Oil and global factors dent Asean business optimism
Business confidence in Asean plunged to a three-year low in the last quarter of 2014 and the outlook remains volatile for this year as prevailing global uncertainties have dampened growth prospects, says the London-based consultancy Grant Thornton.
Grant Thornton’s International Business Report (IBR) showed that optimism for the coming year among the region’s business leaders surveyed fell to 23% in the last three months of 2014, its lowest level since the second quarter of 2012, with declines seen in all major regional economies including Singapore.
Among respondents in Indonesia, under the new Joko Widodo administration, the proportion of those expressing optimism collapsed to just 14% in the quarter, down from 34% three months before, as the government lifted the price of subsidised fuels by one third in an effort to reduce the fiscal and current account deficit.
The move led businesses to be concerned about further contraction of the economy, which could reduce consumer demand, said the report.
Thai business confidence fell considerably to just 27% from 71% in the third quarter, which was a record high as businesses expressed relief that political stability had returned following the coup in May. However, enthusiasm for military rule now seems to be waning. The proportion of respondents citing regulations and red tapes as constraints rose to 45%, the same as before the military coup.
“The backdrop of our own decline in Thailand is also less confidence around the world. The largest Asean countries are more affected by the global economy and that is the chief concern in 2015,” said Ian Pascoe, managing director of Grant Thornton Thailand.
Interestingly, the CLMV (Cambodia, Laos, Myanmar, Vietnam) countries are doing better as their economies are in a higher gear. Laos, Cambodia and Myanmar are on course for economic growth of 7-8% area, albeit from a low base, so optimism in these countries is generally reasonable. Vietnam also has shown signs of improvement, Mr Pascoe told Asia Focus.
The IBR showed that global business optimism averaged 41% in 2014, an improvement from 28% in 2013 and just 12% the year before. The index, however, dropped in the final quarter driven by a steep falls to 59% in the United States, 12% in Japan and 25% in China.
“We saw the highest level of business confidence since 2007 over the past 12 months, but looking ahead there are a number of potential flashpoints which are threatening global economic stability,” said Mr Pascoe, adding that oil price volatility is of particular concern to the global market as prices have dropped to five-year lows.
“While cheaper oil will benefit net importers and industries such as manufacturing and transport, it is already spelling trouble for energy companies and key markets such as Russia and the Middle East. The threat of recession and deflation in the euro zone and Japan is also a massive concern,” he said.
Although Shinzo Abe has won a new four-year mandate to try and kickstart the Japanese economy, the first round of his Abenomics programme can hardly be viewed as a success. Meanwhile, the euro zone has barely grown in five years while unemployment remains stubbornly high, and a change of government in Greece could reignite the sovereign debt crisis.
The slowdown in China is dampening demand for natural resources from Latin America and exports from Southeast Asia and it’s clear that the outlook for 2015 is “far from stable”, said Mr Pascoe.
This uncertainty, he said, was weighing heavily on business growth prospects globally, both in terms of revenue and profit, mainly in China, the US and Thailand. European businesses are actually more optimistic about growth now compared to the previous quarter, notably profitability expectations.
Chinese export growth continues to slow as the global market rebalances and that could have major consequences for the global economy. Meanwhile, if the US Federal Reserve finally raises interest rates this year, it could have major knock-on effects across the world, especially in a number of emerging markets.
Although a decline in optimism was common finding of the IBR, Thailand showed a “considerable difference” with a 44-point drop from 71% in the third quarter to 27% in the last three months of last year.
“This is a much larger drop than the global change from 43% to 35% and deeper than Asean’s drop, which is fairly sharp from 56% to 23%,” said the report.
“After a sustained period of uncertainty, Thai businesses are now practising a degree of caution for 2015 despite the emergence of a receptiveness to new and existing business opportunities,” said Mr Pascoe.
“This would seem well placed given the global challenges we are facing in 2015. The headwinds for Thailand continue to be considerably stronger than the tailwinds this year, however, our strongest concerns for the year ahead come from global issues.
“The prevailing uncertainty is making life tough for business, forcing them to delay decisions over investment in the future growth of their operations. They remain positive about their expansion prospects but certainly less so than three months ago.
“Business confidence is a key indicator of future economic performance. The large rise in global optimism in 2014 came as a pleasant surprise after a couple of tough years but the dip in the last three months suggests that businesses globally see trouble on the horizon in 2015.”
An economic report from the US investment bank Morgan Stanley also projects the global growth trajectory to remain bumpy.
While lower prices are generally bullish for Asia, the impacts are more mixed in Asean, Malaysia and Indonesia are the two net commodity exporters in Asean. The falling oil price is negative for the former, it said in its latest research paper about the Asean economy.
Malaysia’s GDP growth was in a healthy range of 5.6% to 6.5% for the first three quarters of last year before the continued oil price fall introduced downside growth risks.
Despite fiscal benefits from the reduction in fuel price subsidies, every US$10 drop in the oil price per barrel weakens government revenue by 0.06% of GDP. If oil prices persist at $50 a barrel, the net impact on the fiscal balance together with fuel subsidy rollback is at least -1.3% of GDP.
“Persistently soft oil prices and its impacts on government revenue mean that policymakers would need to cut back on expenditure or increase revenue elsewhere in order to stay on the fiscal consolidation track,” said the report.
Within Asean, Thailand is most energy-intensive given the fact that the country is more dependent on roads rather than rail, while oil has a relatively high share compared to other fuel types in energy consumption mix.
“In this context, a falling oil price could lend support to Thailand’s trade and oil burden to GDP,” it noted, pointing out that lower oil prices, meanwhile, would add to existing disinflationary pressures given that petrol and diesel prices currently are not subsidised.