Mixed signals
Revival of trade has been good economic news for Asia this year, but longer-term prosperity will require more dedication to fundamental reforms.
Trade and investment have been vital contributors to growth in the Asia Pacific region, where many developing economies were surging before the 2008-09 global financial crisis. Global and regional trade subsequently weakened, and while the outlook has brightened this year, clouds loom on the horizon.
Structural challenges, coupled with still-fragile prospects for global and regional trade, threaten the chance of a full economic recovery of the region, experts have cautioned.
Imports and exports in Asia Pacific are projected to increase in both volume and value this year as demand recovers. That follows a contraction in 2016 when regional trade fell by 4.3%, surpassing the 3.2% global decline, due mainly to a drop in Chinese which accounts to one-third of the region’s exports.
The Asia-Pacific Trade and Investment Report 2017 by the UN Economic and Social Commission for Asia and the Pacific (Escap) projects that the region’s exports will grow by 4.5% and imports will rise faster at nearly 8% this year.
Asia Pacific accounts for 40% of global exports and 35% of global imports, according to the report released late last month.
Asian countries previously affected by the slowdown of global value chain activity, such as South Korea and the Philippines, are expected to post significantly better trade, while rising prices of industrial commodities and fuels will give a lift to commodity exporters including Australia, India, Indonesia, Kazakhstan and Iran.
But China’s structural rebalancing of its economy and protectionist rhetoric in some developed economies will dim prospects next year. And structural factors that have contributed to weak trade performance since 2008 persist. “These may hinder trade growth in 2018,” the report said.
While import demand in developed economies has not fully recovered, import demand in China, especially for intermediate inputs, will also moderate as Beijing shifts its emphasis from export orientation to domestic consumption. As a result, intra-regional demand may not be sufficient to bring trade growth back to pre-crisis levels. Protectionism could create additional risks.
“While many of the f ears about renewed trade protectionism may not be realised, rising uncertainties could be a disincentive for long-term investment and trade,” the report noted.
Deepening uncertainties may also affect the extent of investment liberalisation, which has been increasing gross domestic product (GDP) by US$19.5 billion annually, while decreasing inequality in the region by 0.02% per year.
Hence, Escap forecasts that regional exports next year will expand at a more moderate 3.5%, while imports will expand by less than 3%. Export and import prices, notably for commodities, are unlikely to gain and “in fact may trend downward” as investment and consumption slows, precipitated by rising uncertainties.
Foreign direct investment (FDI) inflows to the region, most notably in China and Hong Kong, have contracted as a result of tepid growth and economic uncertainties. In Southeast Asia, inflows contracted in most major economies except for the Philippines and Vietnam.
However, greenfield investments have increased significantly, signalling investors’ “continued interest and confidence in the region”, the report noted.
Meanwhile, the region’s FDI outflows surged in 2016, led by a 44% gain in China, whose multinational enterprises stepped up investments abroad in a wide range of strategic industrial sectors. Surprisingly, FDI outflows exceeded inflows to China.
ASEAN PRIORITIES
Although Asean has seen a sharp-trade driven cyclical recovery this year, the region is still working to fulfill its immense potential from a long-term perspective, and much more needs to be done, according to HSBC.
In the case of Indonesia, Thailand and Singapore, overall growth performance is dependent on infrastructure spending and budget disbursement as other parts of the economy remain subdued.
In Thailand, private investment and consumption are constrained by political uncertainties and high household debts across most income levels and regions. In Singapore, plans for a highly connected smart city are contingent on elevated infrastructure spending. In the Philippines and Indonesia, the weak infrastructure base is severely limiting long-term growth, HSBC analysts wrote in their report titled “Asean Perspectives: When Reforms Meet Politics”.
Meanwhile, educational improvements are important across the board, and are seen as particularly urgent in Thailand and Malaysia. This will increasingly become an issue as China’s industrial upgrading brings it into more direct competition with Asean countries, notably in electronics.
Indonesia’s infrastructure gap is by far the largest in Asean, HSBC noted. A total of $1.6 trillion is needed by 2030 but spending capacity is estimated at only $440 billion, leaving a gap of $48 billion a year.
“We believe the only solution is to spur private investments and encourage PPP (public-private partnership) projects under an enhanced framework,” the report said, noting that funding from the national budget should be the “last resort” for infrastructure projects.
“But spending from the budget remains a key and improvements in disbursement appear to have stalled following two years of improvement in 2015 and 2016.”
The only solution to address the shortfall is to create a better format for private investment. PPP laws and have been amended but further progress has been slow.
In the Philippines, President Rodrigo Duterte’s promises of liberalisation and building on the previous administration’s blueprint have been slow to materialise. Nevertheless, HSBC said, the government has identified the right areas to build on recent momentum.
“Tax reform would provide the Philippine government with additional revenue-generating measures, which it needs to be on par with the rest of Asean,” said the report.
The Duterte administration has been far more active in infrastructure investments this year after a slow start. It hopes to boost infrastructure spending from 5.3% of GDP this year to as high as 7.4% in 2022.
“This is much needed as the Philippines is currently ranked 97th out of 137 countries in infrastructure competitiveness, according to the latest World Economic Forum Global Competitiveness Index. The country is also ranked last in Asean in overall infrastructure quality (Myanmar not included),” HSBC noted.
The Philippines also attracts minimal FDI compared with its Asean pers. New foreign investments have focused on the manufacturing and financial service sectors, which are exportable. Continued investments in those areas could help boost export competitiveness and improve the current account, which recently entered negative territory for the first time in 15 years, HSBC said.
Vietnam, meanwhile, has enjoyed fast economic growth with a target of 6.7% for 2017 but it has not been immune to structural challenges that require drastic reforms.
“We believe the Vietnamese government’s top priorities are twofold: first to sustain the country’s high GDP growth rate and second to curtail its debt-to-GDP ratio. As such, the most pertinent reforms ... are continued SOE (state-owned enterprise) equitisation, tax reforms and equitable credit growth.”
Reforms by the Hanoi government to date have led to the sale or closure of most small loss-making SOEs. But many remaining enterprises are much larger
“The rapid economic growth achieved through trade and investment liberalisation has increased pressure on the environment. Making trade and investment policies sustainable is therefore essential” SHAMSHAD AKTHAR Executive secretary, UN Escap
with more complex ownership and management structures, and often opaque financial and debt obligations.
Reforms of t axes, i ncluding value-added tax (VAT), FDI incentives and improved civil service efficiency are also needed to overcome budget deficit issues but progress so far has been lagging.
HSBC pointed out that Malaysia needs to do more to ensure that its industries continue to upgrade, particularly in manufacturing, to “retain manufacturing competitiveness in the Asian supply chain.
Malaysia’s labour force is relatively strong, but the growth rate is slowing, and with high participation among men, improving female participation is the key. The International Monetary Fund (IMF) suggests that policies to increase women’s participation should focus on measures to encourage a return to the job market after childbearing age, more flexible arrangements, and more equal opportunities for women in all fields of education and jobs.
Research suggests that Malaysia’s per capita income would be as much as 23% higher if the gender gap were closed. Encouragingly, the government does appear to be taking measures to address these issues.
As well, upgrading sufficiently to compete with regional exporters is required for Malaysia, which has been losing market share in electronics which account for about a third of the country’s exports. Rising competition from China is the key, and Malaysia must further diversify from commodities to reverse the trend.
In Thailand, labour productivity growth is sluggish, while investment as a percentage of GDP has never recovered to the levels seen before the 1997 Asian financial crisis.
Thailand is aiming to achieve high-income status by 2036 according to the 12th National Economic and Social Development Plan, HSBC noted. That would require annual real GDP growth of 5% on average over the next 19 years, it said.
Thailand also faces a daunting demographic challenge as one of the fastest-ageing countries in Asia. The population aged 65 or more is projected to grow from about 10% now to 15% of the total by 2025, placing a growing burden on the national health budget.
Thailand’s social security system is currently inadequate to cushion the sharp demographic transition, the report said. Households are more likely to increase precautionary saving for living after retirement. A comprehensive review of pension schemes and reforms is thus urgently needed.
SUSTAINABILITY IN FOCUS
The Escap report, meanwhile, points out that increases in FDI do not automatically contribute to sustainable development.
Policies, laws, regulations and institutions need to be established or reformed to guide FDI toward sustainable development and motivate transnational corporations to invest in the United Nations’ Sustainable Development Goals (SDGs). This will require strong government and improvements in the domestic business environment by providing businesses the necessary enabling environment.
“Sustainable development calls for a balance to be struck between the economic, social and environmental dimensions of development,” said Shamshad Akthar, a UN undersecretary-general and the executive secretary of Escap.
“The rapid economic growth achieved through trade and investment liberalisation has increased pressure on the environment. Making trade and investment policies sustainable is therefore essential.”
Openness to trade and investment are a necessary condition for sustainable development. Possible undesirable side effects of trade and investment such as increased inequality, short-term unemployment, drops in real wages and environmental degradation need to be more fully acknowledged and tackled.
The design of the national policies to address such issues will vary significantly from country to country, as there is no onesize-fits-all policy when balancing economic, social and environmental needs.
“The impact analysis of different policy scenarios featured in the report make it clear that SDGs cannot be achieved through protectionist policies,” said Dr Akhtar. “What we need are targeted trade and investment liberalisation policies that are more inclusive and mindful of the social and environmental dimensions of sustainable development.”
As well, continued efforts should be made to strengthen regional cooperation and integration as an important means of sharing the benefits of trade and investment to reduce development gaps between countries in the region, as well as to maintaining peace and stability.
Regional trade agreements should be pursued including the Regional Comprehensive Economic Partnership (RCEP), the report suggests. Regional connectivity should be prioritised, building on voluntary initiatives such as China’s Belt and Road initiative. It will be important, however, that all such initiatives fully integrate the social and environmental dimensions of sustainable development.
“Regional trade and investment liberalisation and facilitation should be combined with well-designed domestic social and environment policies to achieve positive outcomes of sustainable development,” Dr Akthar noted.
“The global implementation of CO2 emission commitments under the Paris Accord, as well as domestic income transfer from high-skill to low-skill workers, in addition to liberalisation policies, result not only in lower inequality and fewer CO2 emissions, but also in higher overall economic growth for the region.”