Asean summit’s upbeat message fails to calm investor nerves
Through April, Morgan Stanley Capital Index stock performance in the Asean bloc lagged the overall benchmark 13% spurt, as investors shrugged off commitments at the recent Association of Southeast Asian Nations summit toward greater trade integration and poverty reduction, focusing instead on debt, political and banking system fears. Malaysia and the Philippines both gained 11.5% on the index, while Indonesia and Thailand were ahead 9.5% and 6% respectively.
At the summit in Manila, Asean leaders proclaimed their readiness for a “fourth industrial revolution” of further technological transformation in the global economy. They also reported US$1 trillion in goods trade and $52 billion in foreign direct investment, one-quarter intra-Asean, as of the latest first-half 2016 statistics. However, uncertain relations with the new US administration, rising global interest rates, and mixed domestic growth and reform direction combined to squash the upbeat message and spur fund managers’ caution into the second quarter, as China and India with 15%-plus advances are embraced more positively.
Indonesia’s central bank pointed to weak domestic consumption, which accounts for 70% of output, and an increase in bad loans to 3% of bank portfolios as red flags for estimated 5% first-quarter growth in gross domestic product. The Planning Ministry predicts a pick-up to 5.5% in 2018, with expansion in the agriculture, processing, and tourism sectors in particular to come from government and state-owned-company infrastructure projects.
Indonesia’s pure public-debt ratio is just 30% of GDP, but the International Monetary Fund’s Global Financial Stability Report for its spring meeting cited corporate-leverage danger among the highest in major emerging economies. Fiscal and monetary policy is solid, as inflation and budget deficit targets are on track.
The benchmark seven-day repo rate remains at 4.75%, and Finance Minister Sri Mulyani Indrawati does not expect to be forced to slash spending again with a tax-amnesty windfall. However, reserve requirements were slightly eased to stoke annual single-digit credit growth, the lowest in two decades, as the head of the main bank-bailout fund called for more than the $6 billion on hand for potential intervention.
At the same time, the result of the Jakarta gubernatorial election, widely cast as a precursor to the 2019 presidential poll, raised questions about continued ethnic and religious tolerance and President Joko Widodo’s political strength after his ally and successor as governor, a Chinese Christian, was defeated amid Islamic blasphemy allegations. Former education minister Anies Badewan, closely tied to the previous ruling party elite, won handily with a 15% margin.
The Indonesian currency sold off on the outcome, which may stall reform momentum, as Jakarta was considered a showcase for slashing bureaucracy and overhauling public-service delivery. A visit by US Vice-President Mike Pence at the end of April urged respectful treatment of minorities, as $10 billion worth of bilateral energy and power deals were signed, with Washington pressing for further local access as part of its “free and fair trade” campaign.
In April the IMF released its Article IV consultation for Malaysia citing high household debt and exhorting officials to weigh the costs of new currency-exchange controls for offshore ringgit trading and export revenue transfer. Moody’s Ratings underscored contingent sovereign risk from the announced $1.2 billion settlement between beleaguered 1MDB (1Malaysia Development Berhad), still under global investigation, and an Abu Dhabi investment fund for two guaranteed bonds as the Malaysian government aims to balance the budget by the end of the decade.
Moody’s puts Malaysia’s GDP growth in the 4% range this year on a recovery of commodity and manufacturing exports, but inflation jumped to 5% in March, an eight-year peak, on fuel-tax increases. The ringgit dipped 5% in the first quarter, with foreign investors cutting local bond exposure from 45% to below 40% of the total. They have complained about the lack of hedging tools, and anxiety heightened with the crackdown on cross-border non-deliverable forwards last December.
Short-selling will be introduced to address concerns within strict initial exposure limits, which could stabilize one-year yields around 4%, according to analysts. Bank-margin pressure will persist over the near term, but capital adequacy and profitability are sound and the Malaysian central bank stands ready to provide support as it builds out the wealth-management segment of Islamic finance, rating agencies believe.
They were equally circumspect about the Philippines, upholding the investment-grade rating with 7% growth and ambitious tax reform alongside “diminished policy predictability” from President Rodrigo Duterte’s diplomatic and law-and-order extremes as Asean market conviction splinters.