Southeast Asia’s growth will remain resilient over the next five years as stronger investment and private consumption reduce dependence on exports for expansion, the Organization for Economic Cooperation and Development said.
Europe’s sovereign debt crisis and a slowdown in advanced economies have had a “limited” impact on Southeast Asian nations with most of the effect experienced through trade, the Paris-based OECD said in a report released in Phnom Penh today. The region, along with China, may face risks stemming from volatility of capital inflows in the medium term, it said.
The prospects for developing Asian nations contrast with the fiscal and demographic challenges faced by more advanced economies, as higher public spending and younger populations support domestic demand and lure investment even as global expansion weakens. Increased government expenditure on social safety nets and health will encourage household spending and reduce the need for precautionary savings in emerging Asia, according to the report.
“A combination of cyclical factors, government policies, and longer-term shifts in economic structure that have supported consumption growth over the past several years are likely to continue to underpin its growth over the medium term in Southeast Asia, China and India,” the OECD said in its 2013 outlook for the region.
Governments in Southeast Asia have loosened fiscal policies to spur growth. Philippine President Benigno Aquino is increasing spending to a record and seeking more than $16 billion of investments in roads and airports, while Malaysian Prime Minister Najib Razak is also boosting outlays.
The region’s growth prospects are helping attract overseas companies, with Japan’s foreign direct investment in Southeast Asia surpassing that in China, according to Japan External Trade Organization’s figures using finance ministry data. Japan’s investment in the Association of Southeast Asian Nations more than doubled to $19.6 billion in 2011 from the previous year, while that in China was $12.6 billion, according to the organization.
Fiscal deficits in most Southeast Asian nations will narrow through 2017, leading to an improvement in public debt levels as a percentage of gross domestic product, the OECD said.
Indonesia’s growth will outperform its neighbors, with a 6.4 percent annual rate of expansion from 2013 to 2017, the OECD estimated, equal to that recorded in the two decades before the 1997 Asian financial crisis, the OECD said.
“This favorable outlook for Indonesia reflects the significant improvement in the country’s standing with international investors and the ambitious infrastructure investment and economic reforms specified in Indonesia’s medium- term development plan,” the OECD said.
Indonesian President Susilo Bambang Yudhoyono is increasing spending on roads, seaports and airports as he woos investment to spur Southeast Asia’s largest economy. More than a decade after the Asian financial crisis forced Indonesia to seek an International Monetary Fund bailout, Fitch Ratings and Moody’s Investors Service have raised their ratings on the nation’s debt to investment grade and growth is among the fastest in the Group of 20 nations.
The Philippines will expand about 5.5 percent a year from 2013 to 2017, while Malaysia and Thailand will see annual expansion of about 5.1 percent, the OECD predicted. Singapore’s economy may grow 3.1 percent a year.
“The slower projected growth for these countries compared to Indonesia highlights the fact that they are now in the stage where further rapid gains in productivity become more difficult to achieve and the risks increase of falling into a ‘middle- income trap’ of slower growth,” the OECD said.
For the region’s less-developed economies, Myanmar’s growth outlook has improved “substantially” amid political reforms, which are expected to lead to a large influx of foreign investment, the OECD said. High inflation partly due to a weak macroeconomic management framework is a “major downside risk” for Vietnam, it said.
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