Asia-Pacific is identified as the pace-setter in the global economic growth in 2015. Image: ktcatbd.com.vn
Sharp drop in oil prices and increase of US dollar has confronted domestic currencies of developing economies with new challenges. This is a noticeable maker of the world economy in general and the Asia-Pacific economy in particular in 2014. Nevertheless, Asia-Pacific has been identifies as the “the pace setter” of the world economic growth.
The economy of Asia-Pacific in 2014
As compared with other economies in the Asia-Pacific region, the US economy proved to be the most positive one, especially its recovery during the last two quarters of the year and the growth of 3.5% throughout 2014. Besides, strong job growth dragged its unemployment rate down to below 6% in 2014. With the recovery of the “leading” position of the US economy, the US Federal Reserve (FED) has shifted to a more intermediary role in the economy with its decision to bring to an end the third round of quantitative easing programme (QE3) on 30 October, 2014 (1). Though the Fed has not raised existing interest rates from the record-low levels of 0%-0.25%, this issue has been much debated and it is expected that the Fed will raise the rates in 2015. This means the US economy is strong enough to “exist” without printing more money.
In the mean time, China closed 2014 with its economic growth rate of 7.3% (the lowest for the past 10 years) while Chinese leaders applied measures to prevent the danger of “hard lending” of the economy by “stalling” big debts of local governments and private sector after the period of heating growth. Additionally, low external demands led to reduction of exports and domestic consumption, frozen property market and increase of credit bubble. These were also the causes that slowed down the growth of the Chinese economy.
Japan - another “locomotive” of the Asia-Pacific economy did not see growth in 2014. More than one year since the implementation of Abenomics policies, the Japanese economy showed some indications of improvement. However, it failed to achieve the goal of 2% inflation due to higher consumption tax which greatly impacted consumption. Meanwhile, efforts to “pump money” into the economy and lower interest rates of the Bank of Japan (BOJ) to encourage domestic demands, growth and prevent deflation did not yield clear results.
In commodity market, oil prices were the most heated and debated issue, particularly in the second half of 2014. Since June 2014, oil prices declined continuously and lost 50% of its value, an all-time low during the past 5 years. One of the causes to this situation was supply by far surpassed demand. In spite of oil price fall, the Organization of the Petroleum Exporting Countries (OPEC) maintained its oil output target. Besides, outstanding oil drilling technological advances, namely horizontal drilling and hydraulic “fracking” currently in use in the US have considerably pushed up oil output. Meanwhile, deceasing demand for oil in the world due to slow economic growth was also another objective cause to oil price fall. Oil prices have been used by powers to attack each others.
In the monetary market, the US dollar continued to soar up in the end of 2014 and pushed down currencies of developing countries to lowest levels in the past 14 years. Weak domestic currencies can be beneficial to some countries because they can step up export due to their stronger competitiveness, but it can also make import more expensive, hence higher inflation and debts in US dollar in economies, particularly emerging economies. According to assessment of economic analysts, in the world scale, countries, businesses and even households’ debts accounted to US$ 10,000 billion, of which US$ 5,600 billion are of emerging economies. These huge debts can become a real danger when loans are paid in US dollar. Recently, the Bank of International Settlements (BIS) warned that the increased value of the US dollar against other currencies could have a strong impact on the Asia-Pacific economy. (2)
China’s debts reach US$1,100 billion, but its economy is “shielded” by foreign currency reserve worth US$ 4,000 billion. According to BIS, 63% of international debts are in US dollar, 19% in euro, 8% in British pound and 3% in Japanese yen. The rise of US dollar value and the fall of oil prices indirectly stimulate economic growth, creating favorable conditions for oil-importing economies while causing implications to economies with revenues coming mainly from oil export. So, the world economy has not shown progress. That is not to mention instability in global security which darkens the world economy in 2014.
Major impacts to the Asia-Pacific economy in 2015
First, increasing competition of powers in Asia-Pacific. In 2015, Asia-Pacific continues to be a “battlefield” of fierce competition among powers because it relates to interests of the majority of power centers in the world. The trend of cooperation and fighting is the key feature of the region with the two “main players” as the US and China. However, potential events and unexpected elements will emerge.
Recently, China has reoriented its foreign policies toward “charm offensive” in its relations with neighboring countries by economic interests and detente. However, according to analysts, in the long-run, China has renounced its foreign policy of “hiding itself to wait for opportunity” to change to a new stage. Chinese President Xi Jinping once affirmed the unchangeable trend of multipolar world, and the long struggle for world order, meaning the sole superpower position of the US will end and China is determined to compete with US’s influence. Thus, China will maintain firm attitude on issues of sovereignty. “This year, Chia will continue to push forward the “Chinese dream,” but will also be of no less resolute on the issue of sovereignty.”(3)
In 2015, the US will continue its strategy of “turning” to Asia-Pacific through strengthening its relations with allies and countries having sovereign disputes with China, particularly pushing up the signing of TPP in the middle of 2015 with a long-term goal of preventing a “power transfer” within the region. (4) However, there are complicated opposing waves. Several Asian countries have been worried that the US commitment to the region is wavering due to greater challenges from the Middle East and Ukraine. On the other hand they do not want deep involvement of the US in regional issues.
Japan is considered to be an indefinite factor that impacts the Asia-Pacific situation in 2015, particularly after the victory of Prime Minister Shinzo Abe in the election to the Lower House. His determination to reinterpret Japan’s Peaceful Constitution and beefing up military strength will create premise for Japan to “turn itself” from an economic power to a political - military power, especially when Japan and China are in dispute over the sovereignty of Senkaku/ Diaoyu islands.
In addition, “Asia has “hot” spots which are mainly long-term disputes over sovereignty. Concerned parties and the US want to restraint conflicts at the lowest possible level, but given too many participating stakeholders and complicated intermingled interests, the possibility of conflict as force majeure or due to wrong assessment is undeniable.” (5) All these will directly influence economic development in Asia-Pacific in general and of each country in particular in 2015.
Second, the signing of major free trade agreements (FTA) in Asia-Pacific. FTAs and important dialogues or negotiations in Asia-Pacific will be salient points in 2015 which will facilitate regional economies to participate in the global supply chain. In this chain, countries which are successful in removing trade tariffs and joining the chain will advance far ahead of those which do not do so.
In that trend, ASEAN is striving to become an ASEAN Economic Community (AEC) by the end of 2015. It has set up criteria to “measure” the progress in the process of building AEC and AEC will be the major pillar for the regional community to take shape. ASEAN leaders maintained that approximately 85% of the objectives have been completed, the remaining 15% are the most challenging. It is an important change in the coming decade for ASEAN countries to develop the regional production and supply chain. Thus, according to ASEAN leaders, the year 2015 will become a millstone in accelerating regional integration. (6)
Meanwhile, China and ASEAN started negotiations on upgrading the ASEAN-China Free Trade Area (ACFTA), emphasizing service and investment free trade. China advanced proposals on building the 21st century “Marine Silk Road” and the Asian Infrastructure Investment Bank. Another agreement being followed is the Regional Comprehensive Economic Partnership (RCEP) with the participation of ASEAN and six economic partners. The goal of participating countries is to complete negotiations on regional free trade in 2015. However, according to many experts, it is not easy to achieve this goal as participating countries are debating on negotiation methods and market access.
In parallel with RCEP and ACFTA is the prospect of negotiating and concluding of TPP. TPP is not only of great importance to the US in its endeavor to rebalance Asia in both economic and security aspects but will also receive continued concern of the world in 2015 though there are different observations on this ambitious agreement. So, it is possible to see that both China and the US have had their own plans in turning the Pacific into a colossal free trade hub in future.
Third, oil prices continue dropping. On November 27, 2014, the Citigroup stated that the global oil surplus would double to 1.3 million barrels a day in the first half of 2015. Plunging oil prices and loose monetary policy help global demand for goods and services recover and the world economy in general and the Asia-Pacific economy in particular gain higher growth in 2015 as compared with 2014 (7) because oil accounts for as much as 18% of total imports in Asia, excluding Japan, or about 3.4% of its total GDP, according to Bank of America Merrill Lynch. And oil makes up 18% of Japan’s imports, or 3.3% of its GDP. (8) The decline in oil prices should boost GDP growth in the Asia-Pacific region by 0.25% to 0.5% percentage point (9), however, this impact is not the same for each country in the region.
Of Asia’s economies, none is more dependent on oil imports than China. The country spent $234.4 billion to import oil in 2013. That was just below the US, which was the world’s top buyer of crude until it was surpassed by China in 2014, according to estimates from the US Energy Information Administration. Depressed oil prices could help China make up for some lost ground in its economy due to slowing industrial growth, falling exports, rising bad-debt levels and struggles in shifting to a consumption-led, rather than investment-led growth model. If oil prices remain low, China could follow up its November 2014 interest-rate cut with another one in 2015. Given oil price plunge, China has been garnering “black gold” for stockpile and at the same time seeking to build a strategic petroleum reserve. (10) The London-based Energy Aspects Ltd. projected that China’s efforts to boost oil reserves might increase its imports by as much as 700,000 barrels a day in 2015. (11) That’s more than half the global glut. (12)
Beside China, India and Indonesia have gained big benefits from falling oil prices. As both countries have suffered high current account deficits, so oil price drop will help improve their current accounts. In addition, India and Indonesia can cut their relatively high interest rates without affecting inflation. According a an official of India energy sector, each decrease in the oil price by US$ 1 results in US$ 1 billion drop in Government subsidy and raise India’s GDP growth to 6.3% from the projected 5.6% growth by the end of the fiscal year in March 2015. Meanwhile, Indonesia removed all its subsidies to oil prices by the end of 2014 and its GDP is forecast to reach 5.5% in 2015 from the projected growth rate of 5.1% in 2014.
For Japan’s economy, impact of oil price fall is less obvious. Though oil prices in US dollar has dropped drastically, the value of Japanese yen continues to slide hence oil prices in Japanese yen fall more slowly. In addition, Japan is facing deflation, oil price decrease does not greatly affect is economy. Nevertheless, low-cost energy prices help reduce Japan’s trade deficit by 2% of GDP in the first months of 2015.
However, oil price decline is a big disadvantage for oil export countries like Malaysia, Myanmar, Brunei and Australia. Recent budget report of the Australian Government made known that oil price fall would lower its revenues from oil exploiting tax by US$ 615 million in the coming 4 years and forecast that oil prices would not rise within the next 2 years.
Prospects of the Asia-Pacific economy
Entering 2015, the Asia-Pacific economy is not optimistically projected, though it looks brighter as the result of the recovery of the US and other economies. According to chief investment officer for fixed income in Asia at HSBC Cecilia Chan growth and low inflation were a nice situation to be in and that the worries on Asia's outlook might look like a hill of beans relative to other regions, such as Europe. “Positive fundamentals are in place for the momentum in the regional economy to improve during 2015. There is no great risk in Asia-Pacific, even including China and economy growth of the Asia-Pacific has flat-lined at about 3.5-4 percent. Right from the US and China to Singapore to Taiwan to Korea, we’re doing okay… . The region is fully employed and although wage growth has slowed, it hasn't collapsed,” (13) “meanwhile world economy is expected growth rate of 3%.” (14)
Though the American has recovered more clearly, it’s just enough to make up for growth decline and economic recession in other countries like China and Japan. However, this is still the remarkable “brightest spot” in the world economy when entering 2015. The number one economy of the world will continue stronger growth than other leading economies due to greater demands of domestic market, especially consumer demands which accounts for 70% of its GDP, analysts said. Job increase, low oil prices, dollar’s gaining position as an international exchange currency, improved financial situation of households are major developments of the US economy in 2015. HIS forecasted that the US economy would achieve growth rate of 2.5%-3% in 2015. What is more important is that with the firm recovery of its economy, the US will regain its “leading” position and be a driving force for the global economy which was replaced by newly-emerging countries since 2008 when the global financial and economic crisis started.
Though China, the second biggest economy in the world, has maintained its high growth rate due to support from monetary and fiscal policies, its growth rate has dropped considerably in 2015 to 6.5%-7% as compared with the average 9%-10% of the previous 10 years and with the goal of 7.5% in 2015. This means that China will stabilize economic growth rate which will be lower than the historic peak in previous years. In 2015, China will undertake economic restructuring for more sustainable growth with the key task of strengthening domestic financial market, improving legal framework and strengthening private sector’s role. However, China will have to face potential risk of credit collapse and huge debts which will lead to comprehensive crisis of its banking system.
Japan – the third largest economy in the world is also forecast to get out of recession in 2015 with the growth rate of 1% though still facing difficulties (nevertheless, there is another forecast that the Japanese economic growth will range from 0.7% to 1.5% in 2015). Japanese Prime Minister S. Abe and LDP Party’s victory in the Lower House, the postponement of consumer tax hike to 10% to April 2017, Bank of Japan’s new economic stimulus package of 3,500 billion yen (US$ 29 billion) and the record-low oil prices below 50 US% per barrel are stimulants for Japanese economic rebound.
In the Asia-Pacific region, India is the only big economy with more optimism, with a forecast of 6.4% growth in the 2015-2016 fiscal year as a result of the “Modinomics” policy of Indian Prime Minister Narendra Modi. Papua New Guinea ranks first in the regional rating with the growth rate of 14.8% in 2015 followed by Macau with 10.6%, East Timor, Laos, Bhutan, Cambodia and Mongolia 8%; Sri Lanka 7,1%; the Philippine 6% - 6,4%; Indonesia 5,5% - 6%, Bangladesh 5,8% and Pakistan 4,1%. However, these are small economies, their contribution to GDP to the Asia-Pacific region will not be great.
In addition to optimistic signs, most countries in the region are still emerging markets, it does affect all the emerging market countries as investment habits can be "seasonal" and when the theme is out of fashion, the selloff can be broad. There's been so much capital into Asia over the last few years it's sent valuations up to a level that's unseen and unprecedented. Where previously a Europe-listed multi-national company would trade at 16-17 time price-to-earnings ratio and its Asian-listed subsidiary would be at single-digits, now the Asian subsidiary often trades at around 35 times earnings, with the mother company at 12-13 times.” (15) In that context, declination, recession and stalling are areas used by researchers and forecasters to describe a grey gamut in the regional economic picture in 2015.
Another noticeable issue in 2015 is the risk on monetary “clashes”. The Fed is likely to raise interest rates in 2015 and the US dollar will continue to gain its value against other currencies. Meanwhile, other countries like Japan, China and South Korea have continuously lowered their interest rates and imposed policies to currencies’ value to stimulate export. The two opposite directions taken by the Fed and other major central banks, particularly in Asia, may result in great changes in Asia in 2015.
In general, though obstacles to growth have reduced for some countries, especially the US, advantages, disadvantages, contradictions and mutual annihilation together with geopolitical attempts of big powers in the world will not bring about much optimism to the global economy in general and the Asia-Pacific economy in particular in 2015.
(1) The financial market responded strongly, the USD Index (USDX) measures the US dollar’s value against major currencies including the euro, the Japanese yen, the British pound, the Canadian dollar, the French and Swiss franc and the Swedish kronor (considered to be the “standard” to identify its value) soared continuously from 79.9770 to 92.2870 and possibly surpassed 115 (of 2002), or 35% since July 2014
(2) In the past, the US dollar increased value caused crisis in emerging economies typically in the early 1980s of the 21th century. The stronger US dollar pushed South American countries in big trouble and “Asian tigers” into collapse in the middle of 1990s
(3) Douglas Paul, Special Assistant to the former US President G. Bush for Asia-Pacific affairs
(4) 2015 Global Forecast, the Center for Strategic and International Studies (CSIC), Washington December 2014
(5) Douglas Paul
(6) ASEAN has put forth a plan to promote the construction of a common community in the new period
(7) Data from the Bank of America Merrill Lynch, 5 January, 2015
(8) Data from Capital Economics, 5 January, 2015
(9) Analysis of Rajiv Biswas, Chief economist of Asia-Pacific at consulting firm HIS
(10) Gordon Kwan, the Hong Kong-based head of regional oil and gas research at Nomura, said that this was a golden time window (for China) to acquire more strategic oil stockpiles at lower costs. China boosted imports by 8.3 percent, or 460,000 barrels a day (more than demand) in the first nine months of 2014, the fastest pace since 2010, customs data show. While China currently holds reserves equivalent to about 30 days of imports, the government is seeking to boost that level to 100 days by 2020, according to China Petrochemical Corp., Asia’s biggest refiner. That would be the equivalent of about 570 million barrels, based on the most recent monthly imports of China. Meanwhile, the US stockpiles, peaked in 2009 at 726.6 million barrels, according to the Energy Information Administration. Supplies were 691 million as of Nov. 21, 2014, enough for 37 days of demand.
(11) In 2009, China completed building 4 strategic petroleum reserves with a capacity of 103 million barrels. In the second stage of strategic petroleum reserve plan, China constructs another 7 reserves with a capacity of 191 million barrels. The second stage was started in 2014 and by now 2 reserves were completed. The third stage was begun to build another 3 reserves
(12) According to City groups’ estimation after OPEC declared to keep its production target at 30 million barrels a day in November 2014
(13) According to Bhaskar Laxminarayan, chief investment officer for Asia at Pictet Wealth Management
(14) Dr. Nariman Behravesh is Chief Economist of HIS
(15) According to Jalil Rasheed, investment director at Invesco on 5 December, 2014
This article was published on Communist Review No 869 (March 2015)