According to a recent report by atradius, the ASEAN area economy grew by 4,9% in 2016, slightly above 4,8% in 2015, thanks to the recovery of growth in Thailand, the marginal acceleration in Indonesia and the rebound in the Philippines. On the other hand, growth slowed down in Vietnam, where it remained high and above 6%, and for the second consecutive year in Malaysia where, at 4,2%, it was the lowest since 2010. However, due to the severe drought linked to the El Niño phenomenon, and in some cases also to heavy floods, in all countries the performance of the agricultural sector was weak or slowing down up to registering a clear decrease in Malaysia (-5,1%) and the Philippines (-1,3%). The service sectorInstead, it has held up well and is accelerating in nearly every market, industrial production slowed in Vietnam, Thailand and Malaysia, while manufacturing, stable in Indonesia and slowing down in Malaysia and Thailand, accelerated in Vietnam (+11,9%) and the Philippines (+7% ). On the demand side, growth was strongly supported by private consumption and investments, especially public ones, and the contribution of the foreign channel was positive with the exception of Malaysia and the Philippines.
The increase in raw material prices and, in part, a moderate rise in foreign orders favored an improvement in exports in the last quarter of last year. However, the recovery still appears fragile, given the slowdown in orders at the turn of the year in Vietnam and the Philippines, the two markets where the dynamics of exports had been more solid. In this context Vietnam is still heavily dependent on exports to the rest of the Asian continent (50% of deliveries) and therefore remains susceptible to any economic crises in the region. Although the country was one of the main recipients of the Trans-Pacific Partnership, an agreement that would have led to a significant increase in medium-term growth prospects, now everything seems to indicate that the new US administration could withdraw from the agreement, leaving the country's future in limbo. Foreign-owned enterprises make up about 70% of Vietnamese exportsThis fact makes the economy vulnerable to possible slowdowns in the event of a possible transfer of operations by foreign companies. According to Asian Development Bank (ADB)Only 35% of firms are integrated across export industries as domestic suppliers to foreign-owned export firms in Vietnam (compared to nearly 60% in Malaysia and Thailand). Despite slow but progressive changes, the business environment continues to be hampered by weak institutions, infrastructure problems and endemic corruption. The level of state intervention remains high and many public enterprises are inefficient and hinder productivity growth. Vietnamese companies also suffer from limited access to capital, thus encountering greater difficulties in terms of competition at an international level. And failing banking sectors and limits on foreign ownership are hampering efforts to attract more foreign capital.
In the region, public spending remains focused on investments in infrastructure, health and education, and will continue to be so in the coming years in line with the 2020 development plans of the various countries given the strong pressure coming from rapid urbanization, shortage of skilled workforce and aging population. Many projects concern the transport network and are also supported, albeit not without controversy, by the Chinese initiative One Belt One Road (OBOR). Domestic demand is expected to be supported by private consumption and investments, especially public ones, with the support of a still expansive fiscal policy throughout 2017.
In 2016, inflation fell on average from 3,5% to 2,7% but rose again in almost all countries in the last part of the year due to the increase in food and fuel prices. The first factor is temporary, linked to climatic factors, and should subside in the coming months, while the second will continue to exert limited upward pressure due to the expected increase in oil prices, partly mitigated by a favorable base effect. In this scenario, the increase in inflation, expected to be around 3,4% in 2017, could trigger a moderate monetary tightening at the end of the year in Vietnam and the Philippines, while rates are still expected to remain unchanged in Malaysia, Indonesia and Thailand, to support growth and support the exchange rate. Hence, the risks on the growth scenario are downward and in most cases of international character, even if in some countries there is no shortage of internal risks.
On the financial front, the risks come from a stronger than expected slowdown in China and from a more aggressive and faster rate of hikes by the Fed than the markets are now discounting. La World Bank estimates that a 1% drop in Chinese growth would reduce GDP by 0,4% over two years in Indonesia, Malaysia and Thailand, markets most affected in the area, also due to their dependence on exports of raw materials. Similarly, the ADB estimates that a drop in Chinese growth of the same magnitude would reduce performance in the region by about 0,3% annually. Were the slowdown sharper, as it would be if it were triggered by the outbreak of a financial crisis, growth in emerging Asia would be reduced by an average of 1,8%. Furthermore, a more aggressive than expected Fed hike path could trigger new increases in market volatility, encouraging the outflow of capital from emerging countries with consequent downward pressure on the exchange rate and an increase in debt burdens. Those markets where indicators of external vulnerability are weaker will remain under pressure.
Despite average annual GDP growth rates stable at around 5,5% since 2000 and some reforms being implemented, Indonesia is still grappling with deep structural problems. Bureaucracy, rampant corruption, a flawed legal system, an inflexible labor market and poor infrastructure keep the growth rate below potential. Many industries still remain excluded from foreign investment, while decentralization continues to impede the coordination of infrastructure development policies, resulting in inefficiencies in terms of spending. And, despite generally strong economic fundamentals, Indonesia's position vis-à-vis foreign countries is currently more vulnerable than in the past. Indonesia is heavily dependent on portfolio investment to finance its persistent current account deficits and rising private sector external debtThis makes the economy vulnerable to further US monetary tightening and the resulting impact on capital inflows and outflows. In 2013/2014, Indonesia had already seen a massive international capital outflow after the shocks suffered by its local currency following the scaling back of the Fed's bond-buying program and the disposal of financial assets and shares by investors foreigners. Nonetheless, the country's vulnerability to changes in investor confidence is somewhat mitigated by sound monetary policies and the fact that a large part of public external debt is long-term. However, Indonesian businesses are increasingly vulnerable to currency volatility due to the large share of external debt they account for: it currently makes up more than 70% of total exports.
At the same time, too Malaysia was forced to introduce measures to support the currency since indicators of external vulnerability, while stable in the last two years, have deteriorated compared to previous years: the ringgit has in fact suffered the sharpest depreciation against the dollar (-7%) among Asian currencies since the results of the elections american. Despite the high economic growth, the same indicators, albeit improving, are still fragile also in Vietnam, where the deterioration of the public finances also weighs. In the Philippinesfinally, despite solid domestic demand, the expansion of the economy continues to be affected by a difficult business environment characterized by corruption and poor infrastructure. At the same time, President Duterte's violent campaign against drug trafficking has raised questions among international investors about the government's commitment to the rule of law. A further factor of uncertainty came from Duterte's anti-American public statements and the apparent attempts by the Philippines to strengthen ties with China at the expense of close political and economic cooperation with the USA. These moves could pose a risk to the country's otherwise positive economic outlook by negatively impacting business confidence, trade and foreign investment.
