The two-day meeting that ended last week at the California Sunnylands resort between US President Barack Obama and leaders of 10 Asean countries offered a scenic backdrop for the first such gathering highlighting Washington’s “pivot” to the region. The major economic initiative unveiled at the summit was a series of hubs in major cities to better coordinate commercial contacts.
Bangkok, Jakarta and Singapore will host one-stop shops to promote bilateral trade and investment in infrastructure, energy and information technology, as the Trans-Pacific Partnership (TPP) with the same objectives awaits approval by national parliaments. However, the main emerging market signatories, Malaysia and Vietnam, are struggling with slumping commodity and manufacturing exports to China, their biggest trading partner.
Indonesia, the Philippines and Thailand which may eventually try to join the arrangement are also in the throes of delicate political and competitive transitions outside immediate US influence. Since the last joint gathering in November global banks and fund managers have flagged relative changes in financial position ignoring California’s incremental inter-governmental reorganization and warm sentiments.
Malaysia scandal fallout
Malaysia was the previous summit host and President Obama continued to keep distance from Prime Minister Najib Razak, as the 1MDB debt and corruption scandal unfolds at home and in Gulf and European capitals. The attorney general initially cleared him of alleged wrongdoing over a US$600 million payment determined to be a Saudi election donation, but Switzerland is still investigating US$4 billion in suspicious accounts.
The Prime Minister’s predecessor, Mahathir Mohamed, has called for his resignation, as critical ruling party officials have been purged and the local Goldman Sachs investment banker formerly in charge of billions of dollars in deals quietly returned to the US. However, US$4 billion in fund assets were sold to Chinese firms in January to pare debt, and opinion surveys show weariness with the episode as the government concentrates on fiscal and monetary discipline with GDP growth expected to fall below 4%. The new budget will cap the deficit at 3% of GDP, and the central bank has held interest rates and adjusted prudential rules to curb credit excess. With these moves foreign investor net portfolio outflows have abated and the currency has recovered ground after 2015’s double digit drop against the dollar.
Vietnam budget shortfall
Vietnam has been in the spotlight as the largest beneficiary of the TPP pact over time, according to studies by the World Bank and Peterson Institute, and with the reappointment of Nguyen Phu Trong as Communist Party chief in a battle against the younger, more market-oriented outgoing prime minister. However, next generation technocrats will be members of the broader Politburo, as they grapple with fiscal and external imbalances.
The budget shortfall will likely breach the 5% of GDP target, and estimated foreign reserves of US$30 billion cover only two months imports. The crawling exchange rate peg may have to go to a more flexible regime with the squeeze, as US lawmakers also describe the practice as “manipulation,” warranting trade retaliation.
Indonesia regains balance
Indonesia has been the early 2016 bond and stock market leader as foreign direct investment was up 20% last year following cabinet and ruling party coalition shifts. President Widodo overcame initial personnel stumbles and protectionist leanings to unveil a package of business-friendly infrastructure and regulatory reforms, including faster licensing and paring of the “negative list” for foreign firm industry entry. He offered project guarantees equal to 7% of GDP to supplement 5 percent consumer-driven growth. The current account deficit will stay manageable at around 2%, and can be offset by resumed heavy local bond inflows attracted by 8% yields and new mandatory domestic insurance and pension fund buying.
Philippines sovereign bond oversubscribed
Philippines President Aquino is attending his final summit before May elections, as a Standard Chartered survey put the country toward the top of Asean investor favorites, ahead of Malaysia and Thailand. A US$2 billion 25-year external sovereign bond was oversubscribed at a 3.7% coupon, on the heels of 6% growth and high-grade ratings. However, remittances are slowing and capital outflows persist ahead of the handover, with Sunnylands anti-corruption campaigners warning of the return of insider dealing among regional darkness still looming in the coming months.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington DC