Minimal impact seen for Asean
Region’s exports, domestic demand expected to offset effects of US interest rate hike
POSSIBLE monetary tightening by the Federal Reserve of the United States (US) in 2018 is unlikely to hit Asean significantly, as the region’s growth is expected to be buttressed by exports and robust domestic demand.
According to Maybank Kim Eng senior economist Chua Hak Bin, contractions in the US’ monetary policy are not expected to yield large impact on the region, at least in the near-term period.
Globally, concerns are looming on whether further increase in the US’ benchmark interest rate will affect other economies moving forward.
Generally, rate hikes by the US’ central bank could result in capital flights and a stronger US dollar, among others.
A Reuters poll has indicated that three more rate hikes are expected in 2018, driven by a tight US labour market and domestic inflationary pressures.
Beginning in late 2015, the Federal Reserve has increased its funds rate by four times and has hinted that one more round of rate hike is likely by year-end. Currently, the benchmark rate stands at 1.25%.
“While there are concerns on possible rate hikes by the Federal Reserve in future, Asean will continue to stage good economic growth driven by stronger exports and private investments.
“Synchronised global growth will be driving an export-led recovery across Asia and Asean.
“As long as overall trade in the region is growing, any increase in the US interest rate will not hurt countries in the region, probably not in the near term.
“However, the real impact will be seen when the Federal Reserve ups its rate to the range of 3% to 3.5% and if it speeds up the pace of rate hike going forward,” Chua tells StarBizWeek in an interview.
With regard to global trade, he anticipates a less robust growth in 2018 as compared to this year, mainly as a result of the technical high-base effect.
Similarly, the World Trade Organisation expects world trade growth to moderate to 3.2% next year, driven by further monetary policy tightening in the US and the euro zone.
The international body has recently upgraded its global trade growth projection for 2017 to 3.6%, supported by a revival import demand in Asia and North America.
In 2016, world trade grew by a lacklustre 1.3%.
Investment revival
On the region’s economic prospects for next year, Chua describes that 2018’s theme will be “investment revival”.
He predicts an encouraging recovery in Asean’s overall investments next year, following a rather sluggish investment performance in recent years.
The weakness in investments is largely attributed to a private investment slump in the past few years.
“However, since investments typically tracked export recovery as seen in historical trend, I expect Asean to see a stronger growth in overall investments in 2018.
“Apart from stronger trade, private investments will also be the key driver of the region’s economies next year,” says Chua, adding that Asean exports are seeing a firm recovery in recent times.
Chua does not discount more monetary tightening within the countries in Asean next year, given improved economic growth and higher projected headline inflation.
As for Malaysia, Bank Negara has recently hinted for a hike in the benchmark overnight policy rate (OPR).
Currently, the OPR stands at 3%.
The central bank last raised the OPR in July 2014, when the rate was increased by 25 basis points to 3.25%.
This was later slashed to 3% in July last year to support domestic economic activities amid rising external uncertainties.
The next OPR review would be held in January 2018.
Maybank Kim Eng predicts Malaysia’s gross domestic product (GDP) to grow by 5.3% year-on-year in 2018, with headline inflation to average at 2.8%.
Meanwhile, Standard Chartered Bank (HK) Ltd’s senior economist for Greater China Kelvin Lau says Malaysia’s economic growth has been very decent especially in the third quarter of 2017, stronger than expected.
Beating consensus estimate, Malaysia saw its GDP expand at the fastest pace in three years at 6.2% for the third quarter of 2017.
“It is very encouraging.
“This is something other regionally economies may not be able to demonstrate,” says Lau.
He explains that very few countries can claim that their domestic consumption and private investments were doing well which is the case for Malaysia.
“Having said that, we still expect Malaysia’s growth to ease a bit into next year simply because that’s the regional trend,” Lau says.
He is expecting the country to grow at the higher end of 4-5% in 2018.
He says that the could be a rate hike in January 2018 following hawkish signs from Bank Negara.
He expects the ringgit to be well supported as well.
Stock market rally
When asked on global stock markets rally, Lau, who is based in Hong Kong, says equities in emerging markets (EMs) are relatively cheaper compared with developed markets.
“The valuations for emerging markets equities in general are not as expensive as it seems despite having risen so much.
“It is still cheaper than a lot of the developed markets’ equities by a factor of two,” Lau says.
Nonetheless, he says different markets will have different dynamics and some might be frothier than the others.
“What make 2017 works as a favourable backdrop is because of strong growth rates, low inflation and rational policy response from central bank.
“As long as these factors are in place in 2018, there will be little very disruptive,” he notes.
Lau states that events such the hawkish stance of the US Federal Reserve, tax reforms in the US, inflation and geopolitical issues could prove disruptive to the economy.
“What could derail the current favourable backdrop for Asia is if we have global economies dipping into another round of recession, hawkish stance from the Federal Reserve leading to money leaving Asia.
“In both cases, we don’t see it happen- ing.”
Lau remains optimistic on China’s economic growth.
He is expecting the country to grow 6.5% in 2018.
“We see some downside risks emerging in the coming few quarters heading into 2018 but it is more like normalisation of growth from very high levels back to a more sustainable level,” he says.
China’s GDP expanded by 6.8% in the July-September period from a year earlier, decelerating from a 6.9% gain in the first half of the year.
Lau notes that a lot of focus shifts to structural issues like debt level in China, the state-owned enterprises (SOEs) reform and fiscal reforms.
A month ago, China held its 19th National Congress of China and its President Xi Jinping gave a speech which also emphasis on the country’s long term reforms.
Since then, Lau says the reforms momentum have picked up in the form of opening up the economy to the rest of the world and internally within China.
“In terms of opening up, we have seen announcements being made to relax foreign ownership threshold for onshore China financial institutions.
“I think that is a major step forward for China to open up the key strategic industry to foreign investors,” Lau says.
He also points out that a new set of regulations for the asset management industry was announced last week.
“Again, that is a very strong signal from China that they are seriously trying to reduce the financial risks within the banking and financial systems through tighter regulations.
“Overall, China from a policy angle is moving in the right direction to address some of the structural problems through tighter regulations and also at the same time opening up its economy,” Lau has noted.
Additionally, the Belt and Road Initiative has made significant progress, creating a lot of major infrastructure linkages and collaborations between China and many other EMs including Malaysia.
“Going forward, I still think that the partnership between China and Asean including Malaysia is still a key driver of this initiative,” Lau says.
He adds that the development of infrastructures and a stronger manufacturing base in Asean could lead to higher trade flows between China and Asean.
It is estimated that China will import US$24 trillion worth of goods, attract US$2 trillion inbound direct investment and make US$2 trillion of outbound investment in the next 10-15 years.
According to Lau, China and Asia ex-Japan contributes about 60% of global growth in 2017 and he expects that to continue between now and 2020.