Malaysia Debt Overhang

Slower consumption growth in both Thailand and Malaysia are likely to cause some drag on the regional domestic demand outlook for 2017.

HSBC Bank said Malaysia could see an even more pronounced slowdown in consumption, from 5.6 per cent in 2016 to 3.7 per cent this year.

“Wage growth has been losing steam, and labour market softness has been increasingly evident,” said economist Lim Su Sian in a report.

For two years now, Malaysia’s unemployment rate has crept gradually higher, to 3.6 per cent as of November 2016, a multi-year high.

“While there are cash handouts for current and retired civil servants and a possible snap election in the first half of 2017, consumption could be lifted temporarily.”

But a `soggy’ ringgit and large debt overhang are also factors that are likely to keep consumer confidence depressed, she added.

Households will still have to work through paying off debt equivalent to nearly 90 per cent of GDP ‒ the highest not just in Asean, but in Asia.

Consumer spending in Indonesia and Vietnam, she said, is expected to pick up this year while consumption in the Philippines is projected to be even faster, at an impressive 7.1 per cent.

Employment in the manufacturing sector, particularly in the Philippines and Vietnam, has held up well despite weak demand globally, though these job gains have perhaps been over-reliant on electronics. In the Philippines, further support to consumption will continue to come from remittances by overseas Filipino workers.

On its investment outlook, HSBC reckons the capital outlays in Vietnam should rise to 7.5% this year from 7% in 2016, while in the Philippines investment growth should remain in double digits to meet the much-needed development of infrastructure ‒ ports, airports, roads, railroads, airports, power and water plants, and so forth. Indonesia, too, is experiencing some fiscal constraints with regards to its ambitious infrastructure push, albeit nowhere as acutely as Vietnam.

The research house said for a fourth year running, GDP growth in Asean looks poised to average around the mid-4 per cent handle in 2017 and 2018. On a GDP-weighted basis, it expects growth for the six economies of Indonesia, Malaysia, Thailand, the Philippines, Singapore and Vietnam to average 4.4 per cent in 2017, and 4.5 per cent in 2018 ‒ the slowest pace of growth since the 2009 global financial crisis.

Singapore is expected to see the smallest expansion this year within the Asia Pacific alongside Japan, with GDP growth of just 1.2 per cent. Then huddled around the middle of the pack it has Thailand, Malaysia and Indonesia, with projected growth rates of around 3-5 per cent for this year. HSBC expects real export growth in Asean to more than double this year.

“At 1.5 per cent though, it is weak by historical standards.”

The data shows a bottoming-out in Asean exports since 2016, but also suggests that investors looking for this ‘turnaround’ to accelerate materially probably shouldn’t hold their breath.

“This is not surprising considering the muted growth we expect in Asean ‒ the region is still its own largest customer ‒ as well as in Japan, growth stabilizing at around 6.5 per cent in China, and a deceleration in Eurozone growth to 1.2 per cent from 1.6 per cent.”

Economic recovery in the US, which accounts for some 11 per cent of the region’ shipments, will be unable to offset these feeble demand trends. The likelihood of increased trade protectionism in the US suggests that Asean may end up benefitting even less than it otherwise would from a turnaround in US growth.