Asian economies
IN Asia, significant progress has been made at the regional level in strengthening the underlying economic structures and fundamentals. The economies in Asia continue to be among the fastest growing in the world, and thus contributing to the rebalancing of global growth and stability. In addition to promoting domestic sources of growth, economies in Asia have also enhanced regional economic and financial cooperation, including measures to strengthen regional surveillance and financial support mechanisms, and to deepen the regional capital market.
The greater economic and financial integration in Asia has been a mutually reinforcing force in strengthening growth in the regional economies. Intra-regional trade and investment flows in Asia have continued to increase significantly in recent years. Progress has also been made in the further deregulation and liberalisation of the economic and financial sector, thereby increasing the potential for the Asian economies to contribute to global growth and stability.
While growth in China and India remained relatively robust, the expansion in much of the rest of the region slowed, reflecting the impact of higher oil prices and the IT sector correction. With conditions in the IT sector starting to improve, and recent data suggesting that industrial production and trade in the region are picking up, the expansion is expected to strengthen during the year, with regional GDP growth projected to average over 7 percent in 2005 and close to that in 2006.
Persistently high oil prices will adversely affect activity, especially since a number of countries—including India, Indonesia, Malaysia, and Thailand—have yet to pass through the full effect of past increases to domestic prices, in some cases at substantial fiscal cost. More generally, much depends on the strength of the pickup in the IT sector as well as developments in the United States and, increasingly, China. Elsewhere in the region—with the exception of India, and to some extent Indonesia and Thailand—there are only modest signs of autonomous domestic demand-led growth.
Consequently, the region has a particularly large stake in an orderly reduction of global imbalances and the avoidance of a pickup in protectionist pressures. Country-specific risks are also a concern, including in Indonesia, where excess liquidity and the rising budgetary cost of oil subsidies led to significant financial market pressures in late August, and in the Philippines, where, after several months of improving fundamentals, the recent political turmoil has raised concerns about the prospects for economic reforms and led to downward revisions to the ratings outlook.
On the external side, the regional current account surplus is projected to decline only modestly from 4.1 per cent of the GDP to 3.7 per cent of the GDP in 2005. This aggregate figure disguises sharply different trends across the region, with a marked increase in the current account surplus in China to over six per cent of the GDP offset by reductions—to varying degrees—elsewhere in the region (except in Hong Kong and Malaysia).
Elsewhere, weaker current account positions reflect a variety of factors, including higher oil prices, slower growth in IT exports, and exchange rate appreciation (Korea, Taiwan Province of China); and country-specific factors, including the adverse effect of the tsunami (Thailand). There have been similar shifts in the composition of reserve accumulation in the region. Although the monthly average pace of reserve accumulation in emerging Asia thus far in 2005 remains broadly unchanged from 2003 and 2004, China now accounts for nearly two thirds of the regional average, compared with less than one-third in the previous two years.
Looking forward, the IMF predicts, the key challenge facing the region remains to achieve appropriately balanced, twin-engine growth consistent with an orderly reduction in external surpluses over the medium term. In China, where investment is very strong, this will require a gradual shift in the composition of demand toward private consumption, which—at 40 per cent of the GDP - is at a historic low. In most other countries, the continued very low level of private investment is the greater concern, underscoring the need to complete the unfinished reform agenda in financial and corporate sector restructuring, including improvements in governance.
Turning to individual countries, the expansion in China has continued to exceed expectations, with the GDP growth now forecast at nine per cent in 2005. Investment growth has moderated somewhat from the levels of early 2004, reflecting a variety of administrative and monetary tightening measures, but remains above 20 per cent; moreover, the contribution from net exports has risen sharply.
With large external surpluses continuing to add to considerable excess liquidity in the banking system, open market operations need to be strengthened to reduce excess liquidity, and further monetary tightening will be needed if signs of a rebound in investment growth intensify. Following a slowdown from mid-2004, the GDP growth in the NIEs and ASEAN-4 countries is generally projected to pick up in the second half of 2005 and in 2006.
With policy rates still at or close to zero in real terms, and inflationary pressures edging upward, monetary policy tightening in most countries has continued, with the important exception of Korea, where low interest rates have helped to lift consumption by reducing household debt burdens. Except Malaysia, where the ringgit has appreciated marginally since the introduction of the managed float, most ASEAN-4 currencies have come under downward pressure, particularly in Indonesia as noted above.
Malaysia
Malaysia’s performance has been favourable, with continued steady growth being experienced. The economy has continued to shift to new areas of comparative advantage, to new areas of growth, with the private sector being the main driver of growth. Resources have continued to shift towards the services sector, towards strengthening linkages in the manufacturing sector, and to the resource-based industries and the agricultural sector. This has contributed to a well-diversified economic structure and has increased the resilience of the economy to external developments.
The financial sector has also seen significant transformation. The restructuring, consolidation, and internal rationalisation of the banking sector are now virtually completed. Governance and risk management practices have also been improved while structural enhancements have been made in the capital market, significantly enhancing its role in the financial system. A comprehensive and robust Islamic financial system now also operates in parallel with the domestic, conventional financial system.
Against the background of strengthened economic fundamentals and financial system, Malaysia has taken the opportunity to sequentially deregulate and liberalise the financial system. This includes the introduction of a new interest rate framework that is market-driven, the liberalisation of foreign exchange administration rules to promote greater efficiency and enhance risk management in foreign exchange transactions, and the introduction of new foreign players into our financial system.
In July this year, Malaysia adopted a managed float for the ringgit exchange rate to better position Malaysia to respond to structural changes in the global and regional environment. Under this arrangement, the ringgit is monitored against a basket of currencies of Malaysia’s major trading partners. The economy is expected to maintain its growth momentum next year, with real gross domestic product projected to expand by 5.5 per cent. Growth is expected to be broad-based, with expansion in all sectors spurred by private investment spending and strong activities in the services sector.
The manufacturing sector is expected to grow at a faster rate of 4.9 per cent next year following the increase in global electronics demand and strong domestic economic activities. This will take place amid new developments in areas like biotechnology, along with the shift toward technology-driven manufacturing processes with more research and development activities.
The services sector is forecast to have stronger growth next year at 6.1 per cent. The sector’s growth is supported by increased activities in information and communication technology related and business outsourcing services, private healthcare and education services. Investments in the agriculture sector are expected to gain momentum in line with the Government policy to revitalise the sector through modernisation and large-scale mechanisation. The agriculture sector is forecast to grow at a higher rate of five per cent in 2006, contributed by higher production of palm oil, rubber and food along with investments in niche areas such as aquaculture, seaweed, herbs, floriculture and ornamental fish.
Investment activities in the oil and gas industry are expected to accelerate, spurred by persistently high oil prices since the second half of last year and expectation of increasing global demand. Recent discoveries of new oil and gas fields will expedite investments. Output of crude oil and gas is projected to rise by 4.2 per cent and 10 per cent respectively due to strong demand, higher prices and capacity expansion in oil and gas fields. The construction sector is poised to recover with a growth of three per cent. The sector will get a boost from new infrastructure projects under the Ninth Malaysia Plan.