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p. 15 of 77 BACK | NEXT Foreword, Acknowledgments, Contents, Acronyms and Abbreviations, Definitions I. Developing Asia and the World Developing Asia and the Pacific: Performance and Prospects Prospects for the World Economy in 2006-2007 Subregional Summaries Central Asia East Asia South Asia Southeast Asia The Pacific Textiles and Clothing in the Post-Quota Era: The Outlook for Asian Suppliers The Doha Development Agenda: Asian Challenges and Prospects after the Ministerial Meeting in Hong Kong, China II. Economic trends and prospects in developing Asia III. Routes for Asia's Trade Statistical appendix

Asian Development Outlook 2006 : I. Developing Asia and the World : Subregional Summaries

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Southeast Asia

Economic performance

The economies of Southeast Asia expanded by 5.5% in aggregate last year, above the average of the previous 5 years, but easing from a rapid 6.3% in 2004. In a notable performance, Indonesia ramped up its growth rate, despite some major hurdles. Growth in the smaller economies—Cambodia, Lao People's Democratic Republic (Lao PDR), and Viet Nam—accelerated and topped the subregional list (Figure 1.3.4). However, the pace slowed in four of the five biggest economies, namely Malaysia, Philippines, Singapore, and Thailand.

Indonesia had to deal with the impact of the December 2004 tsunami, and later in 2005, a slump in the rupiah, a sharp rise in fuel prices, and a resulting surge in inflation and interest rates. Even then, growth in Southeast Asia's biggest economy picked up by 0.7 percentage points to 5.6% in 2005, having accelerated over 4 years from 3.8%. Private consumption and fixed investment contributed most to last year's expansion.

Viet Nam's economic performance continued to be robust, with growth accelerating above 8%, fueled by surging private investment and strong domestic demand. (As a net oil exporter, the economy has benefited from higher world oil prices.) However, inflation has also accelerated. Cambodia's economy, too, expanded by more than 8%, bolstered by stronger agricultural production that partly reflected a recovery from drought and an increase in clothing exports. The Lao PDR grew by an estimated 7.2%, with its industry sector the main source of expansion, driven by gold and copper mining.

Thailand's growth slowed to 4.5% in 2005. This economy was hurt by a drought in the first half that reduced agricultural production, the effects of the tsunami on tourism, and high global oil prices. Consumption remained the major contributor to GDP growth. Higher oil prices and buoyant demand for capital goods pushed up imports, and the surplus on the trade and current accounts swung into deficit. In Malaysia, growth decelerated to 5.3%, mainly because of weaker external demand for the country's electronics products. Private consumption was the main driver of growth, supported by low interest rates, easy access to credit, and firm commodity prices that lifted rural incomes. The Philippines was also affected by drought in the first half of the year, and, to a lesser extent, by slower growth in services. GDP grew by 5.1%. Buoyed by a strong flow of remittances from overseas workers, personal consumption spending was the largest contributor to growth. Government consumption was weak as the Government reined in its fiscal deficit.

Singapore benefited late in the year from the upswing in global demand for electronics products and from a recovery in domestic demand, which was buttressed by strengthening employment and a pickup in the property market. GDP grew by 6.4%, although this was well below the high rate recorded in 2004.

Prospects for 2006 and 2007

Growth in 2006 is forecast to remain at around 5.5% for Southeast Asia as a group, with a slight increase to 5.7% penciled in for 2007. Cambodia and Viet Nam, the economies that grew the fastest last year, are likely to moderate their expansion rates. Growth is expected to be slightly stronger in Lao PDR, Malaysia, and Thailand, and a little lower in the other subregional economies. Consumption in several of the bigger economies will be damped by continuing high oil costs and firming interest rates. Investment, though, is forecast to pick up.

Indonesia will be constrained for much of 2006 by high inflation and interest rates. Increased fiscal spending allowed by a reduction in fuel subsidies last year will start to counteract this weakness, leaving full-year growth at about 5.4%. The authorities are pushing to improve the investment climate, which will help pave the way for a pickup to 6.0% in 2007, when inflation and interest rates should be lower than now.

Thailand is projected to grow by 4.7% in 2006, with a moderate increase in public investment, better performance in agriculture, and robust exports. The trade and current account deficits are expected to widen. Growth is seen accelerating to 5.5% in 2007 when the Government is scheduled to increase spending on a megaprojects program. In Malaysia, growth is forecast to rise to 5.5% this year and 5.8% in 2007, driven by robust consumer spending, a lift in private investment, and higher public spending related to the start of the Ninth Malaysia Plan. Growth in the Philippines could soften to 5.0% this year, partly because crop production may be reduced by forecast heavy rains. Also, investment and exports are expected to weaken. In 2007, growth is seen recovering to 5.3%, when agriculture should have a better year (because of more normal weather) and investment is likely to rise.

Singapore, the most export-dependent economy in Asia, is benefiting from stronger exports of electronics and from a continued recovery of domestic demand. The full-year 2006 expansion rate is forecast at 6.1%. Growth is expected to soften later in 2006, and further into 2007, when it is seen at 4.6%.

Viet Nam's growth is projected to consolidate at around 8% in the next 2 years. Exports will probably grow at slightly below recent rates as world prices retreat for some of its commodities. The momentum for domestic demand is likely to be maintained through sustained expansion of FDI, private remittances, and tourism receipts. The country is expected to join WTO in the forecast period, which should assist its export efforts and maintain its momentum toward domestic market-oriented reforms.

Cambodia is expected to post an average growth of around 6.3% in 2006–2007. Agriculture will return to slightly lower growth rates after the rebound from drought, while clothing exports will face intensified competition. In the Lao PDR, growth is underpinned by investment in a major hydroelectric project and in mining. This economy is seen expanding by 7.3% this year, and by 6.5% in 2007.

Medium-term outlook

In the 2006—2010 period, Indonesia is expected to grow by about 6% on average, so long as the investment environment continues to improve. For Thailand, the outlook is for growth in the 5—6% range, with assistance from major public investment projects. Malaysia is seen growing at around 5.5%. In the Philippines, average growth is projected at 5%, but this could be boosted if momentum builds behind reforms and the capital stock expands much faster than in recent years. Viet Nam will continue to grow at the fastest rate in Southeast Asia, averaging 7.5—8.0%, provided that it pushes ahead with market-oriented reforms. The Lao PDR is expected to grow by 6—7.0% and Cambodia by perhaps 6.0% over the medium term. Singapore, at a much higher level of development, is seen growing at 4.5—5.0%.

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