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What lies ahead for Asean markets?
2016 has already served up a few surprises. On the global front, we have seen market volatility, continued weakness in oil prices and central bank measures aimed to lend support to their respective dithering economies. Against this backdrop, the outlook for Asean markets remains cautious.
For the rest of the year, Asean markets could still be fraught with emerging currency risks and a slow growth environment, as markets remain watchful on developments in China. It is also unlikely that most Asean central banks will push through meaningful monetary policy easing to bolster their domestic economies, as they grapple with the impact of US Federal Reserve's monetary tightening on their own currencies.
With crude oil prices at 12-year lows, commodity exporters such as Malaysia and Indonesia are likely to see a drop in export revenues. As a result, these Asean governments are expected to recalibrate their budget spending and gravitate towards non-oil revenue, as we have already seen in Malaysia's revised budget which was announced in late January. Further rationalisation of subsidies could be on the cards and any failure to maintain fiscal discipline could also hurt investor confidence.
Adding to this is the elevated household debt in selective Asean countries such as Malaysia and Thailand, which is likely to hold back consumer spending. Exacerbating the impact is currency weakness, as a weak local unit makes imported goods more expensive. As households have lower disposable income and are constrained in accessing credit, this might potentially lead to restraints in economic activities.
In the long run, Asean still offers vast opportunities despite the cyclical challenges it faces largely due to external elements such as lower commodity prices and policy actions from major global central banks. With its rich natural resources, competitive labour pool, and significant population size, it is conducive for labour-intensive industries. These provide a strong structural backdrop, allowing it to maximise its economic potential over the longer term.
Looking beyond the current market volatility, infrastructure development remains a key priority for most Asean countries. Expansion of road, rail and airport networks should create new avenues of economic growth, as the sector attracts more foreign direct investment (FDI) and supports job creation.
Key projects that are to be rolled out include the Kuala Lumpur-Singapore High Speed Rail, Thailand's mass transit expansion plans in Bangkok, Indonesia's proposed Jakarta-Bandung high-speed rail line joint venture with China, and the Philippines' project to upgrade Manila's international airport.
The region is also set to benefit from medical tourism. More affordable air travel, rising healthcare costs and lengthy waiting time in developed countries, coupled with an ageing population, should support inbound medical tourism growth in Asean countries thereby boosting the bloc's healthcare sector. Thailand is popular for its strength in competitively-priced aesthetic treatments, and could continue to attract medical tourists from Japan, Russia, China and the United States.
Singapore, however, saw a recent slowdown in medical tourism, particularly from its key market Indonesia as a result of the Singapore dollar's strength. Despite this, affluent Indonesians will likely continue to opt for overseas treatments, especially for complex procedures. Ultimately, Singapore's status as a world-class healthcare destination should remain attractive to affluent patients, given its expertise and strong branding.
At the same time, the Trans-Pacific Partnership (TPP), if successfully implemented, will represent one of the most significant trade agreements in recent years, after China's entry into the World Trade Organisation in December 2001. The size of the TPP market represents close to 40 per cent of the world's nominal gross domestic product (GDP), and could create the world's largest free trade zone.
Four Asean countries, namely Singapore, Malaysia, Brunei and Vietnam, are inaugural members of the TPP. Singapore's higher value-add industries should benefit, given its strong talent pool and stringent intellectual property legislations.
TPP should also be net positive for the Malaysian economy, as the contribution to GDP, investment, welfare and wages are anticipated to more than offset the prospective narrower trade surplus.
For Vietnam, TPP could improve market access and serve as a critical anchor for the next stage of its structural reforms. FDI and trade in Brunei are also expected to grow under the TPP deal.
Overall, the TPP should offer a much-needed boost to revive Asean trade growth, given the current lacklustre performance in world trade.
- The writer is managing director, Maybank Private Wealth