In 2007, inflation is forecast to subside significantly, to an average 4.2%, on expected lower world fuel prices, appreciating subregional currencies, and the effect of assumed normal weather patterns on agricultural production.
Imports to Southeast Asia are likely to record robust growth as investment is expected to pick up, especially in Indonesia. Continued buoyancy of remittances from overseas workers and in tourism receipts should provide support to current accounts in several countries.
In 2006, the economies of Southeast Asia expanded by 6%, above the average growth of the previous five years. Most countries grew at a faster rate than in 2005, reflecting strong external demand, supportive monetary conditions, and for some, the beneficial impact on agriculture of favorable weather conditions for most of the year.
Export growth in Southeast Asia accelerated last year to nearly 18%, with exports from Cambodia, Lao People’s Democratic Republic, and Viet Nam rising at faster rates. Exports from several economies - Philippines, Singapore, Thailand and Malaysia - benefited from the upturn in global demand for electronics. Indonesia, Malaysia, Myanmar, and Viet Nam benefited from high prices for oil or natural gas exports.
Investment was weak in 2006 in Indonesia, Philippines, and Thailand, which dampened the growth of imports. Southeast Asian inflation averaged 7.1% in 2006, up from 6.3% in the previous year. The average was raised by high inflation in Indonesia, the biggest economy in Southeast Asia, which saw price pressures surge from late 2005 when the government reduced subsidies on fuel.
In Cambodia, the economy expanded strongly by 10.4% in 2006, reflecting robust clothing exports, tourism receipts, and construction activity. Forecast growth averaging just over 9% in the next 2 years will be more dependent on strengthened domestic economic activity underpinned by improved rural incomes, larger inflows of foreign direct investment, and greater government capital spending.
In Indonesia, moderate economic growth of 5.5% last year was based on private consumption and exports, while fixed investment growth dwindled. Inflation eased from high levels as the year progressed, enabling a cut in interest rates. Economic growth is expected to pick up by a half percentage point in 2007, supported by greater development spending and some improvement in the poor investment climate.
In Lao PDR, foreign investment in hydropower and mining, with rising exports of minerals in 2006, continued to drive double-digit growth in industry, the major contributor to gross domestic product growth of 7.3%. Inflation slowed to levels not seen for 12 years. Economic growth is projected to decelerate moderately this year to 6.8%, mainly because export markets and mineral prices will not be as strong as in 2006.
In Malaysia, consumption spending produced a pickup in growth to 5.9% in 2006. Private and public investment also strengthened. Growth is projected to slow by about a half percentage point in 2007 as export markets soften and household spending and private investment decelerate.
In Myanmar, high prices for natural gas exports and a good harvest led to a modest pickup in economic activity. But macroeconomic stability remains elusive with monetized fiscal deficits feeding high inflation, which returned to double-digit levels and could go higher.
In the Philippines, achievements included 5.4% growth, a downtrend in inflation, and stronger fiscal and external positions. This year, still-high remittances and low real interest rates, and greater fiscal expenditures, should keep expansion at around the same level. Growth has not been strong enough to lift employment sufficiently because of a declining investment-to-gross domestic product ratio.
In Singapore, growth in 2006 hit 7.9%, well above the economy’s trend rate for a third year running. External demand was the main driver, although domestic demand, especially investment, also picked up. Growth is expected to decelerate in 2007 to a still-strong but more sustainable rate of 6%. Closer links with global economic networks and structural reforms have contributed to the healthy performance, but also led to widening income gaps.
In Thailand, strong exports drove a pickup in economic growth to 5% last year, since domestic demand was damped by several factors including rising interest rates and inflation in the first half, flooding, and political uncertainties for much of the year. Inflationary pressures eased in the second half of 2006, paving the way for the central bank to start lowering rates early in 2007. Economic growth is projected to slow to 4.0% this year, and the outlook for 2008 depends heavily on elections being held and on the incoming government providing a clear and credible economic program.
In Viet Nam, a rapid growth rate of 8% was maintained in 2006, supported by robust exports, rising consumption spending, and strong investment. Inflation also stayed high, averaging 7.5%. Membership in the World Trade Organization from January 2007 has added impetus to development and market-oriented reforms. If further progress is made on structural reforms, brisk economic growth of just over 8% is projected this year and next.
