Philippines and Thailand could not excite investors to beat the core 9% MSCI Index advance. A Moody’s Ratings report captured economic “slower momentum” angst, and the International Monetary Fund weighed in with a Malaysia Article IV report almost a year after the Mahathir administration retook power citing fiscal and financial stability risks. The analyses addressed potential softness from commodity and tech trade and investment ties with China, as well as uncompleted infrastructure projects and commercial and capital market integration within the region.
The current lethargy overshadowed a Price Waterhouse longer-term fund management study predicting Asia-Pacific assets to double by 2025 to $30 trillion. ASEAN’s cross-border collective investment scheme is modeled on Europe’s UCITS, and rapid urbanization has promoted “impact” investing such as green bonds. Singapore as the area venture capital hub helped generate a record $13 billion in deals in 2017, as governments consider additional small business tax breaks. This future vision also came with a stark warning that retirement savings into the next generation remain inadequate, even as countries strengthen private pension pillars to relieve pressure on official social security systems.
Moody’s projects gross domestic product growth after two years over 5% to fall to the 4.5% range through next year. While the US-China trade spat is a drag, monetary tightening fears faded with the Federal Reserve’s possible pause. The Philippines and Vietnam will lead the pack with 6% expansion as manufacturing exports slow for the rest, although Indonesia’s election spending will partially offset the trend. Thailand faces protectionism abroad and weaker public investment at home, and was hurt by Malaysia’s delay of the East Coast Rail Link connected to the Port Klang container center. Prime Minister Mahathir Mohamed is renegotiating debt terms, and while Thailand’s domestic demand is “relatively healthy,” intermediate tech and auto exports have increased only single digits in recent months.
Malaysia’s new government scuttled other ventures, as natural gas and palm oil earnings slip despite solid private consumption for below 4.5% growth this year according to Moody’s, while the IMF sees it just above that level. The rater expects the fiscal deficit to repeat at 3.5% of GDP, with the narrower goods and services tax pledged during the election campaign. The Article IV survey projects rising inflation around 3% on programmed fuel subsidy cuts, and urges the budget to incorporate contingent liabilities, with end-2018 public debt estimated at 52%, 3% below the agreed cap The current account surplus was 2% last year, and capital outflows reversed with local institutional investors hiking their share of Treasury bonds to three-quarters of the total. Monetary policy is neutral, but the central bank continues ringgit intervention with $100 billion in gross foreign reserves, while mainly private external debt is 65% of GDP. Officials clamped down on currency speculation through mandatory export conversion requirements and an offshore non-deliverable forward ban, and these curbs should be lifted in the near term, the report urges. Commercial bank bad loan ratios are under 2%, but household debt is close to 85% of output, with variable mortgages subject to interest rate risk. House price gains halved to 3% according to the latest figures and macro-prudential controls serve as a cushion, but are directed more to non-residents, the Fund cautions.
Indonesia growth will be 5% as it is less exposed to global trade cycles, but runs a persistent current account deficit forcing rate hikes to steady the rupiah, Moody’s notes. Inflation is at the low end of the 2.5%-4.5% target and could aid private fixed investment post-election. Singapore will lag at under 2.5% growth with export and house price decline. The Philippines’ pace is triple that figure under President Rodrigo Duterte’s original near 7% goal, but he will fall short at 6.2% this year. Over half of 75 major infrastructure projects have been launched to enable a 7.5% of GDP contribution by 2022, but the tax package to pay for it ratcheted headline inflation toward 7% and put the central bank on notice. Equipment imports in turn widened the current account gap, and rice costs have spiked with bad weather. May midterm elections will likely witness backlash despite President Duterte’s still high opinion approval, as voters spot faulty aspects of the signature “Build” program.
