INSIGHT: ASEAN monetary authorities brace for uncertain 2017
Jaysa Rafi Prana
Research associate and officer of the policy department at the Economic Research Institute for ASEAN and East Asia
ASEAN members must remain vigilant to ensure a stable 2017 follows their solid 2016, and are cautiously observing the latest developments in the world economies, particularly in the United States, China and Europe.
In 2016, ASEAN’s economies posted healthy economic data, with good gross domestic product (GDP) growth and relatively low inflation. Focusing on the threelargest markets in the region, which together make up approximately 65 percent of the ASEAN economy, Indonesia posted 5 percent growth in 2016, Malaysia 4.2 percent and Thailand 3.2 percent.
But this year, ASEAN nations must brace themselves for a series of potential shocks from across the globe, while maintaining stability and also factoring in several domestic economic weak spots.
From the US, a tightening of monetary policy, a shift toward protectionist trade policies and expansionary fiscal policies could hurt the international flow of capital. While expansionary policies stimulate growth, they are likely to be financed through the issuance of new US government bonds, which could pull capital from emerging markets.
ASEAN is also closely monitoring China’s financial stability, as credit growth remains high and spending on infrastructure and property construction rose in the second half of 2016. If the construction bubble bursts, ASEAN nations fear the financial shocks will reverberate throughout the region.
Elsewhere, political developments in Europe, including the uncertainties of Brexit and the rise of populist, far-right and anti-EU politicians in the Netherlands and France, could hit world trade volumes. Finally, recent increases in the prices of oil, liquefied natural gas (LNG), refined petroleum products and rubber threaten to push up inflation in ASEAN countries.
So far in 2017, the ASEAN central banks that have announced interest rate decisions — Indonesia, Malaysia, Thailand and the Philippines — have all held flat their benchmark rates, citing the need to maintain stability and growth momentum.
Last month, Bank Indonesia (BI) held its seven-day reverse repo rate at 4.75 percent, unchanged since October 2016. The decision takes into account an improvement in GDP growth fueled by healthy growth in private consumption and an improvement in the current-account deficit to GDP ratio. This latter indicator narrowed to -1.8 percent in 2016 compared to -2 percent in 2015, the result of an increase in exports.
However, the financial system remains vulnerable, as indicated by worsening data on non-performing loans (NPL). Indonesia’s NPL ratio increased in 2016, with the average monthly rate at 3 percent versus 2.6 percent in 2015. Essentially, this means more debtors are defaulting on loans. At the same time, credit growth — the amount of money loaned out by commercial banks — in December 2016 was only 7.9 percent, lower than 10.5 percent in December 2015, suggesting businesses have little appetite to expand.
Last, inflation — although on target — is seeing upward pressure from the Indonesian government’s vehicle registration fee and electricity rate increases in early 2017, as well as the rebound in commodity prices.
In Thailand, the central bank in February held its headline interest rate flat at 1.5 percent and expects the economy to recover at a faster pace in 2017, on the back of 2016’s export and tourism growth.
On the downside, however, there are several weak spots in Thailand’s financial sector. First, loans grew by only 2 percent in 2016, a decline from 4.6 percent growth in 2015. Further, the NPL ratio rose to 2.8 percent in 2016 from 2.6 percent in 2015, indicating continuing vulnerability in the financial sector.
Malaysia also held its benchmark rate steady at 3 percent on March 2, unchanged since July 2016. As with its neighbors, Malaysia’s robust growth is also driven by an expansion in private consumption and an increase in the value of exports — due to an increase in both commodity prices and volumes — including LNG, refined petroleum, timber and rubber.
In addition, the stabilization of the ringgit against the US dollar and higher sovereign bond prices in the first two months of 2017 indicates improvement in Malaysia’s financial system stability and increasing confidence in the government.
Given the current trends in ASEAN’s top-three economies, it is clear that although these economies gained momentum and stabilized in 2016, there are vulnerabilities in the system that mean monetary authorities must remain vigilant in navigating the economy in 2017.
Indonesia, Thailand and Malaysia must promote an easy monetary policy environment — low interest rates, easier access to credit and ample liquidity — and continued growth momentum, while also keeping their economies stable.
ASEAN central banks should explore the possibility of maneuvering in the realm of macro-prudential policy to maintain this growth momentum in 2017. This could, for example, include lowering the reserve that banks must hold, thus freeing up more money to be injected into markets, or increasing the loan-to-value ratio, enabling consumers to borrow more with a smaller down payment. Both measures would create more credit in the market and keep the heat in the economy while minimizing central banks’ direct intervention in the money market and the increase in inflation this could trigger.
But with inflation already on an upward trend and global interest rates seeing upward pressure — the US is expected to raise its rate imminently, possibly on March 15 — there is no room for further benchmark interest rate cuts.
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