Asean dependent on larger markets: economist

China’s economy might determine Asean’s fortunes in 2016. Source: Wikimedia

The economic outlook for Asean this year is positive, according to Manu Bhaskaran, CEO of Centennial Asia Advisors in Singapore.

But he told the annual Regional Outlook Forum 2016 that external forces would determine the bloc’s economic trajectory.

The region’s fortunes would be determined by the recovery in the United States, Europe and Japan and the potentially negative consequences from China’s economic downturn.

“Countries in Asean that are much more exposed to the United States, in particular, obviously will do well. I think Singapore is one of those countries that will benefit greatly from a recovery in the United States,” Bhaskaran said.

“We are significantly exposed to the world economy. I think more than 80 per cent of total demand in the system is actually external demand, not domestic demand, so the benefits from global recovery are going to be very considerable and should help our economy.

“Unfortunately, we also have domestic headwinds. The real-estate sector, I suspect, is going to correct more and there will be an impact on the economy, through real-estate transactions, through a wealth effect, through an impact on the construction sector.

“In addition, we have a local corporate sector that has had to grapple with high labour costs, problems with labour availability because of necessary policy interventions, with a loss of cost-competitiveness over the last three years. These are not adjustments that will be done very quickly. It takes time and I think 2016, 2017 will be periods of adjustment.”

However, Bhaskaran warned about the Chinese effect.

“The impact is first felt through China’s demand for imports but a lot of the imports have been commodities and I think the big hit for commodities in terms of the price effect, volume effect … actually has already been felt in terms of the negative effect.

The economist continued: “Secondly, there is a tourism effect. If you look at the numbers, tourism from China is making a huge comeback. You’re getting extraordinary strong numbers in Thailand, in Malaysia and so on. So I think that it will continue to be positive despite the problems in China, because the one thing that is still doing quite well in China is household income, wages and people are going out and spending as a result. So you have a currency impact which we should not underestimate.

“I suspect the Chinese yuan will be weakened cautiously over time. That is going to create ructions in foreign exchange markets and you’ve seen how damaging that can be. So I think that’s something we need to watch out for and probably need to manage more cautiously.”

With the launch of the Asean Economic Community this month, the 10-member block seeks to position itself as a competitive alternative to China and India, Elodie Sellier writes on the Diplomat website.

Asean would “maintain its central position at the centre of the Asian ‘noodle bowl’ of agreements and multilateral frameworks, and boost its global clout as a common bloc to counter Beijing’s aggressive policy in the South China Sea,” Sellier argued.

“That said, economic influence goes hand in hand with political influence, and economic integration will be of little significance if it is not backed by sound political reforms. It is somewhat ironic that Asean as a regional entity, whose very raison d’être was born out of its leaders’ burning desire to avoid the recurrence of war and establish a durable and peaceful regional equilibrium, has to date remained focused on the integration of its economic pillar.”