ASIA MONTHLY

November 2015

Topics ’s Prayut administration’s economic stimuli and mid-term growth strategies ···· 1 Taiwan ·············································································································· 3 Philippines ········································································································ 4 ················································································································ 5

http://www.jri.co.jp/english/periodical/asia/

ASIA MONTHLY REPORT November 2015, No.176

Topics Thailand’s Prayut administration’s economic stimuli and mid-term growth strategies

The Prayut administration conducted a cabinet reshuffle in August, 2015, immediately after which a series of economic stimuli, focused on support measures for farming communities and small and medium sized enterprises, and measures to attract foreign businesses, was announced. Furthermore the government has embarked upon the development of mid-term growth strategies.

■ Large scale economic stimulus measures announced Thailand’s real GDP growth rate in the April to June quarter, 2015, was 2.8% compared to the same period in the previous year, due to poor growth in private consumption and stagnating agricultural produce prices against a backdrop of drought conditions and increased household ＜Consumer Confidence Index＞ debt, as well as failing export growth in 130 120 response to the slowing of the Chinese Present economy. This performance represented a Good/Will be 110 Future Good slight deceleration in pace from the 3.0% posted for the January to March quarter. In 100 Bad/Will be response, NESDB (National Economic and 90 Bad Social Development Board) revised its real GDP growth rate forecast for 2015 80 downwards from between 3.0% to 4.0% to 70 between 2.7% to 3.2%. 60 Since the start of 2015, consumer confidence indices have been on the way 50 2010 11 12 13 14 15 down, and exports have consistently posted （Y/M） negative year on year growth. Under these Source: CEIC circumstances, the provisional government ＜Export＞ （Million USD） of Prayut Chan-o-cha held a cabinet （YoY） （％） reshuffle on August 19, in which Economic 25,000 30 Value（L） YoY（R） Minister and Deputy Prime Minister 25 swapped posts with 20,000 20 , an economic adviser 15 to the National Council for Peace and Order 15,000

(NCPO), and work began on the planning 10 of economic stimulus measures. Somkid 10,000 was formerly an advisor to the Thaskin 5 administration in its early days and was 0 involved in leading the Thai economy to 5,000 recovery when it fell into stagnation in the -5 wake of the currency crisis, and his ability 0 -10 in that respect has attracted much attention. 2012 13 14 15 （Y/M） At the start of September, two economic Source: stimulus measures were announced. The first, aimed at providing support for farming villages and other communities, included interest free loans through the Village Funds, budget grants at tambon (local government) level, and investments in new and existing small scale public works projects., with a total Bt136 billion investment (ratified by the Cabinet on September 1). The second, aimed at supporting small and medium sized enterprises, set new low interest financing (Bt100 billion) and credit guarantee (Bt100 billion) limits, establishing a new enterprise fund (Bt6 billion), and introducing corporate income tax exemptions (ratified by the Cabinet on September 8). Further, with the aim of encouraging efforts to attract foreign businesses, the intention was announced to extend the maximum period of corporate income tax exemptions on prime projects in high tech industries and contribute to R&D activities from the current eight years to 13 years. Furthermore it is envisaged that there will be additional corporate tax incentive measures for projects that have realized

The Japan Research Institute, Limited 1 Economics Department

ASIA MONTHLY REPORT November 2015, No.176

investment at an early stage, as well as projects for the special economic zones (SEZ). Additionally, the government has begun work on the fostering of area specific clusters of industries such as automobiles, electronic and electrical equipment, environment related industries, digital related industries, food processing, textiles and garments. In this way, these policies of attempting to raise the domestic economy through providing finance (not subsidies) for the activities of agricultural communities and small and medium sized enterprises, while at the same time trying to enhance the country’s international competitiveness by selectively offering preferential treatment to foreign investors, are reminiscent of the dual track policies of the Thaksin era. They are the result of the Prayut government’s emphasis on restoring the country’s stagnating economy, and indicate the sense of realism of the administration. ■ Work starts on mid-term development strategies e In addition, the Prayut administration has begun work on its own, unique set of development strategies with a mid-term focus. The targets are to maintain an annual real GDP growth rate of between 3.3% and 4.3%, year on year, until 2030, and to become a “high income country”, as defined by World Bank, by 2026. The government has embarked upon the development of its “13th Five-Year National Economic and Social Development Plan”, which will become the basic platform for the realization of these goals. Further, the plan also calls for year on year growth targets of 4% or more for exports, 7.5% for private sector investment, and 10.0% for public sector investment. Among the initiatives are the establishment of special economic zones along Thailand’s borders with Cambodia, Laos and Myanmar, the development of the country’s domestic transportation infrastructure, and the development of Thailand as an Indochinese transportation hub. To those ends, the approximately Bt2 trillion (approx. 7 trillion yen) transportation infrastructure development project that had been shelved for many years has now been started. Whereas the Yingluck administration had been negatively disposed towards borrowing from overseas, the current administration is due to go ahead with the – Chiang Mai high speed rail link with Japanese assistance, and the Bangkok - Nong Khai high speed rail link with Chinese assistance. Further, the strategy not only covers growth strategy, but aggressively targets the correction of income disparity, which is seen as a remote cause of political instability. For example, a National Savings Fund, for which the legal framework was established under the Abhisit administration but the implementation was postponed under the Yingluck administration, has been started up. The Fund is essentially a pension system for the self-employed and farmers, who were outside the framework of the social security system, and its introduction will, to an extent, complete a pension system that is inclusive of all of the populace. The implementation of an inheritance tax also, debated for many years, has already been adopted by the National Reform Council (NRC), and is expected to be enforced from January, 2016. On September 16, 2015, the proposed new constitution was rejected by the National Reform Council. As a result, the schedule for the transition to civilian government will need to start again from the installation of the Constitution Drafting Committee. According to Deputy Prime Minister Wissanu Krea-ngam, the drafting of the new constitution will take six months, with a further four months for the preparation and implementation of a national referendum, six months for the establishment of related constitutional laws and another four months to prepare and implement a general election. Based on these figures, the establishment of a new government following a general election will not happen until after mid-2017. In other words, the Prayut junta, established in August, 2014, will in effect be responsible for economic and social management of the country for about three years. Amid the political instability that has plagued Thailand since 2006, when the Thaksin administration was toppled by a military coup d’état, economic stimulus measures had the character very much of doling out financial assistance, due to the use of subsidies, and large scale infrastructure development projects, though they were needed, continued to be postponed. The irony is that, under the provisional government of Prayut Chan-o-cha, a diverse range of policies and plans has begun to be put into action. This perhaps needs to be seen as an example of traditional Thai statecraft, where the policies of realism take priority over those of principle in times of crisis. In any case, Japanese companies wishing to develop businesses in Thailand will not only need to be aware of political issues such as the delay in the transition to civilian government, but will also need to pay attention to those policies announced in the future, and be ready take advantage of business opportunities that may present themselves. (Keiichiro Oizumi)

The Japan Research Institute, Limited 2 Economics Department

ASIA MONTHLY REPORT November 2015, No.176

Taiwan Export growth continues to be sluggish

■ Export stagnation hinders economic growth Taiwan’s September export growth (customs cleared) ＜Exports by Item(YoY)＞ Petroleum Products<6.2> was -14.6%, compared to the same period in the previous （％） Plastic and Articles made of Plastic<6.8> year, marking eight consecutive months of year on year Iron and Steel and Articles made of Iron and Steel<5.8> 40 Electronic Products<31.9> negative growth. It may be suggested that some of the Machinery<6.7> reasons behind this export slump were the deceleration in 20 Export the economies of China and other countries around the 0 world, the end of the current round of demand for smart ‘phones, and the development of supply chains by local -20 industries within China. -40 In terms of individual export items, growth in -60 2014 15 electronic goods, which account for about 30% of total Note1: The January and February data were averaged to （Y/M） export worth, contracted by 9.9%, while the prolonged adjust for the impact of the Lunar New Year, Note2: In <> is the share of exports in 2014. slump in crude oil prices caused the value of exports of Source: MOF, MOEA petroleum products to fall by a massive 47.4%. In addition, even main export products such as general ＜Export Orders and Manufacturing Production（YoY）＞ （％） machinery and iron and steel are continuing to post 20 Manufacturing Production Export Orders double digit decline. 15

In terms of export destinations, the decline in export 10 growth to North America was comparatively slight, 5 posting -1.3%, whereas growth in exports to China was 0 -20.5%, and to the ASEAN 6 (ASEAN 5 + Singapore) -17.2%. These results indicate that the impact of China’s -5 -10 economic deceleration is spreading to the ASEAN 6. 2013 14 15 As a result of this export slump, production in Note: The January and February data of Manufacturing （Y/M） Production were averaged to adjust for the impact manufacturing, principally in major electronic products of the Lunar New Year. such as semiconductors and liquid crystal panels, is Source: MOF, MOEA continuing to decelerate. As regards the outlook, there is a widening trend of deceleration recently in export orders which shows the outlook for export, and it is expected that external demand will continue to stagnate, with the principal cause being the deceleration of the Chinese economy. Further, there are concerns that the slump in production will translate into poorer corporate showings, resulting in negative effects on employment and incomes, and the forecast is that Taiwan’s economy will continue to post a lackluster performance for the time being. ■ Taiwan’s Central Bank lowers interest rates for the first time in seventy-nine months Amid concerns of further economic deterioration, the postponement of US interest rate hikes and the low inflation rate prompted Taiwan’s Central Bank to lower its official discount rate, the policy interest rate, from 1.875% to 1.750%. It is hoped that the lower interest rate will go some way toward stimulating household and corporate demand, as well as helping export competitiveness to recover by leading to a weaker Taiwan dollar. However, given the fact that the inflation rate is trending upwards recently, and that the possibility of higher US interest rates within the year is still strong, any further lowering of the policy interest rate, which could lead to currency depreciation and higher inflation, would need to be carried out with the utmost caution. As to candidates in the next general election, to be held in January, 2016, Taiwan’s largest opposition party, the Democratic Progressive Party, chose Tsai Ing-wen, the current party Chairwoman, in April, while the ruling Kuomintang put forward Hung Hsiu-chu, Vice President of the Legislative Yuan, in July. Then, in August, the People First Party proposed Soong Chu-yu, party Chairman, as a third candidate. While the Democratic Progressive Party has announced economic policies such as the fostering of new industries and the expansion of numbers of tourists, etc., the Kuomintang has been slow in presenting any specific policies, and with strife over changing candidates, it is becoming uncertain as to whether the Kuomintang will be able to hang on to power. In addition to China policy, which is the most pressing issue, it is expected that there will be full-scale debate on economic policies for economic recovery. (Kentaro Matsuda)

The Japan Research Institute, Limited 3 Economics Department

ASIA MONTHLY REPORT November 2015, No.176

Philippines Economy improving

■ 5.6% growth in Q2 ＜Real GDP Growth and Contribution by Expenditure＞ The Philippines’ real economic growth rate in the April to Statistical Discrepancy Import （％） June quarter was 5.6%, compared to the same period in the Export Change in Inventories 20 Gross Fixed Capital Formation Government Consumption previous year, improving from the January to March quarter Private Consumption GDP Growth Rate performance (5.0%). In terms of demand items, in spite of 15 the fact that slowing export growth was a drag on 10 performance, expansion in both private consumption and 5 government expenditure pushed up the economic growth 0 rate. -5 Real exports were affected by the decline in exports to -10 China, whose economy continues to decelerate, and to 2013 14 15 （Y／Q） ASEAN, and posted 3.7% growth in the same period, down Source : NSCB significantly from the January to March quarter ＜GVA Growth and Contribution in Construction Sector＞ performance (6.4%, similarly). On the other hand, private （％） consumption was boosted by a low inflation rate and steady 60 Public Sector growth in money remitted home by Overseas Filipino 50 Private Sector GVA Growth Rate in Construction Sector Workers, and posted 6.2% in the same period, marking 40 30 seven consecutive quarters of high growth levels. In 20 addition, growth in government expenditure increased as a 10 result of a presidential order given by President Aquino to 0 accelerate budget implementation. Government -10 -20 consumption was 3.9% in the same period, accelerating 2013 14 15 from the January to March quarter performance (1.7%, （Y/Q） Source: NSCB similarly), and public sector investment grew steadily, thanks to developments such as the switch to a massive year on year growth in gross value added (GVA) in the public ＜Grobal Competitiveness in ASEAN＞ （２） Singapore construction sector. （３） （18） Over the latter half of the year also, though the global Malaysia （26） economic slowdown will restrict export growth, the （32） Thailand （38） 2015 continuing low inflation rate will likely encourage strong （37） Indonesia 2010 private consumption and an expansion in infrastructure （44） （47） Philippines investment and other types of government expenditure, so （85） （56） the economy is expected to perform fairly solidly. Vietnam Nevertheless, the fact that the real growth rate for the period （59） Cambodia （90） January to June was only 5.3% will have an effect, and the （109） 0 1 2 3 4 5 6 government’s target (7.0% to 8.0%) for the fiscal 2015 （Point） Note: The bar graph shows the point of Global Competitiveness Index. The numbers shown in proposed budget is thought to be unachievable in reality. parentheses are the Ranks. ■ International competitiveness ranking improves Source: World Economic Forum significantly under current administration As the economy improves solidly, foreign corporations are concerned as to whether a new administration after the presidential elections slated for May, 2016, can maintain the path of reform opened up by the Aquino administration, with regard to infrastructure development, the elimination of corruption, and so on. In the International Competitiveness Ranking published by World Economic Forum in September, the Philippines’ ranking was 47th place, improving massively from 85th place at the start of the Aquino administration (2010). In particular, the Philippines scored improved evaluation points related to the macro-economic environment and innovation. Nevertheless, there are still many issues that need to be improved, such as the lack of infrastructure development and inefficient bureaucracy, etc. While the Philippines works to attract foreign capital and achieve economic development, as the presidential election gets fully underway now, the major focus points will be how these issues can be addressed, and how the country’s international competitive strength can be further enhanced. (Yuta Tsukada)

The Japan Research Institute, Limited 4 Economics Department

ASIA MONTHLY REPORT November 2015, No.176

China Economic deceleration becomes ever more obvious

■ Real GDP growth rate is 6.9% in Q3 On October 19, the National Bureau of Statistics announced the July to September quarter real GDP growth rate as 6.9%, ＜Real ＧＤＰ, Investment in Fixed Assets（Y o Y）＞ compared to the same period in the previous year. This marks （％） the first time since the January to March quarter of 2009 （％） Investment（Nominal, R） GDP 8.0 24 (6.2%) that the quarterly growth rate has fallen below the 7.0% mark, and is evidence that the Chinese economy is in a phase 7.5 18 of severe economic deceleration, on a par with that in the immediate aftermath of the Lehman shock. 7.0 12 In terms of individual demand items, boosted by income growth, consumption has performed comparatively well. Retail 6.5 6 turnover, on a nominal basis, continues to expand at about 10% compared to the same period in the previous year (real basis is 6.0 0 around 9%). 2013 14 15 （Y/Q）

However, it has become ever clearer that investment growth Note: Nominal investment figures are year-to-date. has lost its impetus with, for example, fixed asset investment Source: National Bureau of Statistics (excluding rural households) in the January to September period growing at only 10.3%, compared to the same period in the previous year. Though there are encouraging developments on the horizon, such as a slight improvement in growth in central government jurisdiction projects after bottoming out in the January to June period, based on policies geared towards accelerating infrastructure development, in general the burden of excessive debt and overcapacity has become heavier, and corporate investment appetite is waning. Neither is external demand performing very well. September’s exports to the US switched to positive growth and, thanks to this and other developments, the breadth of negative growth contracted, but growth was still below the previous year’s figures for three consecutive months. Import growth has fallen below the previous year’s level for 11 consecutive months, and the rate of decrease is once again beginning to expand, reaffirming the impression of a slump in demand for raw materials and parts and components from overseas. ■ Pump-priming measures help avoid further economic deterioration Looking forward to the Chinese economy’s performance in the October to December quarter, retail and restaurant turnover during the long October holiday is expected to be up 11.0% compared to the same period in the previous year, for example, so the growth trend in consumption will likely be sustained and continue to play a role in supporting the economy. Meanwhile, even with regard to those demand items that have continued to decelerate, as acknowledged by the customs authorities, the cheaper yuan is expected to play a part in the gradual recovery of export growth. With regard to investments also, in addition to the incentive measures introduced at the beginning of the year, extra measures added recently (such as lowering the deposit rate on personal housing mortgages and lowering the minimum capital ratio in investment projects, etc.) have begun to take effect, and the deceleration in the growth rate is expected to slow gradually. Even supposing the deceleration trend of economic indices were to continue beyond October, if the government is prepared to go further than simply implementing additional monetary easing and carrying out expansionary fiscal policies, then the probability is high that further economic deterioration can be averted. On the other hand, it is believed that additional economic stimulus measures inevitably run the risk of increasing the probability that, for example, industrial enhancement initiatives will be put off. In addition, the clearing of excess capacity and inventory subsequent to economic recovery will likely be more difficult than it is now. With regard to the financial aspect as well, though there is still room for increased government expenditure due to a simple surplus when the transfer of expenditure from central government finance to local government is excluded, there is the danger of moral hazard and of an expansion in uncontrolled expenditure and burgeoning government debt. The Xi administration will find itself tasked with controlling economic pump-priming policies to a reasonable scale and doing whatever it can to minimize the envisaged demerits and risks, while moving ahead steadily with administrative and financial reform, as well as the reform of state owned enterprises. (Junya Sano)

The Japan Research Institute, Limited 5 Economics Department