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December 2010

ASEAN: Fiscal strength to continue As concerns over European sovereign debt and the political battles over budgets in the US continue to cause  market volatility, it is worth noting that the countries that make up the ASEAN region (Association of South  East Asian Nations) are in comparatively good fiscal shape.  We look at some of the reasons  why  the  ASEAN  region  has  managed  to  find  itself  in  such  a  strong  fiscal  position. We evaluate how fiscal strength can help to continue to drive ASEAN economic development and  look at the potentially positive implications for investors. 

ASEAN is benefiting from a strong fiscal position Sound fiscal balances have allowed South East Asian countries to implement strong economic stimulus packages in response to the global financial crisis, helping them to quickly regain their growth momentum.

The strong fiscal position in the ASEAN region has also meant that, at the height of the fiscal response to the global financial crisis in 2009, ASEAN fiscal balances only weakened by about 3% of GDP compared to precrisis levels. As the table in exhibit 1 shows the ASEAN situation compares favourably to the steep rise in fiscal deficits seen in the advanced G20 nations, which hit an unprecedented average of 9.5% of GDP.

Exhibit 1 – ASEAN should be in a strong fiscal position through to 2014 General Government Overall Fiscal Balances (% GDP) Average 05-07 Pre-crisis

2008

2009

2010

2011

2012

2013

2014

0.3

-0.2

-2.8

-2.2

-1.7

-1.6

-1.8

-1.7

Indonesia

-0.1

-0.1

-1.6

-1.5

-1.7

-1.6

-1.6

-1.6

Malaysia

-2.6

-3.2

-5.5

-4.6

-5.5

-5.2

-5.0

-4.8

Philippines

-1.9

-1.3

-3.9

-3.9

-3.5

-2.8

-2.0

-1.9

Singapore

6.4

5.1

-0.9

2.4

1.5

1.8

1.9

2.1

Thailand

1.3

0.1

-3.2

-2.7

-2.3

-1.6

-1.5

-1.4

Australia

2.0

-0.5

-4.1

-4.6

-2.5

-0.6

0.1

0.4

Japan

-3.7

-4.1

-10.2

-9.6

-8.9

-8.1

-7.8

-7.6

New Zealand

3.0

0.1

-3.5

-4.8

-4.2

-2.9

-2.1

-1.4

Asia

-1.5

-2.1

-5.5

-5.0

-4.3

-3.6

-3.2

-2.9

Advanced G-20

-2.2

-4.3

-9.5

-8.7

-7.4

-5.4

-4.7

-4.5

Emerging G-20

0.1

-0.3

-4.7

-4.0

-3.2

-2.7

-2.3

-2.0

ASEAN-5

Source: IMF, World Economic Outlook, October 2010

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December 2010

ASEAN: Fiscal strength to continue

Furthermore, although the spending packages introduced during the crisis have increased government debt in South East Asia, at current levels of just over 45% of GDP, ASEAN gross debt is only a little higher than the emerging market average, and only about half as much as the gross debt in the developed economies. ASEAN economies and stock markets are benefiting The debt outlook for ASEAN is also comparatively good. Although Singapore has the region’s highest debt (100% of GDP), it is largely immune to sovereign pressures because of its huge accumulation of foreign exchange assets. In Indonesia, debt is less than one third of what it was in 2000, while the Philippines has also seen a sharp decline in debt. This trend is positive for regional economic development, as new International Monetary Fund (IMF) research suggests that a lower initial public sector debt position (as a percentage of GDP) is associated with better long-term economic performance. For equity investors, the result of ASEAN’s stronger fiscal and debt positions is clear: over the past three years the MSCI South East Asia Index has fallen just 1.3%, while the S&P 500 has fallen 20.3%, the MSCI Europe Index has dropped 28.5%, and even the MSCI Asia Pacific ex Japan Index has declined 15.1%.

Exhibit 2: Southeast Asian equities have outperformed the broader Asia Pacific region in 2010 125 MSCI AC Asia Pacific ex JP - Price Index 120 MSCI South East Asia - Price Index 115 110 105 100 95 90 85 Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Source: MSCI. Data as at 9 December 2010, rebased to 31 December 2009 =100. For illustrative purposes only.

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December 2010

ASEAN: Fiscal strength to continue

Infrastructure and consumption could benefit from fiscal strength We believe that proper fiscal policies, which prioritise strong, long-term growth across the ASEAN region, could benefit certain business sectors, specifically infrastructure and consumer goods. As debt burdens still remain a worry for regional governments, we think that they could institute policies to spur private firms to lead growth going forward. This opens up a great deal of potential for equity investors in the region. Infrastructure – time to play catch up As illustrated by the table in exhibit 3, infrastructure standards vary immensely across the ASEAN region. Singapore has perhaps the best infrastructure in the world, while other South East Asian countries have poor infrastructure, even by the standards of other emerging markets.

However, these countries have seen the immensely positive effect that infrastructure investment has had on growth in both Singapore and North Asia and so we believe they will likely follow with their own infrastructure investment programmes. Already some South East Asian countries are enacting policies to spur private infrastructure investment. For example, in Indonesia an important land acquisition bill was passed by parliament that could lead to more rapid implementation of infrastructure projects. Also, the Singaporean and Malaysian governments recently signed a land swap deal that gives a jointly-run firm control over large land parcels for the development of the Iskandar development project in Johore. This important project is now finally going ahead after two years of discussion and may include a rapid transit link between the two countries. Finally, Thailand’s largest construction firm is building a huge new USD 8.6 billion port facility in neighbouring Myanmar.

Exhibit 3: World competitive ranking Ranking 1999

2009

Singapore

8

2

Hong Kong SAR

19

5

Australia

1

12

Japan

20

15

China

13

16

New Zealand

15

21

Malaysia

26

22

Korea

41

23

Taiwan Province of China

23

27

Thailand

33

29

India

38

37

Indonesia

39

37

Philippines

47

57

Source: IMD, World Competitiveness Yearbook, 2009, Out of 47 in 1999 and 57 in 2009. For illustrative purposes only.

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December 2010

ASEAN: Fiscal strength to continue

Consumer growth is set to fuel ASEAN markets We believe that the strong fiscal position of the ASEAN region may lead to a longterm increase in consumer spending, which has remained low compared to global averages (see exhibit 4). Any pickup in consumer demand will have a positive impact on consumer-related stocks. In Singapore and Malaysia, where populations are aging at a rapid rate, increases in social security payments (particularly on healthcare and pensions) could spark increased consumer demand, as many people in both countries currently save a large amount of their disposable incomes to provide support in their old age. Meanwhile, fiscal strength allows governments in the Philippines, Indonesia and Thailand to focus on poverty alleviation. As of 2009, 45% of the population in the Philippines, 53.8% in Indonesia and 11.5% in Thailand live on less than USD 2 per day. If poverty alleviation policies are put in place, household consumption could increase very quickly as millions of new consumers enter the market. In fact, new IMF research related to China suggests that a 1% increase in education, health and pension expenditure permanently increases the household consumption ratio by at least 1.25 percentage points of GDP. In addition, investment in education, health and pensions is also an investment in human capital, which is key to sustaining long-term economic development. Exhibit 4: ASEAN consumption has room for growth Private Consumption (% GDP) 1990

2000

2004

2008

Indonesia

49.1

61.7

66.8

60.9

Malaysia

52.6

43.8

44.0

45.2

Philippines

71.4

69.6

68.7

71.1

Singapore

46.3

42.2

42.4

41.0

Thailand

55.9

56.1

57.2

54.8

Source: IMF, World Economic Outlook. For illustrative purposes only.

ASEAN can cope with a withdrawal of economic stimulus 2011 will be an important year for ASEAN’s long-term growth prospects as most countries will withdraw the fiscal stimulus packages that they introduced during the global financial crisis. Malaysia and Singapore have already begun to withdraw stimulus, while the governments of the Philippines and Thailand will likely begin a fiscal tightening in early-to-mid 2011.

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December 2010

ASEAN: Fiscal strength to continue

If South East Asian policymakers remain focused on long-term growth while withdrawing these stimulus measures, then investors can potentially reap the benefits for years to come. Nevertheless, the region faces two major risks during this fiscal exit period: 1. Problems related to a volatile tax base and rigid budget structures could exacerbate debt and hurt long-term growth. If policymakers go for the quick fix (widespread public investment cuts) when decreasing fiscal stimulus instead of smarter policies (revenue enhancement and spending prioritisation) markets could stagnate in the long run. 2. The ASEAN region, like most of Asia, is facing the demographic challenge of an aging population. Policymakers need to expand pension and health spending in a responsible manner, despite the budget challenges they will face in the short and medium term. The IMF recently published a paper1 with recommendations on how ASEAN governments can avoid these pitfalls. Investors should look for the following government policies to see if the IMF prescriptions are being followed: 1. The introduction of better tax collection systems that can ensure long-term fiscal health 2. Increased efficiency of government projects and also an increase in the number of public-private partnership (PPP) projects 3. A reform of entitlement programmes aimed to increase spending power and boost the domestic consumer 4. Policies that increase transparency in government decision making, and thus increase accountability. This is especially important in Indonesia, Philippines and Thailand 5. Finally, on the spending side, investors should look for policies that could promote private infrastructure investment and private consumption in an attempt to replace public spending as the main driver of economic growth. Going forward these are key sectors for long-term investors in the region.

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IMF, Post-Crisis Fiscal Policy Priorities for the ASEAN-5, Nina Budina and Anita Tuladhar

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December 2010

ASEAN: Fiscal strength to continue

Conclusion: Fiscal strength is key to ASEAN growth ASEAN’s strong fiscal position has helped the region to outperform despite the financial crisis and its aftermath and continues to make the region a very attractive investment destination. However, 2011 will be a critical time for the region as countries withdraw their fiscal stimulus packages. Investors should carefully watch public policy decisions, because they will impact the long-term growth prospects of both the economies and markets of South East Asia. If governments continue to implement sound policies, then we believe that ASEAN markets can continue to outperform, driven by strength particularly in the infrastructure and consumer goods sectors.

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