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The Year Ahead on Regional Markets & Politics

The Year Ahead on Regional Markets & Politics
Date/Time: Jul 26, 2006 / 5.00pm

The talk began with an introduction by the SIIA Chairman Simon Tay who framed the discussions along several crucial questions for the region. The first is the accelerated growth of China and its impact on Asia; the second is on whether India would be the other engine of growth for the region; and finally the apparent recovery of Japan’s economy and its implications. The two speakers for the event were Dr Eric Teo (Managing Director, Savoir Faire Corporate Consultants) and Mr Joseph Tan (Economist, Standard Chartered Bank).

Joseph Tan began his talk with the outlook on Singapore, indicating that it was generally positive. The economic growth figures have been higher than expected and labour market has increased significantly with the creation of some 80,000 jobs. The export-led sector led the economy in 2005 while the growth in the tech sector is seen as the potential driving force for the beginning of 2006. However, Tan believed that growth will moderate in the second half of 2006. There are several reasons for this:

1. Oil prices remain high with Goldman Sachs reporting that it may hit US$100 per barrel. Political uncertainties in Iran and Nigeria accentuate this. Already, it has hit Southeast Asia with Indonesia experiencing a mini oil crisis. Tan predicted that would hit India, Thailand, Philippines and South Korea the hardest. Singapore being largely export-driven would also be affected somewhat.

2. The main export market for Asia remains undisputedly the US. Sensing the trends,the Federal Reserve has been adjusting the interest rates downs, Tan predicted that this would moderate growth and sentiments that would not be as bullish. Growth in the US is likely to be around 3%.

3. The Integrated Resort project would provide a boost to the Singapore economy with an expected S$3 billion investment. The sluggish construction sector would receive a boost.

Eric Teo provided a broad-sweep of events in the region. First, on domestic politics, the upcoming elections would be the focus. He predicted that the ground is ready for the elections because of the following reasons: economic outlook is buoyant; there is a pacification of race and religious issues; and thirdly, PM Lee is enjoying good standing amongst Singaporeans. However, one greatest uncertainty is the specter of terrorism. A snap election is likely to catch any terror planners by surprise with little time to strike and to disturb and destabilize the country during the electioneering period.

He then went on to provide a quick survey of Southeast Asia. On Malaysia, Teo predicted that the major issue would be the Malay issue - an internal Malay political maneuver within UMNO would be the central focus. On Thailand, Eric Teo noted that Thaksin is going through a rough patch now. The crucial point is how the feud between the royal family and the prime minister would turn out. In the Philippines, GMA’s future is not assured and the economy would remain paralyzed. Vietnam from the 9th Party Congress seems to want to strike a balance between China and the US in view of Chinese unhappiness with PM Phan Van Khai visiting Washington and pledging support for the US-Japan Security Treaty and younger Vietnamese leaders who want to balance these two powers again.

Going on to the all-important question of deteriorating Sino-Japanese relations, Eric Teo pointed out that it had been a tough year on both sides. The rise of nationalism has caused the two states to be profoundly divided. The main worry is not nationalism per se but the fact that both the Japanese and Chinese societies are divided within. Other trends in Northeast Asia is the progressive “divorce” of South Korea from the US, and the “tussle” for “India” by both Japan and China. Teo see India (New Delhi) as the next playground for all the major powers.

The greatest geopolitical game that is going to have both a regional and global impact would be the tussle between the US and China in 10-20 years from now. Rivalry, competition, engagement will all roll into one and intensify. Teo characterized this as the Beijing Consensus versus the Washington Consensus. US and China will compete in all aspects from economy to the new space race and exploration and in different spheres that include Central Asia, Latin American, Africa etc.

The question and answer was first taken up by David Lim from Neptune Orient Lines (NOL). His question focused on why Tan was so sure that interest rates would rise. Tan’s reply was based on trends, and that it was only a matter of whether the interest rate hike would be gradual or face aggressive tightening. Some of the rationale for this was to dampen the housing boom in the US and also reactions to external stimuli including rising oil prices. However, within this tightening of interest rate, US will still continue to enjoy liquidity from Asia from the huge trade surpluses in East Asia’s trade with the US and high savings rate. China in this sense has an ace up its sleeves. If China was pushed too hard on certain issues by the US, it would use the threat of selling US treasury bonds to its advantage.

The second question was on how Joseph Tan saw the US dollar moving. Tan saw an aggressive movement in the US dollar. The currency of Asia Pacific is currently rising due to the fundamental weakness of the US dollar and the prevailing sentiments of selling dollar values. In connection with this, Tan felt that Asian currencies were grossly undervalued. He predicted the US dollar stabilizing at around US$1 to SGD1.55.

Sensing the absence of the EU mentioned in the speeches, an audience member posed the question of what Eric Teo thought of the EU’s role in the regional outlook. His reply was that Europe has a lot of soul-searching to do. Borrowing the German word of angst, Teo mentioned that it is likely that Europe is going through a lot of pain and hence would remain inward-looking in the near future.

Just as Europe was something missing from his presentation, Teo touched on another topic also missing from his discussion – Taiwan. The reason was because he felt that from his recent interactions with the Chinese, the latter had begun to consider Taiwan of more of a non-issue. Instead what were troubling the Chinese were Hongkong to a certain extent, but more importantly, the current and future state of relationship with Japan.

The next question from the audience was on North Korea and Myanmar’s impact on regional stability. The visit of Kim Jong Il to China indicated that China is able to play the North Korean card more and more effectively. Since the US and other strategic neighbors are focused on the issue, China is able to ensure that its interests are met, including not having South Korea becoming too aligned with US interests. Myanmar is another challenge for ASEAN but the initiative seems to be on the Myanmarese side now that they are able to play China and India against each other. In fact, Tan added that Myanmar is far less important to US interests than to ASEAN interests and this was perhaps why it is not a crucial question compared to the North Korean standoff.

David Lim posed his second question for the night. He was interested to know about Vietnam’s chances of entering into WTO soon, and its economic potential.. Joseph Tan opined that Vietnam has tremendous potential. The only thing that has held Vietnam back so long is the fact that they did not have a savvy negotiator at the WTO. Vietnam is starting to hold its ground. China is also another pull factor on Vietnam’s economy with the former’s focus on the Pearl River Delta Region. In some sectors, Tan also detected that the economy is growing at fast pace driven by domestic consumption and dynamic young Vietnamese entrepreneurs. While he saw Ho Chi Minh as one of the most successful story, he felt that Ho Chi Minh is now overcrowded and that it was time for investors to look at Hanoi and the bustling central Vietnamese city of Da Nang. Eric Teo added that Vietnam is more concerned with the social phenomenon (like China's growing unrests) than the propsects of its entry into WTO, which it basically thinks is already an acquis, though timing would be based on tough bargaining with the US. He also adds that China has recently built a fifth refinery in Vietnam as another example of Chinese involvement in the Indo-Chinese country.

Finally, the last question was posed by a member of Khattar Wong law firm. He asked about the price of gold. Joseph Tan pointed out the fundamental trend of continued appreciation as the value of gold is closely related to the US dollar and inflation. As another source of investment, value of gold is likely to increase with the threat of inflation and depreciation of US dollar.

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