The Year Ahead

The Year Ahead

Elections in India and Indonesia, and China’s effort to manage growth more sustainably will keep all eyes on Asia in 2014

After weathering many challenges in 2013, Asia enters a new year with a degree of optimism as it sees itself playing an ever-larger role in shaping the future of the global community, both economically and socially. The region is poised to continue as the driver of the global economy, despite the resurgence of the United States economy and signs of hope in Europe, but Asia faces some challenging times ahead as well. While more good news is expected from Japan, expectations are more modest in two other major engines of growth, China and India. In China, a shaky banking sector is raising concerns, while in India, the campaign for the election will bring economic policymaking to a halt. Smaller countries have their own worries, among them Cambodia where opposition to the government is mounting. As for Thailand, stay tuned.

INDONESIA

Election manoeuvring: With Susilo Bambang Yudhoyono unable to run for a third presidential term, contenders are manoeuvring to win public support in this year’s vote. Possible candidates include Golkar party chairman Aburizal Bakrie, retired general Prabowo Subiato, and new faces such as Trade Minister Gita Wirjawan and State-Owned Enterprises Minister Dahlan Iskan. However, opinion polls put Joko Widodo (Jokowi), the popular governor of Jakarta, at the head of the pack, even though he has declined to discuss his plans.

Commodity boom over: Indonesia needs to reduce its reliance on exports of commodities, which account for about 60% of all overseas shipments, as global prices are expected to remain weak in 2014. Prices of two major Indonesian earners, crude palm oil (CPO) and coal, are expected to fall. The shale gas revolution in the United States is among the factors putting pressure on coal prices. Although global economic growth will improve, it will not lift commodity prices, most analysts say.

FDI impact: Bank Indonesia (BI) Governor Agus Martowardojo has floated the idea of progressive tax incentives to foreign companies that reinvest their profits in Indonesia. He noted that repatriation of profits from Indonesia reached $17 billion in 2013which also reflected substantial increases in FDI in recent years. The government is aiming for FDI realisation this year of 510 trillion rupiah (US$52.5 billion), up 31% from an estimated 390 trillion rupiah in 2013. However, meeting the target could be difficult. FDI growth has been slowing as candidates step up economic nationalism rhetoric ahead of the general election in 2014.


MYANMAR

Asean chairmanship: Dramatic proof of how far Myanmar has come has arrived with its leadership role of Asean in 2014 for the first time ever. The last time the country’s name came up in the rotation, in 2005, the very idea that it could lead the 10-member group was seen as preposterous. But since 2010 the country has adopted partially representative government, eased censorship and released political prisoners, including Nobel laureate Aung San Suu Kyi. As the chair of Asean, one of Myanmar’s main duties this year will be to offer some leadership in the dispute over the South China Sea between China and both the Philippines and Vietnam, and also to help the 10 Asean nations improve their readiness for integration in 2016. The former task might be a challenging one since China has been a firm ally of Myanmar, even in the old junta days when the rest of the world shunned the country.


SINGAPORE

Pursuit of harmony: Following the unrest in Little India riot at the end of last year, Singapore’s government firmly said it would “take no chances” on a repeat of the incident which was deemed the worst social unrest since 1969. The government will be closely watched in terms of its handling of immigrant workers this year. It is also under pressure to appease many increasingly disgruntled citizens who have not benefited from the rapid growth of the city-state’s economy. A reputation as a global financial capital and a hotbed for funds and super-deluxe property doesn’t impress middle-class voters much, ultimately.

Most Business-Friendly Economy: On the positive side, Singapore continues to provide the world’s most business-friendly regulatory environment for local entrepreneurs, according to the new World Bank Group report. The wealthy city-state has held the position for eight years in a row, beating perennial bridesmaid Hong Kong. According to the government, gross domestic product for this year is expected to grow between 2% and 4%.


ASEAN

South China Sea: Progress is expected this year in the adoption of a Code of Conduct (CoC) aimed at resolving disputes between China and Asean countries — the Philippines and Vietnam in particular —after China in 2013 agreed to start consultations. Myanmar, as the Asean chair, will need to play a vital role in coordinating with all parties to ease tensions.

Haze treaty: Indonesia aims to ratify a regional treaty by early 2014 to fight smog from forest fires, making it the final member of a Southeast Asian anti-pollution pact. Environment ministers from five haze-affected Asean countries last year discussed solutions after an especially smoggy season in which the political temperature rose with the smoke. The treaty aims to stop cross-border smog from forest fires by requiring parties to prevent burning, monitor prevention efforts, exchange information and provide mutual help. It also binds signatories to respond promptly to requests for information from countries hit by the smoke.


VIETNAM

Economic improvement: Despite its struggle for growth in 2013, the Vietnamese economy is expected to have a better outlook in 2014, with GDP expansion of 5.8% and inflation around 7%. Tax cuts and other market support measures introduced by the government last year should help, as will and improving global economy. The central bank intends to maintain prudent monetary policy to control inflation while also contributing to credit growth of 12-14%. While credit growth would be a good sign, the quality of lending will be the first priority.

Property in limbo: The government committed 30 trillion dong (47 billion baht) last year to subsidise loans with a 6% cap on interest rates to warm up the frozen real estate market but it has yet to see significant results. Sentiment remains weak as banks are still sitting on many bad loans. It is hoped, however, that a further adjustment of the rules to give direct support to buyers instead of sellers of low-priced housing will improve the situation and help reduce banks’ bad debts.

Better export outlook: Vietnam is expecting a 10% rise in the dollar value of its exports to about $145 billion, helped by progress on trade pacts such as the Trans-Pacific Partnership (TPP) and the imminent formation of the Asean Economic Community (AEC). While many Asian states are not taking part in the US-backed TPP, Vietnam is pursuing all opportunities, including the Regional Comprehensive Economic Partnership (RCEP) that links Asean with China, India, South Korea, Japan, Australia and New Zealand, and an Asean-EU pact. Authorities believe participation in the TPP will help the country improve its export market structure, participate in international and regional production chains, and improve attractiveness to investment.

FDI outlook healthy: New and existing foreign direct investment (FDI) capital in Vietnam totalled $20.8 billion in the first 11 months of 2013, up 54% from the year before. Japan led the table at $5.6 billion, followed by Singapore ($4.2 billion) and South Korea ($4.1 billion). New FDI is forecast to exceed $18 billion this year. As well, new agreements with the EU and Switzerland on official development assistance (ODA) will increase ODA funds in Vietnam by 10-15% from 2013.

War on graft: The government has signalled a tougher stand on corruption following the death sentence handed down last month to Duong Chi Dung, the former chairman of the shipper Vinalines. It was one of 278 corruption trials held last year in a country that ranked 116th out of 177 on the Transparency International corruption perceptions index.


THE PHILIPPINES

Reconstruction year: Reconstruction in the damaged areas hit by Typhoon Haiyan is expected to cost 361 billion pesos ($8.15 billion), of which 125.1 billion will be spent in 2013 and 2014, according to the Economic Planning Agency. The National Economic and Development Authority (NEDA) estimates total damage from the typhoon at 571.1 billion pesos. The Philippines’, the best performer in Asean last year, is likely to see gross domestic product (GDP) growth reduced by 0.3 percentage points this year because of the typhoon devastation. The government has already made adjustments by cutting petrol and sugar subsidies, while electricity tariffs also went up on Jan 1.


MALAYSIA

Economic concern: Malaysians celebrated the New Year by staging protests against price increases — sugar subsidies were the first to be cut — as the government began to take steps to put its shaky economic house in order. More threats to consumers’ pocketbooks are on the way, not to mention the new Goods and Service Tax in 2015. Researchers believe growth in domestic demand will moderate at around 6.8% in 2014. Higher food and energy prices are expected to push up inflation throughout the year (it was 2.9% in November), especially if fuel subsidies get scaled back as most economists expect.

Room for optimism: Despite the domestic challenges, Malaysia’s economy in 2014 should be healthy, driven by improving trade and stable domestic demand, successfully meeting the government’s target of between 5% and 5.5% GDP growth. Private investment is expected to grow 12.7% to 153 billion ringgit. The government’s Economic Transformation Plan has attracted 220 billion ringgit worth of investments, creating 435,000 jobs, since its inception in 2010. This momentum will continue into 2014, creating more jobs and activity.

Dogfight in the skies: The aviation industry will see more competition and airline margins will come under continuous pressure, though fares will be more competitive for some sectors. A new business jet service may take to the skies this year, but Malaysia needs an aviation blueprint to deal with even more competition when Asean skies are liberalized on Jan 1, 2015. The new KLIA2 low-cost air terminal, the biggest in Asia, is expected to open its doors in the second quarter of 2014.


CAMBODIA

Political tension: Opposition protesters continue to gather support for their campaign against the Hun Sen government, having given it three months to hold a new election. He Cambodian National Rescue Party believes irregularities in the July 28 kept it from securing a majority and unseating the Cambodian People’s Party.

Adoptions in spotlight: On the social front, Cambodia expects to resume international adoptions this year. The move comes a surprise to some as the government had suspended the practice for the last four years due to widespread allegation that children were being trafficked. However, Unicef has struck a cautions tone, and it is still not clear whether countries including the United States and the United Kingdom will allow their citizen to participate in the programme.

Wardrobe malfunction: The garment industry, the main driver of Cambodian exports, had a difficult year in 2013 and the challenges are only going to mount this year. Workers have gone on strike and staged huge street rallies to press for a minimum wage of $160 a month — $60 higher than what the government has approved so far. Rising concern in the developed world about the treatment of garment workers in countries such as Cambodia and Bangladesh is also compelling producers to improve practices.


LAOS

Economic growth: As part of its continuing drive to graduate from UN least developed country status by 2020, the government has targeted at least 8% annual GDP growth for the period 2011-15. However, the IMF has cautioned the government that it needs to address growing economic vulnerabilities, including high inflation of around 7.5%. It suggested that continued improvements in tax collection would be an important component in fiscal consolidation efforts, adding that the country’s recent WTO accession would help promote greater economic diversification.

Dammed if they do: Criticism is mounting of the $3.5-billion Xayaburi Dam construction project that is scheduled to be completed in 2019. The government maintains it has considered other countries’ views but decided to move ahead with the project on the Mekong River anyway. Environmentalists fear the dam will have a negative long-term impact on the ecosystem and block migratory routes of fish, including potentially affecting the livelihoods of up to 60 million people along the Mekong. Questions of transparency surrounding the project have also been raised.


CHINA

Steering the economy: Curbing the growth of domestic debt and slashing industrial overcapacity are areas that China’s leaders have agreed to tackle, while trying to not hurt growth in 2014. The Communist Party’s top leaders so far have laid out few specific details about how they will accomplish their goals; however, some analysts said it did not necessarily reflect their ability to follow through. According to Fitch Rating, domestic debt since 2008 has ballooned to 216% of GDP from 128% and could climb to 271% by 2017 if not corrected. Various sources forecast GDP growth for the world’s second largest economy of around 7% to 7.5%.

Property pressure: The largest urbanisation in world history has given rise to fears of a property bubble. China’s swelling middle class, many of whom are now eagerly moving to fancier flats or condominiums, drove up residential sales by 35% in the first three quarters of 2013. Shanghai and Shenzhen recently followed Beijing’s lead by requiring that buyers of second homes put up 70% of the purchase price as a deposit. However, demand does not look so robust, particularly in many developments outside the big cities that appear to be ghost towns.

Disputes at sea: Despite the escalation of tensions, there has been considerable informal discussion about ways to improve ties between China and its neighbours. A number of meetings between various ministries have taken place on confidence and transparency building between naval and coast guard forces in the East China Sea. However, uncertainties about the conditions under which China and Japan will begin improving their relationship still remain. At the end of last year, China deployed its one and only aircraft carrier after two unarmed American B-52 bombers flew over a disputed island chain and through what China insists is restricted airspace.


INDIA

The people decide: The general election must be held before the term of the present Lok Sabha ends on May 31. It will be held in multiple phases and has to be completed before June 1. The Election Commission has the task of accommodating 780 million voters at 800,000 polling stations with 1.18 million voting machines. The main opposition Bharatiya Janata Party (BJP) is expected to defeat the ruling Congress party, enabling Narendra Modi to become prime minister. However, the BJP may not get an outright majority and Modi may be unacceptable to potential coalition partners because of perceived bias against Muslims, who make up 13% of the population. Congress has led the central government for two terms and is facing deep anger among voters over widespread corruption, slowing growth and soaring prices.

Economic outlook: Many international forecasters have lowered their growth projections for India for fiscal 2013-14 (ending March 31) and are continuing to slash forecasts for the following fiscal year. The United Nations projects 2014-15 growth at 6.2%. Some brokers, citing tighter financial conditions and higher macroeconomic uncertainty, have revised down their 2014-15 GDP growth forecasts to 5.5% from 6.6% previously.


JAPAN

Abenomics, Year II: The policy prescription named after Prime Minister Shinzo Abe will be tested this year to see if it really can deliver on extracting this mighty economy out of its 20 year-old deflationary spiral. Though growth in final consumer demand is still modest, there is positive news that consumer activity has at least emerged from a recessionary cocoon and can be seen to be above the first-quarter 2008 pre-recession peak. The government in December raised its GDP growth forecast to 1.3% for the fiscal year starting in March 2014 from 1% forecast previously.

Asean relations: International disputes still require close monitoring, as Japan and Southeast Asian countries called for freedom of the air and sea and urged that disputes be resolved peacefully, amid concerns about Chinese military assertiveness. In order to re-engage with the region after several years in which it has been outpaced by China’s growing economic power, Japan has also pledged $20 billion in financial support to Asean countries.


SOUTH KOREA

Asian Games: Incheon is gearing up to stage the 17th Asian Games from Sept 19 to Oct 4, after outbidding New Delhi for the regional sporting extravaganza. This will be the third time Korea has hosted the Olympic Council of Asia’s showpiece event, following Seoul in 1986 and Busan in 2002. There will be approximately 20,000 participants, including 13,000 athletes and team officials from the 45 countries, and 7,000 media. The slogan is “Diversity Shines Here”.

Lower growth forecast: The central bank has cut its economic growth estimate for 2014 to 3.8% from 4% due to rising uncertainties about downside risks from the US government budget and debt limit tussles, among other factors. However, the bank reiterated that Asia’s fourth-largest economy is firmly on its way to recovery.

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