CEIC News@lert: Economic Potential of ASEAN-4 Nations

May 13, 2014 - OVERVIEW - The Association of Southeast Asian Nations (ASEAN) is a cultural, political and economic organization in the Southeast Asia region comprising ten member countries. Among its members, Indonesia, Malaysia, the Philippines and Thailand have been conventionally clustered and coined as ASEAN-4 as they are four of the larger economies; emerging markets that possess great economic potential. The contribution of the ASEAN-4 economy to the region is evident with Indonesia, Malaysia, the Philippines and Thailand contributing 38.74%, 13.38%, 11.69% and 16.66% to the total Nominal Gross Domestic Product (GDP) created by ASEAN countries (excluding Myanmar) in 2012. Collectively, the ASEAN-4 contributed to more than three quarters of total GDP for the region. As such, the strong and significant economy, reflected in the decent performance for various economic variables, makes ASEAN-4 countries very attractive for investments. A common trait among the four countries has always been the relatively similar economic growth rates. ASEAN-4 economies would typically expand at a healthy rate, approximately 4%-6% Year-on-Year (YoY) except during the 2008-2009 global financial crisis. In 2009, Indonesia and the Philippines suffered steep declines in their growth rates, while the Malaysian and Thai economies also shrank. Although Indonesia, Malaysia and the Philippines managed to rebound to their pre-crisis growth levels after 2009, Thailand has had irregular economic growth, experiencing sharp fluctuations between 2010 and 2013. Even though a few of Thailand’s country risk indicators do indicate a low level of country risk, as with its ASEAN-4 counterparts, volatile economic growth has somewhat eroded its investment prospects. POTENTIAL RISE IN COUNTRY RISK OF THAILAND FROM TURBULENT GDP GROWTH Thailand is Southeast Asia’s second largest economy in terms of GDP after Indonesia. Yet Thailand has not been able to enjoy the stable and strong growth enjoyed by Indonesia. This is partly because of the catastrophic flood in 2011, which slowed down production and other economic activities, as well as the political turmoil in 2013 harming investor confidence. Hence, Thailand’s economy only grew slightly by 0.08% and 2.87% in 2011 and 2013 respectively. Thailand’s production value index fell sharply by 34.14% and 46.88% YoY in October and November 2011 respectively, which can be largely attributed to the severe flooding that happened during that time. This caused GDP for the fourth quarter of 2011 to shrink sharply by 8.88% YoY, as compared to the 3.72% YoY growth in the previous quarter. GDP then grew slightly by 0.38% YoY during the first quarter of 2012. The anti-government protests further aggravated the already shrinking production. The production value index has been experiencing consistently negative growth YoY since May 2013. In October 2013, the production index fell sharply by 9.55% YoY from negative growth of 5.43% in the previous month and continued at this elevated level for six consecutive months. Weaker economic activities meant GDP growth slowed to 0.56% YoY during the last quarter of 2013. Thailand also has an increasing dependence on foreign debt. The external debt-to-GDP ratio increased to 38.17% in 2013 from 22.68% in 2011, while the external debt-to-current account receipts ratio increased to 45.90% in 2013 from 37.18% in 2011. Investments may be further deterred by the fact that Thailand’s ability to finance its short-term foreign debt has diminished over the years. Foreign currency reserves in 2013 fell to 264.44% of short-term external debt from 348.27% in 2011. In addition, Thailand’s widening current account deficit is a potential threat to economic stability, with it widening to THB 45.07 billion and THB 73.87 billion in 2012 and 2013 respectively, from a surplus of THB 276.92 billion in 2011. Nevertheless, the relatively small current account deficit-to-GDP ratio, measuring 0.62% of GDP in 2013, means it is still at a sustainable level. Coupled with a low fiscal deficit-to-GDP ratio of 1.77% and an external debt-to-current account receipts ratio of 45.90%, Thailand clearly has fundamental strengths to attract investments. This partly explains the increase of Foreign Direct Investment (FDI) to 3.35% of GDP in 2013 from 1.12% of GDP in 2011. RESILIENT INDONESIAN ECONOMY In comparison to the slowing economies of Malaysia, the Philippines and Thailand, Indonesia has had stable, but rapid economic growth, constantly growing above 5% YoY for ten years since 2004, except in 2009. Its resilient economy was especially evident during the financial crisis when, despite a slowdown, GDP still grew by 4.63% in 2009, when the Malaysian, Philippine and Thai economies either stagnated or shrank. Indonesia has also been able to retain a sound fiscal balance while sustaining its high GDP growth. As a developing nation, Indonesia’s fiscal deficit in 2012 was 1.86% of total GDP. In response, inward FDI increased sharply to USD 13.77 billion in 2010 from USD 4.88 billion in 2009, subsequently growing to USD 19.24 billion in 2011 before declining marginally during 2012-2013. This signifies an increased willingness to invest in Indonesia. Even though Indonesia’s economy is attractive to many investors, the dependence of Indonesia on foreign financing deters investment decisions. As of 2013, foreign debt is 30.32% of Nominal GDP. Alternative sources of external debt financing have been shrinking as the external debt-to-current account receipt ratio increased to 121.78% in 2013 from 97.30% in 2011. Nevertheless, there has been a reduction in dependence in recent years as foreign debt was previously higher at 31.82% of GDP in 2009. MALAYSIA’S STRONG CURRENT ACCOUNT POSITION Malaysia’s economy was badly affected by the global financial crisis, with its GDP declining sharply by 5.76% YoY during the first quarter of 2009 from 0.33% growth during the previous quarter. Negative growth then persisted for three quarters until the third quarter of 2009. The Malaysian economy subsequently rebounded to strong and steady annual economic growth rates of 5.13%, 5.64% and 4.69% in 2011, 2012 and 2013 respectively. Malaysia also has a long history of strong external competitiveness with a persistent current account surplus arising from a strong performance of goods exports for nine years since 2005. Malaysia had a strong current account surplus of 17.07% of GDP in 2008, which has since declined to 3.79% in 2013. Weaker foreign demand for Malaysian exports, as well as an increase in domestic demand for imports, has caused this narrowing. Even so, Malaysia still has the highest current account-to-GDP ratio among the ASEAN-4 nations, with the Philippines closely behind at 3.47% of GDP, while Indonesia and Thailand are in deficit. The strong current account surplus can be partly credited to current account receipts growing to MYR 871.13 billion in 2013 from MYR 695.04 billion in 2009. Other than acting to support its current account payments, the strong current account receipts provide an alternative debt servicing source, helping to keep external debt down to 36.51% of current account receipts in 2013, the lowest among the ASEAN-4 members. RAPID ECONOMIC GROWTH IN THE PHILIPPINES The smallest economy in terms of Nominal GDP in the ASEAN-4, the Philippines, enjoyed the highest growth rate in 2012 and 2013. GDP growth increased sharply to 6.81% YoY in 2012 from 3.64% YoY in the previous year, subsequently growing to 7.16% YoY in 2013. Such rapid growth has not been at the expense of a weaker fiscal position as the country was able to maintain a low fiscal deficit of 1.42% of GDP. Furthermore, the Philippines has also been decreasing its dependence on foreign debt, which fell to 21.52% of GDP in 2013 from 44.03% in 2006. In a possible attempt to protect against future external shocks, the country has been improving its ability to service its short-term external debt. This saw the archipelago nation amass 649.08% of foreign currency reserves against its short-term external debt by December 2013, up from 242.54% in December 2005. In response to a rapidly growing economy, in tandem with low country risk indicators, the Philippines has gained increasing attention among foreign investors. This is evident with FDI growing for three consecutive years to USD 3.86 billion in 2013 from USD 1.07 billion in 2010. CONCLUSION The table of key economic indicators (above) shows that the Philippines has immense economic potential given its relatively high, yet sustainable growth rate. The Philippines is also one of the most desirable among the ASEAN-4 nations in terms of fiscal discipline, external financing and liquidity indicators. However, the present developmental state of the economy may make it a less attractive option, at least for the foreseeable future. This is in comparison to Malaysia and Indonesia which have larger and more developed economies with comparable key economic performances. Overall, however, despite regional differences in these economic indicators, the Southeast Asian economies remain relatively competitive. This includes the turbulent Thai economy where some of its key economic variables show signs of decent performance. However, Thailand’s weak growth – due to a mixture of political and economic factors - remains a major concern for investors. This may see it continuously under-performing other ASEAN-4 counterparts. While key economic indicators show an increase or decrease in the risk of investing in ASEAN-4, these figures should not be viewed independently as specific country risks still depend on various external factors such as the country’s economic policies, structural factors and the political climate. For instance, the possible political volatility from the upcoming elections in Thailand and Indonesia might appeal differently to different investors. The close ties of the Philippines with the United States might also improve investment prospects. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
13th May 2014 CEIC News@lert: Economic Potential of ASEAN-4 Nations