30
Asia Pacific Economic Oulook 1st Quarter 2017
Asia Pacific Economic Oulook1st Quarter 2017
COVER IMAGE BY JESSICA MCCOURT
03 Australia Shifting the dial toward the long term
07 Indonesia Central bank on the move
13 Singapore Plans for a future economy face challenges
21 South Korea Business investment faces roadblocks
24 About the authors
25 Additional resources
CONTENTS
Asia Pacific Economic Outlook
1
2
AustraliaShifting the dial toward the long term
By Dr. Rumki Majumdar
AUSTRALIA witnessed strong economic growth (3.1 percent year over year) in the first half of 2016 owing to the recovery in
commodity prices; increased government spending on infrastructure; reduced cost of credit, thanks to the Reserve Bank of Australia (RBA), for easy mon-etary policy; and China’s renewed stimulus to prop up construction activities.1 While all these factors have played out favorably so far, and might even continue to support growth in the short term, the medium-term growth outlook is worrying because of impending domestic and external risks. In other words, Australia has to focus on factors that enable sustainable long-term growth, possibly by restruc-turing its economy.
Domestic risks edging upNonmining sectors lack momentum: Mining activities have continued to fall, with investment in the sector declining from its peak of 9.0 per-cent of GDP in 2012–13 to 4.5 percent in 2015–16.2 According to a Deloitte Access Economics report, the steepest fall in this sector’s business invest-ment is likely to happen over the next 18 months, which implies that Australia has to look elsewhere for growth.3 However, despite a strong pick-up, investment in the nonmining sector has only partly offset the lacunae created by falling mining invest-ment. Recent monthly data, such as the industrial production index and performance management
Though Australia experienced strong growth in the first half of 2016, the medium-term growth outlook is worrying because of impending domestic and external risks. The government might have to concen-trate on longer-term plans to ensure sustainable growth.
Asia Pacific Economic Outlook
3
index (PMI), indicate a soft patch in the industrial and manufacturing sector. Australia’s PMI has been swaying close to contractionary territory (below 50) in the past three months, which does not bode well for the economy as it tries to transition away from mining.4
“Lowflation” a concern: Australia’s inflation peaked almost a decade ago, and prices have been steadily falling since. Low inflation has hurt corpo-rate profitability and, thereby, business investment. Several factors such as restrained wage growth, heightened competition in product markets, and the depreciation in China’s domestic currency have contributed to low inflation. Moreover, inflation expectations have been falling, which may be influ-encing price- and wage-setting behavior.
Stagnant wages: In Australia, wages are the sin-gle largest component of the national income, and annual wage growth slipped to record-low levels in October 2016. Falling workforce participation and underemployment are resulting in slowing wage growth. While the unemployment and job creation rates have been steady, the trend in job growth has been firmly toward part time rather than full time. This has limited wage growth in several sectors of the economy. With aging demographics, it is expected that the downward pressure on wages is likely to stay. Stagnant wages have weighed on household spend-ing and will likely restrain national income growth.
Noncommodity trade: Commodities are the big-gest export component, and a third of Australia’s exports go to China. Consequently, the economy has been highly vulnerable to commodity price fluc-tuations (and, thereby, terms of trade) as well as to China’s economic activity. For instance, exports in Australia picked up in 2016 because of increasing iron ore prices and rising demand for iron ore as con-struction in China revived. However, risks associated with both these factors are higher in the medium term, and the Australian economy continues to feel the adverse impact of excessive dependence on commodity exports to China. Lately, Australia has improved services exports from its southeast region and is diversifying the country’s trade basket. How-ever, services still account for less than a quarter of total exports.
Excess easing of monetary policy: The RBA has done a remarkable job of supporting growth, especially during the years of the global financial crisis. Prudent monetary policies are partly the reason why Australia has not experienced a reces-sion since the 1990s. The RBA steadily decreased the cash rate (policy interest rate) over the years to offer support to the Australian economy. How-ever, at the same time, low credit costs have been pumping up household leverages and real estate prices, which are already 22.0 percent overvalued per Deloitte estimates.5 Lower interest rates have resulted in excess construction of houses, which are then sold to households that are struggling to finance these purchases.
External challenges have not lessenedExports (of liquefied natural gas and iron ore), which have buttressed growth lately, face risks from weak-er growth and rising trade protectionism among Australia’s major trading partners. Specifically, in-creasing uncertainties due to the Brexit referendum and US elections, and high liquidity due to several advanced nations’ unconventional monetary policies may have severe trade implications for Australia in the long term.6
Clearly, policies with respect to trade, climate, and foreign relations and investments will likely change in the United States and the United Kingdom and will impact the global economy. This offers China an opportunity to accelerate its effort to pursue new trade relations in the Asia-Pacific region. Amid growing concerns that the US-led Trans-Pacific Partnership agreement will definitely not be imple-mented with Donald Trump’s election, Australia may benefit from China’s increasing presence in trade in the region. According to Deloitte Access Economics, trade-related developments and geopolitical uncer-tainties may be net negative for Australia. However, the pace of these and their impact are expected to be slower and smaller.7
Finally, increasing global liquidity has resulted in a steady appreciation of the Australian dollar. Australia has been mostly a bystander in global
Q1 2017
4
1. Reserve Bank of Australia, “Statement of monetary policy,” November 2016, http://www.rba.gov.au/publications/smp/2016/nov/domestic-economic-conditions.html.
2. Ibid.
3. Deloitte Access Economics, “Prospects for the Australian Budget: 2016–17 to 2019–20,” Budget Monitor, no. 90, November 2016, http://www.deloitteaccesseconomics.com.au/publications+and+reports/subscription+ publications.
4. All statistics in this article are sourced from Haver Analytics unless otherwise stated.
5. Deloitte Access Economics, “Prospects for the Australian Budget.”
6. Advanced nations include the United States, Japan, the United Kingdom, and Switzerland.
7. Deloitte Access Economics, “Prospects for the Australian Budget.”
ENDNOTES
currency wars, which has resulted in an overvalu-ation of the domestic currency, impacting export competitiveness and revenues. With rising trade protection among trading nations, Australia’s ex-change rate may suffer further.
The risks indicate that Australia might, perhaps, fall shy of the federal government’s forecast over the next
few years. The government might have to concen-trate on longer-term plans, especially in propping up nonmining sector investment and trade, to ensure sustainable growth.
Asia Pacific Economic Outlook
5
6
IndonesiaCentral bank on the move
By Akrur Barua
ON November 22, Bank Indonesia (BI) an-nounced that it would ease reserve require-ment rules for banks from 2017 to reduce
volatility in money markets.1 BI’s latest move comes on the heels of six rate cuts this year to stimulate the economy. With GDP growth hovering around 5.0 percent—much below President Joko Widodo’s 7.0 percent target—and the government’s fiscal push losing steam, BI has increasingly taken on the man-tle of aiding economic activity. Unfortunately, the central bank has not been able to push up lending by much, with lenders not yet passing on the rate cuts proportionately to borrowers. BI is hoping that this scenario will change and both consumers and busi-nesses ramp up borrowing. The latter, in particular, will aid investments, a key to long-term growth.
BI will likely hold its easing spree until Q1 2017In October, BI cut its policy rate—the reverse repo rate—for the sixth time this year by 25 basis points to 4.75 percent. BI’s easing spree has been facilitated by a drop in inflation, which is now tending toward the lower end of the central bank’s 3–5 percent range. The easing spree appears well timed, given the current bout of currency weakening post the US presidential election on November 8. Between November 8 and November 21, the Indonesian ru-piah has fallen by about 2.5 percent against the US dollar, reversing half of its gains since the beginning of the year (figure 1).2
Bank Indonesia has cut interest rates six times this year; but now, it is likely to keep them unchanged until early 2017, given that the volatil-ity in financial markets is not likely to die down soon, at least not until there is more clarity on the Fed’s interest rate path and the new US administration’s economic agenda.
Asia Pacific Economic Outlook
7
The rupiah, of course, is not alone; a host of other Asian currencies witnessed losses in recent days. While uncertainty related to the new US adminis-tration’s policies is one factor weighing on global markets, a rise in bond yields and inflation ex-pectations in the United States has set the stage for a rate hike by the US Federal Reserve (Fed) in December. As a result, there has been a sharp out-flow of capital from emerging markets, including Indonesia. According to Bloomberg, foreign inves-tors sold about $1 billion of Indonesian debt and $444.2 million in domestic equities between No-vember 8 and 19, 2016.3
The volatility in financial markets is not likely to die down soon, at least not until there is more clar-ity on the Fed’s interest rate path and the new US administration’s economic agenda. BI will hence be more wary of cutting rates in the near term, even as it keeps track of the weakness of the rupiah and its indirect impact on inflation—the central bank has already intervened in the currency markets to stem the rupiah’s slide. As it did in its latest policy meet in November, BI is likely to keep interest rates un-changed until early 2017.
It is not only external conditions that will force BI to adopt a wait-and-watch approach. The central bank would ideally want to observe the impact of its six rate cuts. Banks, for example, have not cut lending rates proportionately.4 Bank credit, as a result, has not gone up as desired. In September, for example, total credit by commercial banks went up 6.4 per-cent year over year, the slowest in about seven years. Also, banks have been wary about rising bad debt. The share of nonperforming loans in the total credit has been going up since December 2013, and was 3.1 percent in September (figure 2). The supply side of bank credit is therefore facing headwinds not likely to go away soon.
GDP growth not pushing far beyond 5.0 percent In Q3, the economy grew by 5.0 percent year over year, marginally lower than the 5.2 percent rise in Q2. Private consumption continues to be the key growth driver, with household spending rising 5.0 percent. Investments, however, disappointed in Q3, with growth in gross fixed capital formation slowing
Deloitte University Press | dupress.deloitte.comSource: Deloitte analysis.
Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16
14,200
13,600
13,200
13,000
13,800
13,400
14,000
12,800
12,600
12,400
8
5
3
2
6
4
7
1
0
-1
USD/IDR (left axis) Rupiah returns against US$ w.r.t. January 4, 2016 (percent, right axis)
Figure 1. The rupiah has weakened against the US dollar since November 8
Q1 2017
8
Deloitte University Press | dupress.deloitte.comSource: Deloitte analysis.
Jan 13 Jul 13 Jul 14 Jul 15Jan 14 Jan 15 Jan 16 Jul 16
25
20
15
10
5
3.5
3.0
2.5
2.0
1.5
Growth in commercial bank credit (percent, year over year, left axis)Non-performing loans as a share of total loans (percent, right axis)
Figure 2. Loan growth has slowed while non-performing loans are going up
Deloitte University Press | dupress.deloitte.comSource: Deloitte analysis.
Q1 14 Q2 14 Q4 14Q3 14 Q1 15 Q2 15 Q4 15Q3 15 Q1 16 Q2 16 Q3 16
15
-5
-15
-25
-35
0
5
10
-10
-20
-30
Metal oreCoal and lignite
Oil, gas, and geothermalTotal mining and quarrying
Percent, year over year
Figure 3. Mining growth turned positive for the first time in seven quarters in Q3
to 4.1 percent from 5.1 percent in the previous quar-ter. While investment in buildings remains healthy, spending on machinery and equipment fell by 6.8 percent, the third consecutive quarter of decline.
Part of this is likely related to a drop in government spending (-3.0 percent) in the quarter, with the construction of many key projects suffering delays.5
Asia Pacific Economic Outlook
9
Exports continue to be Indonesia’s Achilles’ heel, with the sector contracting for the eighth straight quarter in Q3. Slowing growth in key markets, es-pecially China, and weak commodity prices have weighed on Indonesia’s exports in the past two years. In Q3, for example, oil and gas exports con-tracted by 8.2 percent. However, a rise in hard metal prices helped the mining sector post a small expansion in Q3 (0.1 percent), the first rise in seven quarters. Coal mining activity, however, continued to remain subdued (figure 3).
Consumers to the rescueConsumers will continue to be the flagbearers of the economy in the near term. Household spend-ing growth has averaged 5.0 percent this year, in line with trends in 2014 and 2015. Consumers have benefitted from a healthy labor market—unemploy-ment (non-seasonally adjusted) was 5.6 percent in Q3, lower than a year ago—and easy monetary policy. Slowing inflation will also aid household
consumption due to real income gains. Headline inflation was 3.3 percent year over year in October, about 3 percentage points lower than a year before. No wonder, then, that consumers are upbeat, with consumer confidence in October rising to its highest level since March 2015.6
Support from consumers will come in handy for a government that has had to cut spending in order to keep the fiscal deficit in check. The government will, however, find new inflows of funds from a tax am-nesty law passed in July; in the first of three phases of the amnesty that ended in September, the govern-ment collected about $7.5 billion, amounting to 58.9 percent of the intended target.7 Improvement in fis-cal management could aid the government’s bid for a movement from junk rating to investment grade. If this is coupled with a rise in the ease of doing business—Indonesia moved up 15 positions in the World Bank’s latest rankings—it will add to positive sentiment about the economy.8 Global investors will definitely be waiting and watching with interest.
Q1 2017
10
1. Gayatri Suroyo and Hidayat Setiaji, “Indonesia central bank to ease reserve requirement rules in 2017: Governor,” Reuters, November 22, 2016, http://www.reuters.com/article/us-indonesia-cenbank-idUSKBN13H1ER?il=0.
2. Haver Analytics, November 2016.
3. David Finnerty and Yumi Teso, “Emerging Asia sees $11 billion outflow as dollar rises on Trump,” Bloomberg, November 21, 2016, https://www.bloomberg.com/news/articles/2016-11-22/emerging-asia-sees-11-billion- outflow-as-dollar-rises-on-trump.
4. Gayatri Suroyo and Hidayat Setiaji, “Indonesia central bank to ease reserve requirement rules in 2017: Governor,” Reuters, November 22, 2016, http://www.reuters.com/article/us-indonesia-cenbank-idUSKBN13H1ER?il=0; Nilufar Rizki and Gayatri Suroyo, “Update 2: Indonesia central bank tries again to spur growth by cutting key rate,” Reuters, October 20, 2016, http://in.reuters.com/article/indonesia-economy-rates-idINL4N1CQ1Q3; Haver Analytics, November 2016.
5. Economist Intelligence Unit, “Country report: Indonesia,” November 17, 2016.
6. Bank Indonesia, “Consumer expectations survey: October 2016,” November 11, 2016, http://www.bi.go.id/en/publikasi/survei/konsumen/Documents/PISRT%20SK%20Oktober%202016%20-%20E.pdf.
7. Pooja Thakur Mahrotri, Chanyaporn Chanjaroen, and Haslinda Amin, “Tax amnesty to cleanse Indonesia underground economy, Raidy says,” Bloomberg, October 4, 2016, https://www.bloomberg.com/news/articles/2016-10-04/tax-amnesty-to-cleanse-indonesia-underground-economy-riady-says; Gayatri Suroyo and Hidayat Setiaji, “Indonesians line up to beat deadline for tax amnesty’s best terms,” Reuters, September 30, 2016, http://www.reuters.com/article/us-indonesia-tax-idUSKCN1200R7.
8. World Bank, “Doing Business: Indonesia,” November 2016, http://www.doingbusiness.org/data/explore economies/indonesia.
ENDNOTES
Asia Pacific Economic Outlook
11
12
SingaporePlans for a future economy face challenges
By Lester Gunnion
FACED with slowing economic growth, Singa-pore is revamping its economy toward value creation an higher value addition to sustain
economic growth in the future. Technology, innova-tion, and skill development are at the heart of theis economic transition. The “internationalization” of Singapore’s enterprises and capabilities is likely to play a pivotal role, too. We take a closer look at how technology, innovation, and related policy are driv-ing transformation in the domestic economy as well as the domestic challenges to Singapore’s economic aspirations. We also look at the external environ-ment for global trade, particularly the threat from protectionism to Singapore’s small and medium-sized enterprises (SMEs) and to Singapore’s sta-tus as a global trade entrepot. It is evident that the country’s plans for a “future economy” are likely to face challenges that are both internal and external.
Growth slows, services sector slumpsGDP growth slowed to 1.1 percent year over year in Q3 2016 from 2.1 percent in the previous quarter (figure 1). In the year until Q3, the economy grew 1.6 percent from a year ago. A quarter-over-quarter annualized measure reveals a bleaker picture—Sin-gapore recorded growth of 0.1 percent in Q1 and Q2, and shrank by 2.0 percent in Q3.1
The goods-producing sector contributed 0.3 per-cent to the 1.1 percent growth in GDP in Q3, driven mainly by the manufacturing sector, which contrib-uted 0.2 percent (figure 1). In Q3, manufacturing grew 1.2 percent from a year ago in Q3, supported by growth in the electronics and precision engineering clusters. The electronics cluster grew 15.0 percent,
Singapore is banking on technology, innovation, and skill develop-ment to build its future economy. But weak productivity growth, a rapidly ageing population, and slowing global trade could prove to be a hurdle.
Asia Pacific Economic Outlook
13
supported by higher global demand for semicon-ductors. The precision engineering cluster grew 3.6 percent, fueled by an increase in the production of semiconductor-related equipment stemming from improved global demand for semiconductors. How-ever, manufacturing grew just 0.3 percent from a year ago on a year-to-Q3 basis, revealing weak over-all performance in 2016.2
The services sector did not contribute to over-all growth in Q3. In fact, the wholesale and retail trade sector subtracted 0.3 percent from overall GDP growth, while the finance and insurance sec-tor subtracted 0.1 percent (figure 1). Wholesale and retail trade contracted 1.6 percent from a year ago. In the wholesale segment, the domestic wholesale index contracted by 5.1 percent year over year in Q3, primarily due to a decline in the sales volumes of petroleum and petroleum products, telecommuni-cations, and computers and electronic components. The foreign wholesale index grew a tepid 0.8 per-cent. Retail trade sales volumes rose 1.0 percent in Q3 because of a 29.0 percent increase in the volume
of motor vehicles sold. However, excluding motor vehicles sales, retail sales volume declined by 4.2 percent in Q3. Retail sales value excluding motor vehicles declined for the fourth straight quarter, reflecting weak domestic demand. Finance and in-surance contracted 0.7 percent in Q3, reversing an expansion of 0.7 percent in the previous quarter. The contraction in Q3 was primarily due to weak offshore lending, particularly to East Asia (lending contracted 18.2 percent). Demand for trade finance also remained tepid.3
An economic slowdown due to external factors, such as weak global demand and competition from neighboring countries in low-value-addition sectors, as well as internal structural challenges, such as an aging population, are the primary reasons behind Singapore’s plans to restructure and retool the econ-omy. Technology, innovation, and skill development are the tools being used to build Singapore’s future economy, but obstacles lie on the route to sustained prosperity.
2.5
1.5
1.0
0.5
2.0
0.0
-0.5
-1.0
3.0Percent
-1.5
GDP at 2010 market prices Manufacturing
Wholesale & retail trade Finance & insurance
Deloitte University Press | dupress.deloitte.comSource: Singapore Department of Statistics;Deloitte Services LP economic analysis.
Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16
Figure 1. Percentage contribution to growth in real GDP
Q1 2017
14
High-growth clusters at the helm Singapore has identified five growth clusters that are likely to drive the city-state’s economy of the future. These future-growth clusters are advanced manufacturing, applied health sciences, smart and sustainable urban solutions, logistics and aerospace, and Asian and global financial services. Unlike ear-lier plans for economic growth, which identified target sectors such as the electronics sector or the biomedical sector, these clusters are sector-agnos-tic and are areas in which Singapore already has a foothold. For instance, in the smart and sustainable urban solutions cluster, Singapore became the first country in the world to introduce driverless taxis for public use.4 Furthermore, Singapore is on its way to becoming one of the world’s first smart city—toward this goal, data collected from sensors and cameras across the city-state are to be aggregated on a 3D platform called Virtual Singapore, which will allow urban planners and researchers to run simulations and offer real-time solutions.5 Similarly, in the Asian and global financial services cluster, Singa-pore is already a dominant player. In fact, in a study
conducted by Dell and IHS Economics that looked at human capital, infrastructure, and commerce, Singapore was identified as the most future-ready economy in the Asia-Pacific region.6
Singapore’s strategy to innovate its way to growth in the future is supported by investment in human cap-ital through skill development and life-long learning initiatives such as the SkillsFuture program (Budget 2015) as well as support for Singapore’s SMEs (bud-get 2016). As a result of the transition to new sources of growth that are rooted in Singapore’s existing do-mestic capabilities and human capital, economists will likely be increasingly concerned about what Sin-gaporean enterprises are producing—gross national product (GNP) is therefore likely to be of increasing interest in addition to GDP.7
The approach of innovation and skill development for future growth is not without challenges. The immediate one is weak productivity growth. Produc-tivity gains, stemming from deep skills and expertise, rather than a larger workforce is Singapore’s strategy for generating sustainable future growth. However, productivity growth has been lackluster—value added per worker declined year over year in 2014
Percent
Value added per worker (year-on-year change)
Output per employed person (year-on-year change)
Deloitte University Press | dupress.deloitte.com
Source: Singapore Department of Statistics and Manpower Research & Statistics Department; Ministry of Manpower; Deloitte Services LP economic analysis.
Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16
0.8
0.4
0.2
0.0
0.6
-0.2
-0.4
-0.6
1.0
-0.8
Figure 2. Weak productivity growth is a challenge to the economy of the future
Asia Pacific Economic Outlook
15
Deloitte University Press | dupress.deloitte.comSource: Singapore Department of Statistics; Deloitte Services LP economic analysis.
1970 1980 1990 2000 2010 2014 20162015
14
10
8
6
12
4
2
0
Figure 3. Singapore's old-age support ratio continues to fall, thereby increasing the burden on the working-age population
Deloitte University Press | dupress.deloitte.comSource: World Bank national accounts data, and OECD National Accounts data files; Deloitte Services LP economic analysis.
1965 1975 1985 19951960 1970 1980 1990 2000 2005 20152010
480
400
360
320
440
280
240
200
Percent
Figure 4. Trade as a percentage of GDP has fallen since 2008
Q1 2017
16
and 2015, and has slowed through 2016 despite the effect of a weak base.8 Output per employed person has also been stagnant (figure 2).9 This connects to another challenge that is likely to take center stage in the coming decade—a rapidly aging population. Singapore’s old-age support ratio—the number of working-age residents (20 to 64) per elderly person (65 years and above)—has fallen from 9.0 in 2000 to 5.4 in 2016 (figure 3).10 A low fertility rate—lower than the required replacement rate—implies a fur-ther deterioration of this ratio and a greater strain on the working-age population. By 2030, it is pos-sible that for every two working-age people, there will be one senior citizen.11 If productivity gains do not pick up pace and if skilled migration does not contribute to both productivity gains and population growth, then the transition to the future economy is likely to slow down.
Weak global trade and potential protectionism Other challenges to Singapore’s plans for building a future economy are external. Though the focus is on enhancing the role domestic Singaporean firms play in the economy, internationalization of Singapore’s enterprises and capabilities continues to be a critical factor for success. Studies show that the degree of internationalization positively impacts the perfor-mance of SMEs.12 Today, more than 50 percent of Singapore’s SMEs have overseas revenue.13 Howev-er, global economic growth and global trade growth have been weak. The World Trade Organization cut its forecast for world trade growth to just 1.7 percent in 2016, implying that world trade will grow slower than world GDP for the first time in 15 years.14 In fact, global GDP growth is forecast to be 3.1 percent in 2016, the slowest rate of growth since 2010.15 The International Monetary Fund, in its October 2016 “World economic outlook,” explains that much of the slowdown in global trade since 2012—as much as three-fourths of the overall slowdown—is due to weak global economic activity, primarily in terms of investment.16 However, other factors exacerbate the problem—China’s slowdown continues to be a drag on global trade, and the rising threat of protec-tionism and anti-globalization is likely to restrict a
strong recovery by hampering the growth of global value chains. For instance, the Trans Pacific Partner-ship (TPP), a trade deal between the United States and 11 Pacific Rim nations, including Singapore, will not become a reality without US support. Even though the TPP was projected to add just 2.0 percent to Singapore’s GDP by 2025, it would have likely in-creased Singapore’s importance as a trade hub.17
Trade as a percentage of GDP in Singapore has fallen from a high of 440 percent in 2008 to 326 percent in 2015 (figure 4).18 Non-oil domestic exports have been in decline for the last three years and are likely to decline in 2016 as well (figure 5). All of this has implications for Singapore and its long-term strat-egy for SMEs. Weak investment activity abroad, coupled with protectionism, implies that Singa-pore’s SMEs will find it difficult to build and expand forward and backward trade linkages. This is likely to have a direct impact on Singapore’s strategy for future growth.
The outlook for policy and growthFiscal policy in Singapore is likely to remain expan-sionary over the short to medium term. The increase in planned budgetary expenditure in 2016 is 7.3 per-cent over the previous year.19 This is likely to result in Singapore’s largest primary deficit in history. However, increased government spending is covered by the inclusion of Temasek Holdings in Singapore’s National Investment Returns (NIR) framework. Temasek, a state-owned investment fund joins the Government of Singapore Investment Corporation (GIC, another state-owned investment fund) and the Monetary Authority of Singapore (MAS) as part of the NIR framework. The NIR framework, imple-mented in 2009, allows the government to spend up to 50 percent of expected long-term real returns on the net assets managed by Temasek, the GIC, and MAS. Government spending on infrastructure de-velopment and human capital development is likely to continue over the short to medium term.
At its monetary policy meeting in October 2016, the MAS decided to stick to its stance of zero apprecia-tion in the nominal effective exchange rate of the
Asia Pacific Economic Outlook
17
1. Ministry of Trade and Industry, “Economic survey of Singapore: Third quarter 2016,” https://www.mti.gov.sg/ResearchRoom/SiteAssets/Pages/Economic-Survey-of-Singapore-Third-Quarter-2016/FullReport_3Q16.pdf; Department of Statistics/Haver Analytics; Deloitte Services LP economic analysis.
2. Ibid.
ENDNOTES
Singapore dollar against a trade-weighted basket of currencies. This is likely to continue in the near term in order to prop up export-oriented industries in the face of an economic slowdown in China and weak growth in the United States. In fact, further monetary policy easing is a possibility when the MAS meets in April 2017. Additionally, rising trea-sury yields in the United States and a likely hike in the federal funds rate in December are likely to increase interest rates in Singapore. Rising interest rates would likely overlap weak inflationary pres-sure—the MAS core consumer price index (CPI) remains below 1.0 percent as of Q3, and headline CPI remains in deflationary territory for the eighth straight quarter.20 Household debt burdens also re-main relatively high—the debt service ratio for the
median income household in Singapore was 34.0 percent in 2015, much higher than 10.0 percent in the United States during the same period.21 Most of Singapore’s debt servicing is tied to mortgages for housing. A tightening of financial conditions and a cooling housing market will likely increase the debt burden for Singaporean households and, in turn, impact consumer spending and economic growth.
The growth outlook for Singapore remains soft. The Ministry of Trade and Industry announced that it ex-pects Singapore to grow by just 1.0 to 1.5 percent in 2016.22 Growth in 2017 is also likely to remain tepid. Much will depend on how Singapore addresses its internal challenges to constructing a future econo-my. Global developments related to trade will likely shape how external challenges play out.
Deloitte University Press | dupress.deloitte.comSource: International Enterprise Singapore/Haver Analytics;Deloitte Services LP economic analysis.
Jan
00
Sep
00
May
01
Jan
02
Sep
02
May
03
Jan
04
Sep
04
May
05
Jan
06
Sep
06
May
07
Jan
08
Sep
08
May
09
Jan
10
Sep
10
May
11
Jan
12
Sep
12
May
13
Jan
14
Sep
14
Jan
16
Sep
16
May
15
18
12
8
6
14
10
16
4
2
0
Billions 2012 S$
Figure 5. Non-oil domestic exports have been stagnant after the global financial crisis
Q1 2017
18
3. Ibid.
4. Jake Maxwell Watts, “World’s first self-driving taxis hit the road in Singapore,” Wall Street Journal, August 25, 2016, http://www.wsj.com/articles/worlds-first-self-driving-taxis-hit-the-road-in-singapore-1472102747.
5. Jake Maxwell Watts and Newley Purnell, “Singapore is taking the ‘smart city’ to a whole new level,” Wall Street Journal, April 24, 2016, http://www.wsj.com/articles/singapore-is-taking-the-smart-city-to-a-whole-new-level-1461550026.
6. Dell, “Dell ranks 50 global cities enabling innovation and change through technology,” April 4, 2016, http://www.dell.com/learn/us/en/id/press-releases/2016-04-04-dell-ranks-50-global-cities.
7. Kelly Tay and Andrea Soh, “Beyond 50: Singapore’s growth strategy shifts,” Business Times, August 11, 2015, http://www.businesstimes.com.sg/government-economy/beyond-50-singapores-growth-strategy-shifts.
8. Ministry of Trade and Industry, “Economic survey of Singapore.”
9. Department of Statistics/Haver Analytics; Deloitte Services LP economic analysis.
10. Department of Statistics, “Resident old-age support ratio,” http://www.singstat.gov.sg/statistics/visualising-data/charts/old-age-support-ratio.
11. Prashanth Parameswaran, “Can Singapore overcome its future challenges?” Diplomat, July 2, 2015, http://thediplomat.com/2015/07/can-singapore-overcome-its-future-challenges/.
12. Nitin Pangarkar, “Internationalization and performance of small- and medium-sized enterprises,” Journal of World Business, 2007, http://www.rcmewhu.com/upload/file/20150528/20150528102818_0886.pdf.
13. International Enterprise Singapore, “50% of Singapore SMEs now have overseas revenue,” February 16, 2015, http://www.iesingapore.gov.sg/~/media/IE%20Singapore/Files/Media%20Centre/Press%20Releases/MR00515_IESingapore_50_of_Singapore_SMEs_now_have_overseas_revenue.pdf.
14. World Trade Organization, “Trade in 2016 to grow at slowest pace since the financial crisis,” September 27, 2016, https://www.wto.org/english/news_e/pres16_e/pr779_e.htm.
15. International Monetary Fund, “World economic outlook, subdued demand: Symptoms and remedies,” October 2016, http://www.imf.org/external/pubs/ft/weo/2016/02/pdf/text.pdf.
16. Ibid.
17. Soon Weilun, “TPP breakdown a setback for trade thrust of Singapore’s future economy,” Business Times, November 23, 2016, http://www.businesstimes.com.sg/government-economy/tpp-breakdown-a-setback- for-trade-thrust-of-singapores-future-economy.
18. World Bank national accounts data and OECD National Accounts data files, http://data.worldbank.org/indicator/NE.TRD.GNFS.ZS?locations=SG.
19. Singapore Budget 2016, http://www.singaporebudget.gov.sg/budget_2016/home.aspx.
20. Department of Statistics/Haver Analytics; Deloitte Services LP economic analysis.
21. Monetary Authority of Singapore, “Reply to parliamentary question on the total debt servicing ratios of Singapore resident households,” September 13, 2016, http://www.mas.gov.sg/News-and-Publications/Parliamentary-Replies/2016/Reply-to-Parliamentary-Question-on-the-total-debt-servicing-ratios-of-Singapore-resident-households.aspx ; Federal Reserve Board, “Household debt service and financial obligations ratios,” September 26, 2016, https://www.federalreserve.gov/releases/housedebt/.
22. Ministry of Trade and Industry, “MTI forecasts GDP to grow by ‘1.0 to 1.5 per cent’ in 2016 and ‘1.0 to 3.0 per cent’ in 2017,” November 24, 2016, https://www.mti.gov.sg/ResearchRoom/SiteAssets/Pages/Economic-Survey-of- Singapore-Third-Quarter-2016/PR_3Q16.pdf.
Asia Pacific Economic Outlook
19
20
South KoreaBusiness investment faces roadblocks
By Dr. Ira Kalish
IN the third quarter of 2016, strong growth of ex-ports and fixed asset investment drove the overall growth of the South Korean economy. Real GDP
was up a strong 0.7 percent from the second to the third quarter, with exports up 0.8 percent and fixed asset investment up 2.0 percent. Much of the invest-ment growth was driven by residential construction rather than business investment. This might not be sustained going forward, especially given the high level of consumer indebtedness. Indeed, household debt in South Korea is a higher share of GDP than in the United States, United Kingdom, Japan, Ger-many, or France. It is currently about 77 percent of GDP.
Moreover, business investment faces a number of challenges. The recall of the Samsung Note 7 smart-phone, which has hurt exports and shaken business confidence, is but one of several challenges for the
South Korean business sector. Another major one is the bankruptcy of Hanjin Shipping, one of the coun-try’s largest container shipping companies. This is causing a big negative spillover impact on global trade. It is estimated that ships belonging to Hanjin, which are sitting idle, now contain about $14 billion in merchandise that is not getting delivered.1 The problems of Hanjin and other top global container shippers, which reflect global excess capacity, are creating a significant challenge for shipbuilders, including those of South Korea. Thus the restruc-turing currently taking place in the shipbuilding industry could hamper overall business investment in the near future. Political scandal, which has led to calls for the president’s resignation or impeach-ment, might have a negative impact on business sentiment. Resolution of the political crisis would probably be helpful to investment.
South Korea’s GDP has grown in the last quarter, driven mainly by fixed asset investment, most of which came from residential construc-tion. Business investment, on the other hand, faces several domestic and external challenges
Asia Pacific Economic Outlook
21
On the export side, the troubles in the telecom sec-tor hurt export growth in October and could, conse-quently, hurt economic growth in the fourth quarter. In dollar terms, exports fell 3.2 percent in October versus a year earlier. Exports have also faced the challenge of weak demand in China, weak Chinese exports (which are dependent on a large volume of imported Korean components), and the weakness of the Japanese yen, which has allowed Japanese man-ufacturers to boost their competitiveness in relation to South Korea. In addition, Korean exporters might be worried about the rising protectionist sentiment in the United States and Europe.
ChallengesObservers of South Korea are worried about a vari-ety of factors that could undermine growth and sta-bility in the coming year. These include high house-hold debt, competitive pressures from China and Japan, protectionism in the United States, a poten-tial tightening of US monetary policy, instability in North Korea, and political paralysis in South Korea due to the current scandal. Indeed, South Korea’s need for help from the International Monetary Fund in 1997 is on the minds of some analysts. Yet there are substantial differences between now and then. On the positive side for the economy, the South Ko-rean government runs a large budget surplus and has minimal overall debt. This gives the government wiggle room to assist the economy through fiscal stimulus in the event of economic deceleration. In addition, the country has a large external surplus. This gives the country plenty of room to stimulate domestic demand without being concerned about
rising external debt. Plus, the central bank’s re-serves are substantial, at more than $375 billion. This means that the country is well positioned to withstand any kind of external shock. That was not the case in 1997. Interestingly, South Korea has a better sovereign credit rating than neighboring Ja-pan. This reflects the fact that, unlike Japan, South Korea’s debt level is not regarded as excessive.
Perhaps the biggest long-term challenge facing South Korea’s economy is the necessity to restruc-ture multiple industries that have come under in-tense pressure. These include shipbuilding, steel, and petrochemicals. All of these industries face ex-cess capacity and intense foreign competition. The government is now providing substantial financial support to the shipbuilding industry and provid-ing tax cuts and other forms of support to other in-dustries. It is helping them manage the process of cutting excess capacity. The government’s finance minister said, “The government doesn’t plan to de-lay corporate restructuring that is needed right now and will focus on proceeding with turnaround plans to help companies become more competitive in the global market.”2 The competitiveness of Korean industry is a major concern. In a recent survey by the Korean International Trade Association (KITA), only about a third of corporate respondents said that their products have a competitive advantage in the marketplace.3 The rest said that their prod-ucts either have no advantage or are at a disadvan-tage competitively. Given that exports account for roughly half of GDP, this constitutes a significant problem. On the other hand, the perception of inad-equate competitiveness might compel companies to invest more in innovation.
Q1 2017
22
1. David Dodwell, “Hanjin Shipping collapse may be the beginning of the end for profitable global trade,” South China Morning Post, November 27, 2016, http://www.scmp.com/business/global-economy/article/2049560/hanjin-shipping-collapse-may-be-beginning-end-profitable.
2. “Government pledges more aid for heavy industries,” Korea JoogAng Daily, November 26, 2016, http://mengnews.joins.com/view.aspx?aId=3026665.
3. Jung Suk-yee, “Report: Two-thirds of South Korean exporters lack competitive edge,” Business Korea, November 28, 2016, http://www.businesskorea.co.kr/english/news/industry/16605-little-different-report-two- thirds-south-korean-exporters-lack-competitive-edge.
ENDNOTES
Asia Pacific Economic Outlook
23
ABOUT THE AUTHORS
Akrur Barua is an economist and a manager at Deloitte Research, Deloitte Services LP.
Lester Gunnion is an economist and a senior analyst at Deloitte Research, Deloitte Services LP.
Dr. Ira Kalish is the chief global economist of Deloitte Touche Tohmatsu Limited.
Dr. Rumki Majumdar is a macroeconomist and a manager at Deloitte Research, Deloitte Services LP.
Q1 2017
24
ADDITIONAL RESOURCES
Deloitte Research thought leadershipGlobal Economic Outlook, Q4 2016: United States, Eurozone, China, Japan, India, United Kingdom, Canada, Brazil, Russia, and a special topic
Issues by the Numbers, November 2016: The US housing market recovery: The past is not prologue
United States Economic Forecast, Q4 2016
Please visit www.deloitte.com/research for the latest Deloitte Research thought leadership or contact Deloitte Services LP at: [email protected].
For more information about Deloitte Research, please contact John Shumadine, director, Deloitte Research, part of Deloitte Services LP, at +1 703.251.1800 or via e-mail at [email protected].
Asia Pacific Economic Outlook
25
Q1 2017
Global Economics TeamRamani Moses Deloitte Services LPIndia Tel: +1 615 718 5204E-mail: [email protected]
Dr. Ira KalishDeloitte Touche Tohmatsu LimitedUSATel: +1 213 688 4765E-mail: [email protected]
Dr. Rumki MajumdarDeloitte Research Deloitte Services LPIndiaTel: +1 615 209 4090E-mail: [email protected]
Lester GunnionDeloitte ResearchDeloitte Services LPIndiaTel: +1 615 718 8559E-mail: [email protected]
Akrur BaruaDeloitte Research Deloitte Services LP IndiaTel: +1 678 299 9766E-mail: [email protected]
Chinese Services Group Leaders Global Chinese Services Group Rosa Yang Deloitte Touche Tohmatsu Certified Public Accountants LLP China Tel: +86 21 6141 1578 E-mail: [email protected]
Mark Robinson Deloitte Touche Tohmatsu LimitedCanada Tel: +1 416 601 6065E-mail: [email protected]
Japanese Services Group Leaders Global Japanese Services Group
Hitoshi Matsumoto Deloitte Touche Tohmatsu LLC Japan Tel: +09 09 688 8396 E-mail: [email protected] Japanese Services Group
US Japanese Services Group
George Warnock Deloitte LLP USA Tel: +1 212 436 2733 E-mail: [email protected]
Global Industry LeadersConsumer Business
Tim HanleyDeloitte Touche Tohmatsu LimitedUSATel: +1 414 688 2052E-mail: [email protected]
Energy & Resources
Rajeev ChopraDeloitte Touche Tohmatsu LimitedUKTel: +44 77 7578 5350E-mail: [email protected]
Financial Services
Bob ContriDeloitte LLPUSA Tel: +1 917 327 0828 E-mail:[email protected]
Life Sciences & Health Care
Mitch MorrisDeloitte Touche Tohmatsu LimitedUSATel: +1 310 966 0566E-mail: [email protected]
Manufacturing
Tim HanleyDeloitte Touche Tohmatsu LimitedUSATel: +1.414.977.2520E-mail: [email protected]
CONTACTS
26
About Deloitte University Press Deloitte University Press publishes original articles, reports and periodicals that provide insights for businesses, the public sector and NGOs. Our goal is to draw upon research and experience from throughout our professional services organization, and that of coauthors in academia and business, to advance the conversation on a broad spectrum of topics of interest to executives and government leaders.
Deloitte University Press is an imprint of Deloitte Development LLC.
About this publication This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or its and their affiliates are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser.
None of Deloitte Touche Tohmatsu Limited, its member firms, or its and their respective affiliates shall be responsible for any loss whatsoever sustained by any person who relies on this publication.
About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.
Copyright © 2017 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited
Follow @DU_Press
Sign up for Deloitte University Press updates at www.dupress.deloitte.com.
