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Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia
Southeast AsiaGDP growth in Southeast Asia improved to 5.1 percent in 2000, from 3.1 percent in 1999 as the economic recovery that began in 1999 continued to broaden and deepen. The driving force behind the momentum was robust external demand for the subregion's products and a slight increase in domestic demand. These overall trends, however, masked significant variations among countries, with GDP growth ranging from 8.5 percent in Malaysia to 3.9 percent in the Philippines. Moreover, toward the end of the year, economic growth seemed to lose some of its momentum with export growth, particularly of electronic products, declining sharply. This tracked increased signs of a slowdown in the US economy and a corresponding weakening in global demand for electronic goods. While exports across the subregion received a boost in 2000 from strong US growth and recovery elsewhere in Asia, domestic demand growth has been underpinned in a majority of countries by expansionary fiscal and monetary policies. While public consumption and investment have substantially increased since the Asian financial crisis, private consumption remains relatively subdued despite rises in public sector wages and tax breaks. However, the distinction between cyclically advanced and less advanced economies is important. In Malaysia, private consumption has grown strongly on the back of greater consumer confidence resulting from higher export revenues, employment levels, and real wages, and low interest rates. On the other hand, in Indonesia, Philippines, and Thailand, consumer sentiment remained downbeat in 2000, due to weakening currencies and uncertainty over the sustainability of recovery. Although renewed investment in export-oriented industries has led to a recovery in private capital formation from the crisis-induced contractions of 1998 and 1999, the overall level of gross fixed capital formation in 2000 remained considerably below pre-crisis levels. Private investment activity (especially foreign direct investment) remained slack owing to a combination of factors that included excess capacity in non-export industries, weak corporate sector profitability, and incomplete corporate and financial sector restructuring. Moreover, in Indonesia and the Philippines, this has been compounded by political uncertainty, civil unrest, and a perceived lack of transparency in business practices. These factors, together with a lack of market orientation, have also hindered private capital formation in Cambodia, Lao PDR, and Viet Nam. Low interest rates, made possible by subdued inflation, helped balance sheet restructuring in the corporate and banking sectors and limited the growth of public debt-service payments. However, weak loan growth across the subregion due to concerns by banks over their asset quality has tended to reduce the effectiveness of an accommodative monetary stance. Moreover, in Indonesia and the Philippines, the authorities pushed up interest rates during 2000 to defend weakening currencies in the face of persistent doubts over their resolve to implement needed structural reforms. Despite a pickup in subregional inflation during the last quarter of 2000 as a result of higher oil prices, overall inflation during the year remained low and relatively stable due to moderate food price inflation and continued excess capacity in certain production sectors. Current account surpluses throughout the subregion narrowed during the year due to a recovery in imports, in spite of robust export growth. This owed much to higher domestic economic activity, the import-dependent nature of manufactured exports, and (except for Indonesia, Malaysia, and Viet Nam) higher oil prices. Immediate prospects for the subregion have been clouded considerably by less hospitable external and domestic environments. The outlook for the US economy has deteriorated: a relatively sharp slowdown in GDP growth is expected in the first half of 2001 before activity picks up in the second. This is likely to have a significant negative impact on Southeast Asia's exports in general and electronic products in particular, as the US remains the subregion's largest export market, accounting for some 20 percent of total exports. Individual country expo-sure to electronics exports varies from 14 percent of total exports for Indonesia to around 60 percent of total exports for Malaysia and the Philippines. The slowdown in the US is also likely to adversely affect exports within the subregion, given that a large proportion of these form part of linked production sites that ultimately feed final demand for goods from industrial countries. In terms of domestic demand, consumption growth is also likely to remain weaker in 2001 than in 2000. Although lower US interest rates have provided some flexibility for lowering domestic interest rates (especially in the context of generally low domestic inflation), fiscal options remain more constrained (especially in Indonesia and Thailand). Slower export growth will also hold back domestic consumption and investment in the subregion. Moreover, investment activity in 2001 is likely to remain subdued owing to incomplete corporate sector restructuring in Indonesia, Malaysia, and Thailand. A perceived nontransparent investment environment in Indonesia, Philippines, and Viet Nam, and ongoing political uncertainty and civil unrest in Indonesia are other factors that are likely to hinder inward investment into the subregion. Even in the worst-case scenario of a harder landing and longer downturn for both the US and global high-technology sectors, the risk of a renewed crisis in the subregion remains small. Unlike 1997, Southeast Asia is not in the midst of a financial bubble, interest rates remain relatively low (and could fall further in 2001), current account balances remain healthy, and reliance on short-term foreign funding has been greatly reduced. Subregional economic growth is expected to slow to 4.0 percent in 2001 before picking up to 4.8 percent in 2002 as the US economy recovers and the electronics cycle turns positive. In Cambodia and Viet Nam, which are less dependent than most other countries in the subregion on electronics exports, GDP growth is likely to remain stable or even increase in 2001 due to a recovery in agricultural production, after the effects of severe droughts in 2000. Export growth (in US dollar terms) is likely to slow considerably in 2001 in Southeast Asia due to lower demand for manufactured goods as well as a lower price for crude oil (which will hurt the oil exports of Indonesia, Malaysia, and Viet Nam). This is, however, likely to be accompanied by faster import growth (relative to exports) and a further narrowing of the current account surplus in the subregion in 2001. In the medium term, high growth in Southeast Asia can only be sustained if governments step up the pace of structural reforms. In the countries worst affected by the financial crisis, although substantial progress has been made in corporate and financial sector restructuring, some items on the reform agenda remain: nonperforming loans are unacceptably high, and the pace of restructuring of heavily indebted companies is slow. In the Lao PDR and Viet Nam, as well as pursuing banking sector reform, the governments should play a less active role in the economy while enhancing their regulatory and supervisory capabilities to promote greater competition. These governments also need to expedite trade liberalization by dismantling exist-ing quantitative restrictions. In addition, throughout the subregion, governments need to enhance human resources development to provide greater flexibility to take full advantage of the opportunities that globalization presents.
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