ASEAN’s external balances a mixed bag

The current account is a key concept in macroeconomic analysis. It stands for exports and imports of currently produced goods, services, and income flows to and from foreign residents. The balance there forecaptures the extent to which a country is either accumulating net foreign assets or issuing foreign liabilities, i.e. if they are a net borrower or lender to the rest of the world.

The current account balance is usually dominated by trade in goods and services, but also includesso-called‘primary and secondary’ incomes.The first tends to be spearheaded by investment income, while the latter by remittances from workers residing overseas. Indonesia, Thailand, Malaysia, the Philippines and Vietnam – who we refer to in aggregate as ‘ASEAN-5’ – are a mixed bag in terms of their current account positions. Thailand, Malaysia and Vietnam are persistent net lenders to the rest of the world. In 2017, their current account surpluses as a percentage of GDP amounted to 10.8%, 3.0% and 4.1%, respectively.

Thailand’s large surplus is the result of four years of improvements in the external accounts. Malaysia’s current account surplus reached the recent level after a gradual reduction since the post-Lehman peak of 10.9% in 2011.  Vietnam began to run current account surpluses more recently in 2011, when the impact of structural reforms such as trade and foreign ownership liberalization started to kick in.

The Philippines used to run a surplus but current account tipped into slightly negative territory since 2015. In 2017, the current account deficit amounted to 0.4% of GDP. The country has an unusual current account structure as large trade deficits are often combined with big inflows of remittances from the expansive community of Philippine expatriate workers. While for most of the 2000s remittances tended to outstriptrade deficits, accelerating GDP growth has reversed this dynamic since 2013.  

With a deficit amounting to 1.7% of GDP last year, Indonesia is the only serial current account deficit country in the ASEAN-5. The country became a net borrower in 2011 when net hydrocarbon exports turned negative on the back of a secular decline in crude oil production capacity. Despite their differences, all ASEAN-5 countries except for Vietnam have witnessed their current accounts deteriorate in recent quarters. The trade balance has inevitably been the key driver.  Whileexports have benefited from the world trade rebound, increasing by 43% from their trough in January 2016, imports have seen even stronger growth; up 47% during the same period.

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Three common factorsare in play.  First, our ASEAN-5 weighted aggregate for GDP growth has seen its fastest growth in four years in recent quarters.Growth has peaked at 5.5% y/y in Q12018 before cooling somewhat to 5.3% in Q2. Robust activity naturally prompts import growth, which is ‘elastic’ with respect to demand.

Second, the ASEAN-5 is a net importer of crude oil. Except for Malaysia, the other four countries arenet importers.In fact, the net oil position of the region has deteriorated considerably over the last eight years. During this period, both Indonesia and Vietnam transitioned from being net oil exporters to becoming net oil importers. Accordingly, ASEAN’s trade balance is vulnerable to higher oil prices. The recovery in oil prices has been a major drag on trade balances. Brent crude prices averaged USD44/b in 2016, USD55/b in 2017 and USD71/b in H1 2018. Brent’s recent move above USD80/b suggests even higher import bills to come in the next few months.

Third, a new generation of capital expenditure programmes have kicked in in the Philippines, Indonesia and Thailand.Investment in infrastructure and other fixed assets has a high import content, ensuring that capex booms have led to a surge in the imports of capital goods. While the deteriorating trade balances spill over to the overall current account positions, Thailand and Malaysia continued to run large surpluses of USD 9.5bn and USD 1.8bn, respectively, in Q2 2018. Vietnam data is only available for Q1, when it registered a USD3.4bn surplus. 

Not surprisingly, the ASEAN surplus economies have been less affetcted by the recent pressure over EM currencies. Their currencies have all outperformed the J.P. Morgan EM Currency Index (EMCI), which tracks the movements of ten major EM currencies against the USD. YTD, the EMCI is down 11.1%, while the Thai Baht is up 0.6% and the Malaysian Ringgit is down 2.8% against the USD. The Vietnamese Dong, which is not a free floating currency,has devalued by a modest 2.0% so far this year.  

By contrast, the deficit countries of Indonesia and the Philippines have seen their currencies undergreater pressure. The Indonesia Rupiah and the Philippine Peso are down8.4% and 7.6%, respectively,against the USD in 2018. In the Philippines, however, the current account deficit remains modest, suggesting that financing over the medium-term may be less problematic.

Indonesia is the ASEAN economy that is more vulnerable to sudden changes in global liquidity and capital flows. Bank Indonesia (BI) hasundertaken what the BI governor called a ‘preemptive, front-loaded and ahead of the curve’ approach.The policy rate is up 150bp so far this year and is expected to increase more, which should help limit portfolio outflows, especially from the bond markets. Moreover, the government has also announced several measures to prop up external revenues and curb imports, including an expansion in the cap for coal production, a more targeted approach to infrastructure spending, an acceleration of the plans to mix domestic biodiesel into petrol, and the imposition of a 7.5% tariff on 500 different consumer goods.

In brief, current account balances are deteriorating across the ASEAN-5, but generally speaking external accounts are healthy. Indonesia is the exception. As such, economic authorities in Jakarta are being more active in targeting deficits over the next quarters.