The second half of 2013 has posed significant challenges to growth in major Emerging Asia Pacific economies. Almost all emerging Asia Pacific economies showed signs of strain arising from stubborn inflation, higher interest rates, slower consumer spending and lukewarm exports. Although China, the preeminent Asian economy, posted its best growth numbers in three quarters, tapering fiscal stimulus and jumping food and fuel costs posed a challenge for future growth. Elsewhere in Asia, however, investment growth seemed to level off. In fact, the World Bank pared down its outlook for East Asia as a whole due to slow investment growth in the region. Other key reasons too, such as weak commodity prices and lower exports have played spoilsport in Asia’s prospects for the year.
At a Glance
China: Helped by a strong property market and investment growth, China’s economy ended three quarters of sliding GDP growth to register growth figures of 7.8 percent in the third quarter of 2013. However, a rising domestic currency, the yuan, is threatening the country’s vast export engine and growth for 2014. India: Accelerating inflation and a sliding currency forced the country’s central bank to raise interest rates in September. A slowdown in investment, however, has clouded the country’s growth prospects. The IMF forecasted growth figures of just 3.8 percent for India in 2014, the lowest in a decade.
South Korea: Quarterly economic growth during the third quarter jumped at the fastest pace since 2011. Helped by low inflation and relatively strong capital inflows, the South Korean central bank held interest rates steady, fueling consumption and investment. Taiwan: As exports fell and inflation remained muted, Taiwan’s central bank held its interest rates unchanged for a ninth straight meeting. Further, Taiwan’s government pared down its growth forecast to 2.31 percent to 2013 from an earlier projection of 2.4 percent.
Indonesia: The country’s currency, the rupiah, fared amongst the worst in emerging market currencies as Indonesia was troubled by inflation and current account deficit. The Indonesian central bank has hiked interest rates and pared down its growth forecast for 2013 to a range of 5.8 percent and 6.2 percent. Thailand: A slump in exports and a spike in household debt have threatened Thailand’s GDP growth for 2013. The country’s central bank expects 3.7 percent growth in 2013 compared to an earlier forecast of 4 percent.
Philippines: The Philippine economy expanded 7.6 percent during the second quarter of 2013, making it one of the fastest growing economies in Asia. A strong current account surplus, low inflation, and an investment grade debt rating helped the economy travel steadily along a growth trajectory.
In the past few months, many emerging Asian economies saw their currencies plunge in the wake of a possible tapering in U.S. monetary stimulus. Although the U.S. Federal Reserve has emphasized its preference for keeping the monetary stimulus intact, Asian currencies that suffered a rout in their value did not regain all their lost strength. That is because many of the consumption-driven economies such as India and Indonesia, which had run up higher current account deficits, are hardly likely to trim their deficits quickly. These countries in turn were seen raising interest rates to attract capital to finance their deficits. But raising interest rates served to weaken consumer sentiment and investments further.
The lot of export-dependent emerging Asia was not quite different either. While South Korea has managed to improve its exports lately, exports from Taiwan and China were lukewarm as key export markets such as the European Union and the U.S. were a cause of concern.
Amidst all the gloom, however, the Philippines stood out as the star of Asia’s emerging markets. The country’s economy sailed through the storm growing at its fastest pace in many quarters thanks to prudent fiscal management that has ushered in stable inflation, low interest rates and robust consumer spending.
CHINA: GDP ACCELERATES AFTER THREE CONSECUTIVE QUARTERS OF DECLINE
China’s economy offered increasing signs of hope during the third quarter of 2013. First of all, GDP growth gained pace after three continuous quarters of slowdown. An increase in investment in the wake of a measured fiscal stimulus, which included strong construction spending in railways, helped growth during the quarter. Secondly, both industrial consumption and consumer spending grew amidst tax cuts from the central government. A broad-based optimism in the property markets further helped the Middle Kingdom post growth figures of 7.8 percent during the third quarter.
Earlier, many China-watchers had projected a hard-landing for the country as growth decelerated for three consecutive quarters. But much of those fears were laid to rest as economists surveyed by Bloomberg expressed confidence that China would meet its 2013 year-end growth target of 7.5 percent. Chinese policy makers, however, seem to be betting on investment-led growth to achieve their growth target. For instance, fixed-asset investment, which has grown by nearly 20 percent for the first eight months of 2013, was one of the prominent engines of expansion. Although measures such as retail sales driven by increasing consumer spending has contributed to overall growth, further appreciation in consumption- driven growth in China has been threatened by rising inflation. Rising prices of food items coupled with glitches in China’s famed export factories are still posing challenges to economic growth.
Meanwhile, China’s huge property markets were seen to be on the upswing. China’s new leaders, who came to power in the past year, have thus far refrained from tightening the residential construction market. The results of this strategy were telling as property prices in four major cities jumped more than 15 percent in August. Small cities also had their piece of growth as home prices spiked in 69 of the 70 cities in which the survey was conducted.
Nonetheless, the strength of the property markets is likely to be tested in the future as China’s central bank has adopted a hawkish view on inflation. Analysts opine that any rise in interest rates accompanied by a rising domestic currency, the yuan, could dampen the prospects for China’s export engine. For this reason, economists forecast a decline in China’s GDP to 7.2 percent for 2014.
INDIA: BALLOONING DEFICIT AND HIGH INFLATION CLOUD GROWTH PROSPECTS
India’s economy is facing a host of challenges arising from flagging growth, accelerating inflation, and a ballooning fiscal deficit. In the past two years, Asia’s third-largest economy slid amidst rising interest rates and gloomy forecasts for growth. Many of the world’s international financial institutions have lowered growth estimates for the country. The International Monetary Fund (IMF) has predicted a growth rate of 3.8 percent for India for the year ending March 2014, the slowest in a decade.
India’s growing fiscal deficit and current account deficit have acted as a double-edged sword for the economy. Many economists trace India’s persistently high inflation to the country’s spendthrift ways, which have resulted in a fiscal deficit of 4.9 percent of GDP in 2013. As well, the country’s dependence on oil and a rising current account deficit have contributed to a steep slide in the value of the country’s currency, the rupee, accentuating further inflation.
Not surprisingly, India’s consumer inflation has exceeded the 9 percent mark frequently through this year. This has in turn constrained the ability of the country’s central bank to offer any kind of monetary stimulus by lowering interest rates. For instance, when India needed to lower interest rates the most to support investment projects, the country’s central bank was forced to raise interest rates to contain both inflation and a relentless slide in the country’s currency.
India’s government is belatedly working to put its house in order. The country has said that it will lower its budget deficit to 4.8 percent for the year ending March 2014. On a positive note, some of the measures engineered by the central bank have slowly worked to prop up the country’s currency. The rupee, which sank to an all-time low in August this year, trimmed some of the losses by rising more than 10 percent against major currencies in the world, since September.
SOUTH KOREA: INVESTMENT AND CONSUMPTION FUEL FASTEST GROWTH IN 10 QUARTERS
South Korea’s economy continued steadily in its growth path, recording the strongest pace of expansion in 10 quarters. Growth during the third quarter of 2013 was the most robust since 2011 as private consumption improved and investments climbed. While exports, which account for nearly 50 percent of the country’s economy slowed during the third quarter, recent data showed that overseas sales too recovered considerably.
A host of reasons underpin expansion in Asia’s fourth-largest economy. While exports to many markets such as the U.S. and the European Union slowed, sales to China have improved substantially since the second quarter of 2013.
Korea’s myriad export industries, which include shipbuilding and chip-making, were humming with activity. While a 60 percent jump in exports of ocean vessels kept shipbuilding yards busy, strong sales of iPhones, for which South Korean manufacturers supply chips and screens, kept assembly lines abuzz. Due to increased manufacturing activity, the Purchasing Manager’s Index in South Korea compiled by HSBC rose to the highest level since June.
South Korea also achieved its growth without triggering inflation. The country’s central bank, Bank of Korea, has held its key interest rates steady for the most part of the second half of 2013, thanks to the lowest level of inflation since 1999.
Furthermore, unlike other Asian emerging economies, South Korea has been enjoying steady capital flows, which also aid the central bank in keeping interest rates low. Nonetheless, South Korean exporters worry about their prospects going forward as Japanese companies, traditional rivals in the electronics and auto industries, gained competitiveness from a weak yen. Economists surveyed by Bloomberg opine that this coupled with high indebtedness of Korean households could challenge the country’s growth path during 2014.
TAIWAN: PRESSURE ON EXPORTS CONTINUES AS KEY OVERSEAS MARKETS FUMBLE
Taiwan is paying the price for relying on exports for nearly two-thirds of its GDP. In September, economists tracking Taiwan expected a 1 percent fall in exports. Instead, Taiwan registered a fall of 7 percent in exports.
Taiwan’s reliance on global exports has subjected it to the current uncertainty in the global economy. The global economy, although still growing, is expanding by fits and starts. As Taiwan depends completely on the U.S., Europe, and China for exports, a small faltering in any of these markets has a marked effect on the industrialized island as well. While exports from the electronics segment jumped significantly it was not enough for the island to make up for a fall in other export segments during the third quarter. Some economists also expressed concern that a partial shutdown of the U.S. government in October could have a near-term effect on the island’s economy.
With Taiwan’s economy operating below potential, inflation has fallen consistently. In fact, inflation turned negative during September, registering its first fall since February 2010. A decline in industrial production and exports has been a matter of concern to the country’s central bank. The central bank, which has held interest rates unchanged for its past nine straight meetings, ruled out any interest rate hike until a pick-up in demand materializes.
Amidst falling exports and weak prospects in many of the surrounding emerging economies, Taiwan pared down its economic growth forecast to 2.31 percent for 2013 from its earlier forecast of 2.4 percent.
INDONESIA: TUMBLING CURRENCY TAKES A TOLL ON EXPANSION
Indonesia’s economy is suffering from a cocktail of woes. Indonesia’s consumption-driven expansion of the past few years is now increasingly troubled by stubborn inflation, a falling domestic currency and soaring oil prices.
For the first time in many quarters, the pace of consumption in Indonesia eased during mid-2013. The reasons were not hard to guess. Indonesia has run up a substantial current account deficit over the past few years. Until now, strong capital inflows have helped the country finance the deficit.
However, since the beginning of talks about a possible tapering in the monetary stimulus from the U.S. Federal Reserve in mid-2013, Indonesia has been troubled by an exodus of capital. The capital outflows triggered a fall in the Indonesian currency, the rupiah. The rupiah was one of the worst performing emerging market currencies for the most part of 2013.
To support the currency and to reduce ballooning oil bills, the Indonesian central bank has raised interest rates. But raising interest rates has served to crimp consumer spending in the Southeast Asian archipelago. Reversing capital flows were only one of Indonesia’s myriad problems. Slowing investments too have posed significant troubles for the economy. Foreign direct investment growth during the second quarter of 2013 fell to its slowest pace since 2010. In the wake of slowing consumer demand and exports, Indonesia’s government spending had risen quickly.
With stubborn inflation seen to prevail in the near future, many Indonesian watchers predict the country’s central bank will maintain a hawkish interest rate regime. The central bank trimmed its growth forecast for 2013 to a range of 5.8 percent and 6.2 percent from an earlier projection of 6.6 percent.
THAILAND: FALTERING EXPORTS AND RISING HOUSEHOLD DEBT SLOWDOWN GROWTH
Two key engines of Thailand’s economy faltered during the third quarter of 2013. Exports and consumer spending have come under pressure in recent months as the Southeast Asian economy slowly emerges from a spate of natural disasters over the past few quarters.
A slump in export and consumer spending had pushed Thailand’s economy into a technical recession during the second quarter of 2013. Weak growth also prevailed well into the third quarter of 2013. For instance, Thailand’s diverse manufacturing industries, which produce cars and electrical appliances predominantly for export markets, posted meager growth.
In fact, manufacturing output contracted for the fifth consecutive month in August. Capacity utilization had fallen by more than one percentage point in the month of August alone. Not surprisingly, exports are not likely to grow more than 1 percent for the year according to the country’s central bank, which had earlier forecast a 4 percent growth in exports.
Further, Thailand’s consumer spending has remained anemic in recent times. Thailand’s household indebtedness has soared in recent months. Second-quarter household debt jumped to a high of 81.5 percent of GDP compared to 78.9 percent during the first-quarter of 2013. This spike in debt crimped each household’s ability to consume more and further spur the economy. For its part, the Thai government’s inability to accelerate the pace of infrastructure spending has also delayed a timely fiscal stimulus for the economy.
With demand and capacity utilization slumping, inflation in Thailand has remained subdued. Nonetheless, Thailand’s central bank has kept interest rates unchanged for its third straight meeting in October despite calls from the Thai government for lower interest rates for fear of triggering a fall in the domestic currency. Thailand’s central bank trimmed its GDP forecast for 2013 to 3.7 percent from its earlier forecast of 4 percent mainly due to faltering export prospects.
THE PHILIPPINES: EMERGING STAR OF ASIA
The Philippine economy has had standout economic performance for the most part of 2013. Economic growth during the second quarter of 2013 expanded nearly 7.5 percent closely matching that of China’s and exceeding its own expectations of around 6.0 percent to 7.0 percent. Philippine growth has come at a time when almost all of Asia’s emerging economies seem tired and spent.
Even as many of its neighbors such as India and Indonesia have suffered a rout on their currencies, the Philippine peso has stood the test of capital exodus quite commendably. One key difference has thus far separated the Philippines’s economic performance with the rest of Asia: its current account deficit.
When times were good and capital flows were easy, many emerging Asian economies such as India and Indonesia ran up current account deficits in contrast to Philippines, which showed much more prudence in how much it imported. As the Philippines managed its finances conservatively, it is still running a current account surplus. That has made quite a bit of difference at a time when capital is exiting much of Asia in the wake of expectations for a possible tapering in U.S. monetary stimulus. Even as others in the Asia Pacific region had to raise interest rates to keep capital within their shores at the cost of consumption at home, the Philippines did not have to raise interest rates. As a result, with interest rates remaining low, Philippine consumers are still contributing strongly to the economy. In contrast, elsewhere in Asia, consumers have turned timid in the face of higher interest rates.
Furthermore, unlike other Asian economies, the Philippines has also focused more on infrastructure investment. This has served to keep inflation tempered even amidst fast-paced growth. Not surprisingly, the Philippines has now leapfrogged India and Indonesia in securing an investment grade debt rating.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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