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Moody Survey

Moody's slashes Thai forecast

Cuts predicted rate for 2014 to 3.2% on political crisis

Moody's analytics, a research arm of rating agency Moody's Investors Service, has slashed its 2014 economic growth forecast for Thailand to 3.2 per cent from 5.2 per cent on the enduring political uncertainty.

In Asean, the economic outlook will improve when global demand buoys exporter incomes. Good governance in Singapore, Malaysia and the Philippines will support their outlook over the next 18 months. The varying political landscapes and asymmetric capital outflows from tighter US monetary policy will dictate the outlook this year.

The firming US recovery, a stabilising euro zone, improvement in Japan and the steady Chinese economy are set to lift global growth to 3.1 per cent from 2.1 per cent last year.

Simple correlations suggest most economies have become increasingly tethered to the global business cycle. Malaysia, Singapore and Thailand, the most export facing economies, should receive the largest boost from stronger global trade flows.

However, Singapore's links to the global economy have weakened over the last five years because of its increasing reliance on pharmaceuticals, which tend to be acyclical.

Indonesia has become more entwined with the globe, as it is increasingly dependent on hard commodity exports and foreign direct investment - both of which are pro-cyclical. On net, however, it remains a domestic-led economy.

While the upturn in global growth is a broad positive, tighter monetary policy in the US poses significant risks to financial stability across the region. External surpluses in Asean have generally weakened over the last five years as export receipts slowed in line with lacklustre global demand.

Sagging imports

Imports, however, lost none of their vigour, as the large surge of quantitative easing in the developed world following the 2008 global financial crisis spurred a sharp injection of liquidity into the region, supporting a debt-fuelled upturn.

Fast forward five years and the US is poised to slowly turn off the liquidity taps, causing investors to reposition their portfolios away from emerging markets. This has already caused a mass selloff in emerging-market currencies and stocks. Investors are particularly harsh on economies with large external imbalances and structural deficiencies such as India, Indonesia and Turkey.

Looking ahead, investors will continue to punish those with unfavourable external positions and incompetent policies. It is no coincidence that economies with large external imbalances are generally mismanaged, with a long track record of corruption, heavy-handed regulation and ongoing political infighting.

Thailand's political woes have intensified as the opposition party and anti-government protesters have threatened to boycott elections slated for last Sunday.

With no clear resolution in sight, violence between pro- and anti-government protesters has risen, forcing officials to declare a state of emergency in Bangkok.

The Bank of Thailand has lowered policy rates to try to support spending, but this will not be enough to offset the damage from the growing unrest.

Foreign investors have grown bearish. International outflows from the local stock market have reached US$2.1 billion since November, while the spread on credit default swaps - an insurance against default - has widened. This trend will persist until a resolution is reached. There are reports of foreign firms holding back on direct investment.

Indonesia is the other big worry. President Susilo Yudhoyono's second term has not been productive, with no clear policies to remedy chronic corruption or lack of infrastructure. There are also heavy-handed regulations around foreign investment and various political scandals. The elections scheduled for July will be an avenue for change, however, there appears to be no clear frontrunner.

The latest election polls suggest the governor of Jakarta, Joko Widodo, at 43.5 per cent, is the people's choice - although he has not been officially endorsed by any political party, which makes his participation uncertain.

Government policies in Singapore, Malaysia and the Philippines are geared toward sustaining long-term growth.

Singapore is a developed country with quality institutions ranked highly in international surveys. The Philippines and Malaysia are not in the same league, but have made progressive strides on the fiscal front over the last couple of years.

The Philippines has been among the region's strongest performers over the last two years.

The government has set out a feasible blueprint to improving infrastructure, reducing corruption and encouraging greater foreign direct investment.

Malaysia's government recently reduced burdensome fuel subsides and increased welfare payments. It appears policymakers are trying to steer the economy toward a more developed, free market-based system, particularly as Malaysia is one of the more financially developed countries in Asean.


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