They form just 16 per cent of the world’s GDP, but will lead world growth in 2015 too By Rekha B. Roy
Notwithstanding a slowdown in the Chinese economy which has been leading the pack of emerging economies in Asia, the continent is all set to lead global growth in 2015 as India and Myanmar pick up pace and Japan recovers from its prolonged recession last year. According to a report by the International Monetary Fund (IMF), Asian economies are expected to grow at an average of 5.6 per cent. This had fallen to 5.5 per cent last year from 5.9 per cent in 2013, as China’s decade-long double digit growth halted to around 7 per cent.
IMF predicts India and Myanmar will record the highest growth, at 7.5 per cent and 8.3 per cent respectively, while China and Japan will grow at 6.8 per cent and 1 per cent respectively. Japan has been on the mend ever since the government increased sales tax from 5 per cent to 8 per cent. And provided they bypass the negative effects of a sluggish global economy and can withstand the reversal of capital flows (when the Federal Reserve decides to increase rates) Asia is raring to go.
For one, there is unprecedented commitment to economic reforms in the region. From China to India to Indonesia, new leaders have brought in fresh energy in the market. China, for e.g., is remodelling its state-dominated economy to be more productive by encouraging domestic consumption and services. It has also been working towards reducing dependence on trade and investment. Moreover, China’s “One Belt, One Road” or “New Silk Road” strategy is creating flutters in the region and is expected to pave way for more investment. In April, it injected three of its state-owned policy banks with $62 billion for investing in the Silk Road project. It also promised a $46 billion investment plan to longtime friend Pakistan.
China’s next door neighbour and longstanding frenemy, India, is expected to overtake China’s growth rate, despite a slump in its all-important service sector in March. South Asia as a whole will continue to grow at 7.2 per cent in 2015 and 7.6 per cent in 2016. “Worryingly, the stalled recovery in some high-income economies and even some middle-income countries may be a symptom of deeper structural malaise,” Kaushik Basu, World Bank Chief Economist and Senior Vice President,said as Indian news agency PTI reported. “But there are some silver linings behind the clouds. The lower oil price creates a window of opportunity for oilimporting countries such as China and India. What is critical is for nations to use this window to usher in fiscal and structural reforms which can boost longrun growth and inclusive development.”
A look now at the major movers and shakers in the Asian region in 2015.
INDIA: The country is on track to overtake rival China’s growth this year but its finance minister is cautious. “I’m not unusually excited because I know what China has already achieved. China grew at 9 per cent plus for thirty years,” finance minister Arun Jaitley had said recently. India will need to increase investment in both rural and urban infrastructure and focus on the development of its manufacturing sector in order to grow like China, the minister had remarked. “It’s only then that we achieve the 9 to 10 per cent growth rate, and once we are able to do it for a decade or so, we can lower poverty rates. It’s only then, I’ll feel excited about it. Today it’s just the beginning of the whole process,” he had added.
Lowering interest rates in the country would also go a long way in boosting economic activities. The Indian FM has been urging the Reserve Bank of India to cut borrowing costs. “I have not the least doubt that interest rates in future will come down even more, and that’s when the competitiveness of the India economy will continue to rise,” he said.
A major push for the markets would be the passage of the controversial Land Acquisition Bill which the government argues is needed for economic development. Critics of the Bill fear it will harm the interests of the farmers.
CHINA: “China’s GDP growth stood at 7.4 per cent in 2014, averting a hard landing. The growth rate experienced a slowdown from 2013, mainly because of slower fixed asset investment growth and a challenging environment in the manufacturing sector,” KPMG’s China Outlook 2015 says. “However, the speed of economic restructuring and upgrading increased. President Xi Jinping described this economic pattern as the ‘new normal’.”
Despite its slowdown, China’s growth rate has been the most constant among all G20 nations. It grew by 7.3 per cent in the last quarter of 2014 and is expected to grow at around 7 per cent in 2015. A steep correction in the property market and high local debt could offset the growth Beijing achieved through reduced commodity prices and a flexible monetary policy. FocusEconomics Consensus Forecast panelists cut their growth projections for 2015 by 0.1 percentage points to 6.9 per cent. Next year, the panel sees growth at 6.8 per cent.
“Based on the government’s economic restructuring, we anticipate that China’s economy will increasingly be driven by innovation, the service sector and private capital. Sectors along the high-end value chain, such as high-end equipment manufacturing and service sectors including healthcare are expected to have great development opportunities,” the KPMG report says. “On the other hand, the overcapacity phase-out and weakened demand in the manufacturing sector will continue to put pressure on future manufacturing growth.”
INDONESIA: Weak investment growth and a slowdown in exports has affected Indonesia’s growth prospects in 2015. Indonesia’s economy is projected to grow by 5.2 per cent in 2015, lower than the 5.6 per cent previously forecast in July 2014, says a new World Bank report.
The things that work for the country at the moment is its strong private consumption base. A spur in investment later in the year might lead it towards a stronger growth prospect.
The country, however, has major challenges facing it. Government capital expenditure was only 38 per cent of the budgeted amount, much below previous years. However, the current account deficit has been reduced modestly to $6.8 billion or 3.1 per cent of GDP in the third quarter. This is expected to stabilise at 2.8 per cent this year.
Inflation is expected to average 7.5 per cent in 2015. Subsidy reforms had meant over 100 trillion in fiscal savings which will mean more public spending especially in healthcare. Indonesia is amongst one of the lowest spenders on public healthcare (1.2 per cent of its GDP in 2012) in the world.
At the World Economic Forum on East Asia held in April, in Jakarta, President Joko Widodo had assured international investors that Indonesia is a prime investment destination. But it has its challenges cut out. It will only be able to add $22 billion in large infrastructure projects this year, which is not ideal as other sectors like manufacturing and exports are in a limbo with record losses. However, Widodo’s growth-oriented policies have affected the economy positively and FocusEconomics panelists predict the economy growing at 5.3 per cent in 2015.
MYANMAR: “Myanmar’s economy continues to make progress, drawing on the benefits of greater integration with the rest of the world,” writes Lester Gunnion in the Asia Pacific Economic Outlook (January 2015). “Economic growth is set to remain strong in the medium term on the back of foreign direct investment (FDI) inflows into telecommunications, oil and gas, banking and construction.”
FDI inflow into Myanmar had surged at the beginning of this year, the biggest recipient being its telecommunications sector (31 per cent of the total FDI received). According to the Myanmar Investment Commission, FDI in the first five months of 2015 stood at $3.32 billion (a 113 per cent year-over-year rise) and will cross $5 billion this fiscal year, $1 billion more than the estimated amount. Tourism too has been thriving. Tourism inflows went up about 93% to 2 million in 2013 and is expected to touch 3.1 million by the end of this year.
Hydrocarbon reserves in Myanmar too will see increased exploration by foreign companies. The government till now has awarded 20 offshore blocks and will auction another 9 in 2015. Foreign banks too will soon start operating in the country soon although with limited lending capabilities.
According to the IMF, the economy is expected to grow at about 8.50 per cent during the current and next fiscal years; this is up from an estimated 8.25 per cent in 2013–14 and 7.30 per cent in 2012–13.
“Myanmar, however, has a long way to go before it emerges as a key player in Asia. There are tangible risks in sight, including a slowdown in reforms before elections scheduled for the end of 2015,” Gunnion writes in his article. “Moreover, years of economic isolation have led to poor infrastructure, low skills, and data inadequacy, thereby stifling businesses and preventing prudent policymaking. The government will need to fix these loopholes if it wants to ensure strong growth over the medium term. Otherwise the benefits of opening the economy to the world might just dry up,” he contends.
THE PHILIPPINES: “Strong GDP growth is projected for 2015 and 2016 based on buoyant private consumption, a solid outlook for investment and exports, and recovery in government expenditure,” the Asian Development Bank, economic outlook 2015 says. “GDP is projected to increase by 6.4 per cent in 2015 and 6.3 per cent in 2016.”
From poor growth for several decades, the Philippine economy now has the capacity for robust long-term economic growth of around 4.5 per cent to 5.0 per cent per year over the 2016 to 2030 time horizon. This means that the economy will surge ahead from its current $280 billion economy to a $680 billion economy by 2024, with a projected GDP of $1.2 trillion by 2030.
The IT-BPO sector and remittances from Filipino workers abroad have been the major growth drivers of the Philippine economy. Between 2008 and 2013, revenue from the IT-BPO sector more than doubled to $13.3 billion; while remittances from Filipino workers abroad increased to $26 billion in 2014.
The only risk to its growth trajectory is the threat to its internal stability in the Mindanao region and Sulu Archipelago from the Muslim terrorist group Abu Sayyaf which bears alliance to the deadly “Islamic State” terror group. The challenges of poverty and unemployment (more than 10 million) too remains high (28 per cent of its population still living in poverty).
GCC COUNTRIES: The GCC countries are expected to see average economic growth of 4.1 per cent in 2015 riding on robust non-hydrocarbon activities and large budget surpluses. Credit insurance company The Coface Group predicts Qatar will record the strongest growth in the region with a growth rate of 6.7 per cent in 2015.
It added that the UAE is expected to grow by 4.3 per cent to 4.2 per cent, Saudi Arabia by 4.2 per cent to 3.8 per cent, Bahrain by 3.9 per cent to 3 per cent, Kuwait by 2.2 per cent and 2.5 per cent and Oman by 3.8 per cent and 4 per cent.
“These countries also benefit from solid financial fundamentals such as huge assets in their sovereign wealth funds and external surpluses. However, the sharp decline in oil prices would weigh on growth performances and fiscal balances in 2015,” the report said.
The only break in this rolling juggernaut could come from seething geopolitical rivalries between the countries and regional instabilities in case of the GCC countries. However, the Asian players themselves understand this and have been working towards resolving age-old geo-strategic rivalries. China and Japan for e.g, the second and the third largest economies in the world, are only now seeing a thaw in relations. A restoration of their trade ties could stabilise and spur the growth of the region. Territorial claims for long had also soured China’s bilateral relations with India. But the countries have now decided to move on if the recent bonhomie between Chinese President Xi Jinping and India’s Prime Minister Narendra Modi is anything to go by. The two are expected to settle border issues soon. China has already promised to invest a whopping $20 billion in developing India’s railways. Trade tries between the countries are already robust but skewed in China’s favour. China’s trade surplus with India stands at $36.2 billion in fiscal year 2013-14. As far as the GCC countries are concerned, they have largely stayed out of the geopolitical tensions and have continued to attract investment and record consistent growth. They have also offset vulnerabilities to decline in energy prices by investing in non-oil sectors.