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p. 10 of 36 BACK | NEXT Foreword 1. Developing Asia and the world Overview Prospects for developing Asia, 2006 and 2007 Prospects for the world economy, 2006 and 2007 Subregional summaries Central Asia East Asia South Asia Southeast Asia The Pacific Suspension of Doha talks and emerging trade issues II. Economic trends and prospects in developing Asia III. Developing Asia's imprint on global commodity markets Appendix Statistical notes and tables ADO forecasting performance for GDP growth and inflation

Asian Development Outlook 2006 Update : 1. Developing Asia and the world : Subregional summaries

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Southeast Asia

Trends in 2006 and 2007

Economic growth for the subregion is projected at a fairly robust 5.4% for 2006 (Figure 1.4.10). The expansion is helped by strong exports, while domestic demand, especially for fixed investment, is soft in several economies, reflecting a need to improve their investment environments. This projected rate of growth is marginally lower than forecast in ADO 2006 (5.5%) and also a little below actual growth in 2005 (5.5%). Growth forecasts for this year are revised up for two economies— Philippines and Singapore—and adjusted down for two—Malaysia and Thailand.

Next year, Southeast Asia now is seen likely to record aggregate growth of 5.3%, downgraded by nearly a half percentage point from ADO 2006, which would put 2007 growth close to this year’s pace. The downward revision is caused by the deterioration in the near-term outlook for Malaysia and Thailand, which continues into next year. Though significant economic growth is expected in most economies, in some—particularly Indonesia and the Philippines—it will be insufficient to make significant inroads into unemployment and underemployment.

Growth in 2006

Growth in 2006 has been supported by strong exports, reflecting growth in key markets and higher commodity prices. The upturn in the global electronics cycle has benefited exports from Malaysia, Philippines, Singapore, and Thailand. High oil and natural gas prices have contributed to export growth in the subregion’s net energy exporters—Indonesia, Malaysia, Myanmar, and Viet Nam. (These economies have not fully aligned their domestic fuel prices with global levels, though.)

Buoyant prices of nonfuel commodities—natural rubber and minerals for example—have helped countries such as Indonesia, Lao People’s Democratic Republic (Lao PDR), and Malaysia. In many countries, receipts from tourism and remittances from workers abroad have abetted consumption and growth this year, while better agricultural performance in the Philippines and Thailand, as the effects of the previous year’s drought receded, buoyed economic growth there. However, agriculture has been subdued in Viet Nam as avian flu and adverse weather in some regions hurt production.

Apart from these common themes, several country-specific factors have impinged on the growth performance. In Indonesia, consumption and investment have been sluggish, reflecting continued adjustment to sharp hikes in fuel prices implemented in October 2005 to contain the cost of subsidies. As the effects of these increases fade, and supported by a rise in development spending, funded by reallocating some of the budget resources used for fuel subsidies, economic growth is expected to pick up in the second half to average 5.4% for this year, which matches the forecast in April.

In Malaysia and Singapore—the most export-dependent economies in the subregion—strong external demand has contributed to growth. Fixed investment has strengthened, but consumption growth has slowed, particularly in Malaysia, reflecting higher than expected inflation and rising interest rates. With external demand expected to soften in the second half of 2006, Malaysian GDP growth of 5.2% is projected for the whole year, slightly lower than the 5.5% forecast made in ADO 2006. In Singapore, the growth projection is revised up to 6.6% from 6.1%, reflecting stronger than expected growth in the first half.

Remittances to the Philippines from its overseas workers, equivalent to 11–12% of GDP, continue to provide impetus to consumption and to modest rises in overall growth. With an improvement in fiscal performance over the past few years, government spending also contributed modestly to growth. Fixed investment remains weak, however. For the year as a whole, the economy is projected to grow at 5.4%, up from the earlier 5.0% forecast.

Political uncertainty in Thailand since the annulment of April’s elections has weighed on consumer sentiment and led both business and the Government to postpone investment. As a result, the growth projection for 2006 has been cut by a half percentage point to 4.2%.

In the subregion’s fastest-growing economy, Viet Nam, industry and services continue to perform well, reflecting broader and deeper private sector participation. Vigorous growth of 7.8% is still expected for this year, aided by higher international prices of oil and other commodities, buoyant remittances, and strong tourist numbers. There are signs that the fight against corruption is being stepped up.

Among the smaller economies, growth projections are unchanged. Cambodia’s growth is expected to moderate to 6.3% this year from a revised rate of 13.1% in 2005, which was buoyed by a rebound of agriculture as the effects of an earlier drought faded. In the Lao PDR, several large projects in the hydropower and mining sectors are providing an impetus to growth. Economic growth in Myanmar is likely to be supported by high world prices of oil and natural gas, though data are hard to come by.

Inflation in 2006

Inflation for the subregion as a whole is projected to rise to 7.5% in 2006 (Figure 1.4.11), slightly higher than the 7.3% forecast in ADO 2006, and up by more than a percentage point from 2005. Consumer prices have risen faster than expected in Malaysia, Thailand, and Viet Nam, and all three countries have seen an increase in administered prices of various products. In Malaysia, a reduction in fuel subsidies and increases in taxes on liquor and cigarettes have helped push inflation to a projected average of 4.0%, the highest in 8 years.

Domestic prices of fuel in Thailand are now in line with world prices, as fuel subsidies were eliminated in 2005. This year, the Government has allowed a gradual adjustment to administered prices of other essential commodities so as to offset businesses’ higher production costs stemming from the fuel price hikes. This has led to higher than expected inflation, which is now projected at 4.5%.

In Viet Nam too, inflationary pressures have been stronger than foreseen, reflecting robust economic growth and soft agricultural production. These are evident in prices of construction materials and food. An increase in the administered price of fuel in August will likely keep inflation at a year-average rate of 8.3%. Indonesia doubled its fuel prices in October 2005, and inflation soared as anticipated, to 16.2% in the first half of this year. With tighter monetary policy implemented over the past year, and an appreciation of the rupiah, inflation is expected to moderate to 8.0% by year-end, giving an annual average rate of 14%, one of the highest in the subregion.

Consumer inflation in the Philippines picked up in February when the value-added tax rate was raised, but has increased more slowly since then, kept down by a larger domestic supply of key staples such as rice and corn (maize) and a stronger peso against the US dollar. Inflation is projected to average 6.7% this year, similar to the April forecast.

Cambodia’s inflation rate has also moderated this year from 2005 (to a forecast 4.5%) as food production has increased. Inflation in the Lao PDR is seen increasing to about 9%, with economic growth remaining vigorous. In Myanmar, the price of rice has been moving up since early last year. Combined with an eight-fold increase in fuel prices in October 2005, a 10-fold rise in electricity tariffs in May this year, and increases in public sector salaries in April, inflation likely accelerated further from 14.3% at end-2005.

External payments balances in 2006

Stronger than expected export growth across Southeast Asia and continued buoyancy in receipts from tourism and remittances have contributed to an upward revision for this year’s projected aggregate current account balance to a surplus of 6.5% of GDP (Figure 1.4.12). This is higher than the 5.6% forecast in ADO 2006 and the actual surplus of 6.0% in 2005. In some countries, such as Philippines, Thailand, and to a lesser extent, Malaysia, the improvement in the current account also reflects softness in domestic demand.

In the Philippines, electronics exports have rebounded. Weak investment has led to a slower pace of import growth relative to exports, and a smaller trade deficit. With continued buoyancy of remittances, the current account surplus is likely to rise to 2.9% of GDP, higher than forecast in ADO 2006.

Thailand’s export growth has been strong but import growth slack, also reflecting weak investment. With a solid rise in tourism receipts, the current account deficit is likely to narrow to 0.5% of GDP, lower than that projected in April, and much less than the 2.1% of GDP recorded in 2005. The strong growth of Indonesia’s oil and non-oil exports is expected to contribute to a slightly larger current account surplus of 1.2% of GDP in 2006, compared with 1% projected in April.

In Malaysia, although exports have grown faster than a year earlier, imports are expanding at an even higher rate with the recovery in investment. As a result, the current account is expected to show a smaller (but still-large) surplus this year than in 2005, but it remains higher than forecast in ADO 2006. Viet Nam’s oil and non-oil exports have also risen at rapid rates, and its imports are rising at a double-digit pace. With inflows of remittances and tourism receipts both strong, the current account deficit is expected to shrink to 1.2% of GDP this year, compared with the projection of 2.7% made in ADO 2006 and the actual outturn of 3.6% in 2005.

Tourism receipts in Cambodia are likely to help hold the current account deficit to 10.5% of GDP, somewhat better than April’s forecast of 11.8%. In the Lao PDR, import requirements are likely to increase because of hydropower and mining projects. However, with exports of minerals, primarily gold and copper, rising fast, the deficit on the current account will likely be limited to 10% of GDP.

Growth in 2007

In 2007, world trade growth is expected to slow, but will remain at about trend, suggesting that exports will remain supportive of Southeast Asian growth. Malaysia’s growth is expected to slow to 5.0% in 2007, compared with 5.8% projected in ADO 2006, as a softening of growth in the US economy and in domestic consumption have damped the outlook. In Thailand, GDP is now expected to grow at a slower rate of 4.0% in 2007, compared with April’s forecast of 5.5%, as the impact of the prolonged political uncertainty on private and public investment is expected to spill over into next year. For other countries, growth forecasts are unchanged from those in ADO 2006. In Indonesia, Southeast Asia’s biggest economy, growth is seen accelerating to 6.0% as the impact of the hike in fuel prices last year fades, stimulating consumption and investment. The significant decline in public debt in recent years and the reallocation of budget resources enabled by the reduction in fuel subsidies provide room for increasing expenditures on education, health, and infrastructure.

The Philippine economy next year is expected to expand at a similar modest rate as this, bolstered by remittances. The progress in lowering the fiscal deficit allows some room for additional government spending, but, with public sector debt levels and interest payments still high, fiscal consolidation will likely be maintained. In Viet Nam, the transition to private sector-led growth, the reform momentum gained in the process of securing accession to WTO, and the consequent positive impact on investor sentiment, should help the country attain growth of about 8%, the highest in Southeast Asia.

Inflation in 2007

Inflationary pressures in Southeast Asia are still expected to ease in 2007, especially in Indonesia as the effects of last year’s surge in fuel prices recede. Assuming normal weather conditions, food price inflation also will slow, so that Indonesia’s year-average inflation rate falls to about 7.5%. The subregional inflation rate forecast for 2007 is maintained at about 5%, after upward revisions for Thailand and Viet Nam, virtually balanced by downward revisions for the Philippines and Singapore.

External payments balances in 2007

With slower export growth, the aggregate current account surplus in Southeast Asia (though revised up from April) is projected to decline from 2006 to 6.1% of GDP next year. The Philippines and Viet Nam are exceptions. The surplus in the Philippines is projected to rise as import requirements for investment remain subdued and remittances are likely to maintain their buoyancy. In Viet Nam, the current account may revert to a small surplus if WTO membership, expected by the end of this year, leads to new markets for exports, and if continued significant inflows of tourism revenues and remittances from workers abroad are seen.

The surplus in Indonesia may shrink slightly next year with the expected recovery in domestic demand. In Malaysia, the recovery in investment, partly reflecting planned public works projects, is projected to trim the current account surplus marginally. In Thailand, in addition to slower export growth, high fuel prices will likely increase the current account deficit.

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