Subregional performance
The economies of Southeast Asia expanded by 6.0% in aggregate in 2006 (Figure 1.3.4), above the average growth of the previous 5 years. Most countries grew at a faster rate than in 2005, reflecting strong external demand, supportive monetary conditions, and for some, the beneficial impact on agriculture of favorable weather conditions for most of the year.
For the subregion, export growth accelerated to nearly 18% in nominal terms, with exports from Cambodia, Lao People's Democratic Republic (Lao PDR), and Viet Nam rising at faster rates than this. Exports from several economies were boosted by the upturn in global demand for electronics (Malaysia, Philippines, Singapore, and Thailand), others from high prices for oil or natural gas exports (Indonesia, Malaysia, Myanmar, and Viet Nam), and many gained from high prices of agricultural commodities, such as natural rubber and palm oil. Agricultural production also benefited from favorable weather conditions, although floods and typhoons had an adverse impact for parts of the year in Philippines, Thailand, and Viet Nam.
Economic growth in general was supported by ample domestic liquidity, reflecting buoyant inflows from the external balance of payments. Central banks' accommodative monetary policies also kept liquidity flush in several countries. Fiscal policy was more mixed: the general bias was to maintain fiscal consolidation, even if some governments began to shift more of their budgets to development expenditures.
As exports surged, current accounts strengthened across the subregion. Furthermore, investment was weak in Indonesia, Philippines, and Thailand, which moderated growth of imports. Southeast Asian inflation averaged 7.1% in 2006, up from 6.3% the previous year. The average was raised by high 13.1% inflation in Indonesia-the biggest economy in Southeast Asia-which saw price pressures surge from late 2005 when the Government reduced subsidies on fuel.
Subregional prospects
Growth is projected to slow modestly to 5.6% in 2007, primarily reflecting the likely softening in some major export markets. Only in Indonesia and Viet Nam is growth projected to be higher this year. Inflationary pressures are forecast to subside significantly (to average 4.2%) on the expectation of a moderation in world fuel prices and appreciation of subregional currencies.
The aggregate current account balance for the subregion as a whole is projected to deteriorate slightly. The deceleration in growth of global trade and the expected easing of some commodity prices will contribute to lower export growth. Imports are likely to record a solid expansion despite the expected decline in world fuel prices, as investment is set to pick up, especially in Indonesia. Continued buoyancy of remittances from overseas workers and in tourism receipts should provide support to current accounts in several countries.
Country highlights
Cambodia
Consolidating rapid growth over the previous 2 years, the economy expanded strongly by 10.4% in 2006, reflecting strong clothing exports, tourism receipts, and construction activity. Forecast growth averaging just over 9% in the next 2 years will be more dependent on strengthened domestic economic activity, itself underpinned by improved rural incomes, larger inflows of FDI, and greater government capital spending.
Indonesia
Moderate economic growth of 5.5% last year was based on private consumption and exports, while fixed investment growth dwindled. Inflation eased from high levels as the year progressed, enabling a reduction in interest rates. Economic growth is expected to pick up by a half percentage point in 2007, supported by greater development spending and some improvement in the poor investment climate. If the Government can accelerate reforms, it could pave the way for a significant lift in investment and a boost in growth, which in turn would make headway in job creation and poverty reduction.
Lao People's Democratic Republic
Foreign investment in hydropower and mining, together with rising exports of minerals in 2006, continued to drive double-digit expansion in industry, the major contributor to the GDP growth rate of 7.3%. Inflation slowed to levels not seen for 12 years. Economic growth is projected to decelerate moderately this year to 6.8%, mainly because export markets and mineral prices will not be as strong as in 2006.
Malaysia
Consumption spending produced a pickup in growth to 5.9% in 2006. Private and public investment also strengthened with support from the Ninth Malaysia Plan. Growth is projected to slow by about a half percentage point in 2007 as export markets soften and both household spending and private investment decelerate. Higher government investment is expected over the Ninth Plan period as the Government encourages firms to climb the value chain, but constraints such as gaps in skills will need to be overcome for private investment to increase substantially.
Myanmar
High prices for natural gas exports and a good harvest led to a modest pickup in economic activity. But macroeconomic stability remains elusive with monetized fiscal deficits feeding high inflation, which returned to double-digit levels and could go higher.
Philippines
Achievements included another year of moderate economic growth (5.4%), a downtrend in inflation, and stronger fiscal and external positions. This year, still-high levels of remittances and low real interest rates, as well as greater fiscal expenditures, should keep expansion at around the same level. However, growth has not been strong enough to lift employment sufficiently, mainly because of a declining investment-to-GDP ratio. Improvements in the investment climate are needed to spur economic expansion, increase employment generation, and provide public resources for social programs.
Singapore
Growth in 2006 hit 7.9%, well above the economy's trend rate for a third year running. External demand was the main driver, although domestic demand, especially investment, also picked up. The pace of growth is expected to decelerate in 2007 to a still-strong but more sustainable rate of 6.0%. Closer links with global economic networks and structural reforms have contributed to the healthy performance, but also led to widening income gaps.
Thailand
Strong exports drove a pickup in economic growth to 5.0% last year, since domestic demand was damped by several factors including rising interest rates and inflation in the first half, flooding, and political uncertainties for much of the year. Inflationary pressures eased in the second half of 2006, paving the way for the central bank to start lowering rates early in 2007. Economic growth is projected to slow to 4.0% this year, and the outlook for 2008 depends heavily on elections being held and on the incoming Government providing a clear and credible economic program.
Viet Nam
This economy maintained a rapid rate of growth in 2006, estimated at 8.2% according to the Government. It was supported by robust exports, rising consumption spending, and strong investment. Inflation also stayed high, averaging 7.5%. Membership of the World Trade Organization from January 2007 has added impetus to development and market-oriented reforms. Provided that further progress is made on structural reforms, brisk growth of just over 8% is projected this year and next.
Development challenges
Southeast Asian economies face a number of challenges to sustainable growth, social development, and poverty reduction. While countries across the subregion have improved their fiscal performance, spending on social and physical infrastructure has lagged. In Indonesia, Malaysia, and Thailand, where debt ratios are at manageable levels, fiscal policy has more scope for increased expenditures on social and physical infrastructure. In the Philippines, although progress in fiscal consolidation has been significant, the debt level remains high and, consequently, the shift toward development expenditures is likely to be more gradual.
Recent success in raising revenues as a share of GDP in the Philippines and the smaller economies of Cambodia and the Lao PDR needs to be prolonged to ensure that these governments achieve an adequate level of public spending on development.
Institutional reforms to reduce the costs of doing business and to improve the investment environment remain a challenge in most of Southeast Asia's economies. Optimism in financial markets is yet to spill over into the real sector in Indonesia and, especially, the Philippines where investment has declined as a share of GDP in the past few years. Key priorities should be improving the provision of infrastructure, chiefly power, water, and transport, including an adequate regulatory framework for private sector participation; reducing the costs of complying with regulations in customs, trade, and (particularly in Indonesia) labor markets; and enhancing the delivery of public services.
Concerns caused by decentralization in Indonesia and political uncertainties in Thailand underscore the importance of ensuring predictable policies on which investors can base long-term decisions. Malaysia and Thailand need to enhance the skills of their workforces to move up the value-added chain in production. In Viet Nam, where investment is high as a share of GDP, the key challenge is to raise the efficiency of capital, with reforms of state-owned enterprises and banks, development of capital markets, and regulations to ensure transparency and accountability.
Among the smaller economies, Cambodia's main challenge is to diversify its sources of growth, given the economy's high dependence on clothing and tourism. Reforms in agriculture, notably in land management, as well as legal and judicial moves to improve the environment for private sector activity, are key priorities.
The discovery of apparently significant oil and gas reserves has raised the prospects of substantial revenues for the Cambodian Government in the medium term. These revenues could provide a much-needed boost to social spending and infrastructure. However, appropriate policies to guard against the "natural resource curse" and to enhance transparency and accountability in the use of these resources need to be put in place. Similar policies are necessary in the Lao PDR and Myanmar, which also benefit from large receipts from natural resources. They, too, have a need to promote the development of agriculture and rural small businesses to lift more people out of poverty.
Vulnerability to natural disasters and the rising incidence of communicable diseases, such as avian flu, pose another important challenge to subregional economies. This underscores the importance of building into the planning and budgeting processes precautions to mitigate the effects of natural disasters and to manage them once they occur. Information dissemination and putting in place measures for prompt action are also important to curtail the spread of communicable diseases.
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