Regional Outlook: Southeast Asia 2003-2004 9789812306609

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REGIONAL OUTLOOK Southeast Asia 2003–2004

© 2003 Institute of Southeast Asian Studies, Singapore

Institute of Southeast Asian Studies The Institute of Southeast Asian Studies was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the many-faceted issues and challenges of stability and security, economic development, and political and social change. The Institute’s research programmes are Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). The Institute is governed by a Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. An Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute’s chief academic and administrative officer.

REGIONAL OUTLOOK Southeast Asia 2003–2004 Editorial Committee Chairperson K. Kesavapany Editors Russell Heng Denis Hew Production Editor Roselie Ang Reproduced from Regional Outlook: Southeast Asia 2003-2004, edited by Russell Heng Hiang Khng and Denis Hew (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

REGIONAL OUTLOOK Southeast Asia 2003–2004

INSTITUTE OF SOUTHEAST ASIAN STUDIES

First published in Singapore in 2003 by Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Road Singapore 119614 Internet e-mail: [email protected] World Wide Web: http://bookshop.iseas.edu.sg All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior consent of the Institute of Southeast Asian Studies. © 2003 Institute of Southeast Asian Studies, Singapore

The responsibility for facts and opinions expressed in this publication rests exclusively with the contributors and their interpretations do not necessarily reflect the views or the policy of the Institute, or its supporters. ISEAS Library Cataloguing-in-Publication Data Regional outlook: Southeast Asia. 1992–1993– Annual 1. Asia, Southeastern. DS501 S720 1992 ISSN 0218-3056 ISBN 981-230-199-2 Typeset by International Typesetters Pte. Ltd. Printed in Singapore by Seng Lee Press Pte. Ltd.

© 2003 Institute of Southeast Asian Studies, Singapore

sls91-209988

CONTENTS Preface K. Kesavapany

vii

Introduction Russell Heng, Denis Hew

ix

I

POLITICAL OUTLOOK 2003–2004

1

The Asia-Pacific Geopolitical Landscape

2

n

The Terrorist Threat in Southeast Asia

n

Islam in Southeast Asia: At the Crossroads

The ASEAN-10

10

Brunei

10

Cambodia

12

Indonesia

15

Laos

18

Malaysia

21

n

II

Malaysia: Re-examining Malay Rights

Myanmar

26

Philippines

29

Singapore

32

Thailand

35

Vietnam

38

ECONOMIC OUTLOOK 2003–2004

43

Regional Economic Trends

44

n

The Economics of International Reserve Holdings by Developing Countries

The ASEAN-10

52

Brunei

52

Cambodia

53

Indonesia

55

© 2003 Institute of Southeast Asian Studies, Singapore

Laos

59

Malaysia

62

Myanmar

65

Philippines

69

Singapore

72

n

Singapore’s Free Trade Agreements: Implications for ASEAN and Future Challenges

n

The Singapore–Malaysia Water Issue: Trade-Off and Alternatives

Thailand n

82

Public Debt Management in Thailand

Vietnam

90

Selected Sources of Data

93

The Contributors

94

vi © 2003 Institute of Southeast Asian Studies, Singapore

PREFACE

R

egional Outlook was launched in 1992. Designed for the busy executive, professional, diplomat, journalist, and interested observer who face severe time constraints, this annual offers a succinct analysis of political and economic trends in the countries of Southeast Asia and the outlook for the forthcoming two years. In this endeavour, it is impossible not to be overtaken by events. An analysis such as this serves best when it indicates patterns of developments, offers some insight into unfolding dynamics, and puts its finger on emerging issues and areas of change. In this way Regional Outlook aims to provide the necessary background for the reader to interpret new information and data. The year 2002 was etched by the dynamics of post-11 September 2001 as the world watched how old strategic patterns were being reconfigured by that event. The uncertainties and anxieties are by no means over. The threat of terrorism dominates international discourse. Anti-terrorism sensitivities drive new strategic calculations. As 2002 moved into its final quarter, the prospect of the United States going to war with another Muslim country, Iraq, loomed heavily. Although an event occurring half-way round the world, the political and economic fallout would have implications for the security and stability of Southeast Asia. After an economic slowdown in most Southeast Asian countries in 2001, a moderate recovery is expected in 2002. A pick-up in exports since the first half of 2002 was further buoyed by an improvement in domestic demand. Significant progress has been made in financial and corporate restructuring. In recent years, the more developed Southeast Asian economies such as Singapore and Malaysia have also been seriously exploring new sources of growth which are more domestic-based, such as education and health-care services, as well as tourism and biotechnology. Regional economic recovery will be fragile because of external risk factors such as a possible war in the Middle East, a “double-dip” recession in the United States and faltering global demand for electronics and ICT products. Anxiety about losing foreign investment to China continues. In the light of these challenges, ASEAN needs to work towards greater regional integration. Singapore Prime Minister Goh Chok Tong has proposed that the Association be turned into a full-fledged ASEAN Economic Community by the year 2020. Regional Outlook 2003-2004 was written by a team from within the Institute and without. We thank Mely Caballero-Anthony, Derek da Cunha, Soedradjad Djiwandono, Nick J. Freeman, John Funston, Russell Heng Hiang Khng, Denis Hew, David Koh, Lee Hock Guan, Lee Poh Onn, Mohammad Chatib Basri, Mohamad Yusop bin Awang Damit, Rahul Sen, Ramkishen Rajan, Sakulrat Montreevat, Mya Than, K.S. Nathan, Ngiam Kee Jin, Aladdin Rillo, Sharon Siddique, Daljit Singh, Anthony L. Smith, and Tin Maung Maung Than for their contributions. We also thank Russell Heng Hiang Khng and Denis Hew for editing the volume. K. Kesavapany Director Institute of Southeast Asian Studies 15 November 2002

© 2003 Institute of Southeast Asian Studies, Singapore

INTRODUCTION

F

or Southeast Asia, the 11 September 2001 terrorist attacks in the United States continued to cast a long shadow throughout 2002. The terms “11 September” or “9/11” have entered popular language. The event and its aftermath have made terrorism the top security preoccupation in the region. The fear is that an Al Qaeda or Al Qaeda-affiliated network of terrorists may be operating in the region. The October 2002 bomb incident in Bali, Indonesia, dramatized the reality of the terrorist threat in the region even though the debate continues over who its perpetrators and their international linkages are. The escalation of terrorist activities threatens to dampen investors’ interest in the region. It also scares away tourists. These economic repercussions add to the domestic political problems of many regional countries. In those countries that are Muslim-dominated or have a sizeable Muslim minority, the terrorist-linked security climate poses a host of political challenges. The response to the U.S.-led campaign against international terrorism becomes a sensitive issue. Ongoing domestic debates over the interpretation and practice of Islam become more fraught with sensitivities. Apart from terrorism, governments in the region continue to face a whole range of issues related to good governance. For a few countries such as Cambodia, Indonesia, Malaysia, and the Philippines, election fever will rise as they face imminent elections in 2003, or at least no later than 2004. For some others where democratic elections are not a fact of political life, various forms of liberalization will continue. On the whole, no regime in the region faces any threat of total collapse. Other than the terrorist threat, economic performance will continue to be a major determinant of political stability. A modest economic rebound is expected for Southeast Asia in 2002, buoyed by improvements in export performance and domestic demand. The previous year was a very tough one for the region as economic growth significantly decelerated, dragged down by the downturn in the United States and the European Union. According to the International Monetary Fund’s (IMF’s) World Economic Outlook (September 2002), a U.S.-led global economic recovery is under way, reinforced by a pick-up in trade and production worldwide. Despite the economic recession and terrorist attacks in 2001, the U.S. economy has proven to be surprisingly resilient. The economic outlook for Southeast Asia for 2003 and 2004 is cautiously positive. Domestic demand should continue to strengthen over the next two years. However, if excess capacity and weak bank lending continue to persist, while progress made in corporate restructuring remains sluggish, then growth prospects may be limited. Furthermore, the ongoing economic revival in the region is extremely fragile owing to several external risks. These risks include a faltering U.S. economic recovery, military conflict in the Middle East, rising oil prices, and the prospect of global deflation. Amid all these uncertainties, policy-makers across Southeast Asia have also begun to re-examine their economic development strategies. The rapid economic growth experienced by the region during the last three decades was largely driven by foreign direct investments (FDI) from multinational corporations (MNCs) and export-oriented industries. This re-evaluation of economic strategies and policies would include seeking

© 2003 Institute of Southeast Asian Studies, Singapore

new sources of growth as well as developing domestic small and medium-sized enterprises (SMEs). Looking forward, should Southeast Asia worry over China’s rapid economic rise? China is now widely considered the country of choice for foreign investments, especially in manufacturing. Furthermore, China is currently the largest recipient of FDI flows in the Asia-Pacific region. In contrast, FDI inflows to Southeast Asia have remained fairly stagnant, and amounting to less than a third of China’s FDI. Unless external developments turn for the worse, the regional economies should rebound moderately in the next two years. However, prospects for Southeast Asia over the mid- to long-term will largely depend on how successful regional policy-makers are in restructuring their economies and meeting the competitive challenges ahead. Finally, we thank the authors and support staff who have made this volume possible. Russell Heng Hiang Khng Denis Hew Editors 15 November 2002

© 2003 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK 2003 –2004

POLITICAL OUTLOOK THE ASIA-PACIFIC GEOPOLITICAL LANDSCAPE By Daljit Singh

T

he Asian strategic environment will be shaped by the pre-eminence of U.S. power; the rise of new Asian powers, especially China, and their interaction with the United States; and the war against Al Qaeda and radicalized Islamic groups associated with it. For the near term, the last appears to be the most salient challenge because it poses a clear and present threat to the security and economic well-being of states and societies. East Asia looks set to enjoy a stability anchored in co-operative U.S.–China relations. However, North Korea may be the wild card in the pack. Its nuclear and missile programmes are particularly unsettling to Japan and South Korea and could lead to a major crisis in 2003, unless the nuclear genie can be put back into the bottle through diplomacy. In Southeast Asia, the main concerns will be terrorism, developments in Indonesia, and regional economic revival.

U.S. Expanded Military Presence

East Asia

2

A

s a result of the events of 11 September 2001, U.S. policies have become much more interventionist, as indicated by a new doctrine of pre-emptive strike against rogue states that seek to develop weapons of mass destruction and against Al Qaeda and Al Qaeda-linked terrorist groups in other countries. American military presence in Asia has expanded. U.S. forces now operate from bases in Central Asia, Afghanistan, and Pakistan, something that would have been almost unthinkable before 11 September. Deployments in Central Asia and Afghanistan are likely to continue for the longer term, both for strategic reasons and the promise of large oil and gas reserves in the region. The United States is developing closer military ties with India. In the Straits of Malacca, Indian naval ships provide escort for U.S. naval and commercial vessels carrying high-value cargo such as ammunition and fuel. This trend precedes 11 September but looks set to grow with converging strategic interests. In Southeast Asia, signs of U.S. security re-engagement include the expanded military co-operation with the Philippines and the recently concluded ASEAN–U.S. Joint Declaration for Co-operation to Combat Terrorism.

W

hile the threat of terrorism after 11 September has global dimensions, its impact on the East Asian power balance has been less than fundamental. Neither has it had any significant impact on the traditional East Asian trouble spots — the Korean peninsula, the Taiwan Straits and the South China Sea — with their potential for inter-state conflict involving one or more of the major powers. Reproduced from Regional Outlook: Southeast Asia 2003-2004, edited by Russell Heng Hiang Khng and Denis Hew (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

THE THEASEAN-10 SETTING

Stability in East Asia depends much on peaceful and stable relations among the United States, China and Japan, especially between the first two. The current relatively steady U.S.–China relationship will remain for some time because of imperatives on both sides to strengthen co-operation and reduce or manage areas of tension and potential conflict. A peaceful and stable international environment will enable China to concentrate more on its modernization programme and the domestic political risks that come with it. In a maturing foreign policy, Beijing seems to be coming to terms, at least for now, with a U.S.dominated world in which Sino–U.S. interests converge on many issues such as terrorism, arms proliferation, and the need for stability in volatile regions such as the Middle East and Korea. The United States, on its part, needs a good working relationship with China in order to concentrate on the war against terrorism. The actions of Taiwan’s leaders can be an unpredictable spoke in amicable Sino–U.S. ties. However, the United States, will restrain the island’s politicians from going too far in canvassing their desire for independence from China. The last thing Washington wants is a crisis in the Taiwan Straits when it has its hands full elsewhere. Signs of warming U.S.–China relations in 2002 included the U.S. decision to classify the Eastern Turkistan Islamic Movement as a terrorist organization, which China had sought; China’s issue of new regulations to restrict the export of missile technology to terroristlinked countries; the hosting of President Jiang Jemin at President George Bush’s Texas ranch; and indications that high-level military talks between the two countries may resume and military-to-military contacts expanded. However, Beijing also feels an increased sense of strategic vulnerability in the face of an increased U.S. military presence in territories adjacent to China. This is exacerbated by Russia’s apparent swing into the American and Western orbit, a development that undermines a central Chinese objective in the Shanghai Cooperation Organization, namely, to check dominant U.S. power through multipolarity. China as a rising power is likely to remain dissatisfied with the present status quo that favours the United States. Basically, U.S.–China relations will continue to be a mixture of co-operation/engagement and strategic competition. The other big East Asian player, Japan, will remain anchored in its alliance with the United States for the basic reason that it distrusts China. Notwithstanding their deepening economic relations, Sino-Japanese rivalry is a fact of international life and is more likely to intensify than ease off. Japan is still struggling to overcome its economic and political malaise. An economically robust Japan, with its financial and technological resources, can contribute significantly to the longer-term Asian power balance. On the other hand, a Japan that is seen to be feeble or on the decline will mean a disproportionate burden on the United States to balance the growing economic, political and military power of China. Historically, Japan has competed with China and Russia for influence on the Korean peninsula. Recent Japanese diplomacy, especially Prime Minister Junichiro Koizumi’s unexpected visit to Pyongyang in September 2002, is indicative of Japan’s desire to have influence on Korean developments at a time of prospective changes on the peninsula. The revelations about Pyongyang’s nuclear weapons programme can only serve to strengthen this desire.

3 © 2003 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

Southeast Asia

I

n Southeast Asia, the short-term outlook is problematic. The region has still not recovered fully from the economic and political wreckage left behind by the 1997 Asian financial crisis. The decline in foreign direct investment, much of which has been diverted to China, and the uncertain economic recovery in America cloud economic prospects in the region again. The October 2002 bomb blast in Bali, Indonesia, threatens to make already difficult economic circumstances worse by driving away tourists from the region and affecting investor confidence further. However, looking on the bright side, the Bali bombing may make Jakarta take firmer action on terrorist and extremist groups in Indonesia, and co-operate more closely with its ASEAN neighbours, the United States and Australia against the common threat. If this happens, Bali, despite the tragic loss of lives, may prove to be a turning point in the fortunes of Indonesia and Southeast Asia, resulting in a better security and economic climate. Southeast Asia is receiving more attention from the major powers. It is likely to see increasing strategic competition between China and Japan. At present, the advantage would seem to lie with China, given Japan’s economic and political infirmity. The Chinese proposal for a China–ASEAN Free Trade Area has a strong strategic motivation. Japan has countered this with its own proposal for a Closer Economic Partnership.

THE TERRORIST THREAT IN SOUTHEAST ASIA By Daljit Singh

T

he terrorist threat in Southeast Asia is more serious than it seemed a year ago. This is reflected in new arrests in the second half of 2002 of members of the clandestine Al Qaeda-linked organizations Jemaah Islamiah (JI) and Kumpulan Militan Malaysia (KMM) in Singapore and Malaysia respectively, as well as more terrorist incidents in Indonesia and the Philippines, including the Bali bombing in October. The JI, which aims to establish an Islamic state embracing Indonesia, Malaysia, Singapore, Brunei, southern Philippines, and southern Thailand, is an associate of Al Qaeda and has networks in most of these countries. While JI appears to be central to the terrorist agenda in Southeast Asia, both it and Al Qaeda have links with radical groups in the Philippines (such as the Abu Sayaaf and the Moro Islamic Liberation Front [MILF]), Malaysia (the KMM), and possibly also in Indonesia. Thus, a wide network of terrorist organizations with secret cells and support

4 © 2003 Institute of Southeast Asian Studies, Singapore

groups exists and its tentacles are still being uncovered by security agencies. Much of the network is still intact. According to terrorism expert Rohan Gunaratna, of the 400-600 Southeast Asians trained by Al Qaeda and its associate groups in camps in Afghanistan and Southeast Asia, no more than 100 had been arrested up to October 2002. Certain other sources estimate the number trained to be a few thousands. Furthermore, information gleaned from JI detainees shows that the terrorists seem willing to resort to any tactic to create conflict and chaos between and within states, which they can exploit for their own ends. For instance, it has come to light that JI members in Singapore and Johor were planning to incite violence between the ethnic communities in Singapore by bombing installations in Singapore and making it appear that the sabotage was carried out by Malaysian state agents.

THE THEASEAN-10 SETTING

In objective terms, the region is also becoming more important to the United States. The increased U.S. interest has so far been focused largely on the war against terrorism, the region being seen as a “second front” in the war. The war against terrorism has contributed to the strengthening of U.S. co-operation with Malaysia, the Philippines, and Singapore. It could also lead to stronger co-operation with Indonesia. More recently, there are signs that U.S. interest is broadening to encompass stronger economic relations. At the Asia–Pacific Economic Co-operation (APEC) meeting in Mexico in October 2002, the United States held out the prospect of bilateral Free Trade Agreements with the countries of the Association of Southeast Asian Nations (ASEAN) that followed a road-map leading to greater transparency in their regulations, protection for intellectual property, and other desirables spelt out in Trade and Investment Framework Agreements that the United States already has with some countries. Significantly, on the sidelines of the informal APEC leaders meeting at the same venue, President Bush met separately with the leaders of the seven ASEAN countries that are members of APEC. It was only the second time that a U.S. President had chosen to meet ASEAN leaders as a group, the first being in 1984 at the height of the Cold War. However, owing to the weakness of ASEAN, it is left to be seen if Southeast Asia will be able take full advantage of the opportunities in the courtship by the major powers.

Terrorist incidents in Southeast Asia may increase in 2003. After the setbacks suffered in Afghanistan, Al Qaeda appears to have dispersed and decentralized under new leaders. It seems to have ordered more attacks worldwide to demonstrate to both enemies and followers that it is far from finished. These attacks may extend to softer targets, as the Bali bombing showed. Furthermore, it may have given affiliates such as JI and KMM, the freedom to mount their own attacks. Archipelagic Southeast Asia is a relatively comfortable operating theatre for the terrorists compared with the Middle East where the governments have been much harsher on them. This is particularly so in the case of Indonesia, in view of its democratic space, weak governance, and poor law enforcement. However, the threat from the terrorist organizations has to be seen in proper perspective. Several hundred trained terrorists, or even a few thousands, scattered

across Southeast Asia probably do not constitute a threat as serious as that posed by communist insurgents in the region during the Cold War years. They do not have powerful external state supporters as the communists had. They have no capacity directly to bring down by force of arms the government in any Southeast Asian country that they plan to incorporate into their scheme of a pan-Islamic state. The states of Southeast Asia, including even the Indonesian state, which is arguably the weakest in the region, have much greater power and resources at their disposal. Apart from this, most of the Muslims in these countries are moderates. More attacks could also expose the terrorist groups to more arrests, and, in the case of Indonesia, risk turning the government and the moderate Muslim majority strongly against them and extremists. The terrorists do have the capacity to engender perceptions of instability and violence and, in the

5 © 2003 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

THE TERRORIST THREAT IN SOUTHEAST ASIA (continued)

process, adversely affect the tourist industry and investor confidence, but realistically, their hope for success in any country can only be based on the radicalization of a Muslim-majority population. They can hope to bring this about in the medium and longer-term if they can create a vicious circle of instability and economic decline (by staging terrorist incidents and fostering ethnic or religious strife) that will ultimately discredit the state apparatus. A relatively weak state such as Indonesia, with its multi-faceted problems, will be vulnerable to such a vicious cycle and can for that reason be a prime target. Inappropriate state responses, such as undue militarization of the anti-terrorism fight, excessive use of force against civilians, and general political and administrative ineptitude can greatly assist the terrorist cause. The anti-terrorism war in Southeast Asia is largely an intelligence, police, and political/ propaganda war. A key task for the governments is to retain and strengthen support from the moderate Muslim majorities. Indeed, the future of the terrorist threat in Southeast Asia depends much upon what happens in Indonesia, apart from the global fortunes of Al Qaeda. It is the world’s largest Muslim country with a population of more than 200 million. A radicalization of Indonesia because of worsening socio-economic problems will have grave implications not only for Southeast Asia but also the global anti-terror war. On the other hand, sustained appropriate action by the Indonesian Government against terrorist and extremist elements, in close co-operation with its ASEAN neighbours and other friendly powers that have the necessary anti-terrorist expertise, will send a strong positive signal to investors that the terrorist problem is on the mend. Whether the Bali bombings will galvanize the Indonesian authorities to take such action remains to be seen, given the reluctance of political leaders to be tough on Islamists as the elections of 2004 approach, and the weaknesses of the security services.

6 © 2003 Institute of Southeast Asian Studies, Singapore

Most Southeast Asian states have been co-operating closely with the United States in the anti-terror war, and principally out of their own national interest. This is particularly so in the case of Malaysia, Singapore, and the Philippines. The perceived threat from domestic terrorist groups gives them a strong motivation to cooperate with the United States against Al Qaeda and to obtain U.S. support. In the Philippines, the United States has worked out arrangements for the deployment of U.S. special forces in a way that would benefit the Philippine armed forces without inciting too much nationalist antiAmerican sentiments. The United States also has intelligence exchanges with Indonesia and there have been instances of effective co-operation in apprehending some foreign Al Qaeda operatives based in Indonesia. In July 2002, the ASEAN–US Joint Declaration for Co-operation to Combat International Terrorism was signed. Its primary purpose seems to be to allow the ASEAN governments that have domestic political constraints to act more firmly against their own terrorist and extremist elements in the name of an ASEAN agreement, and if necessary, seek U.S. assistance. Indonesia has been promised aid by the United States to upgrade its anti-terrorist capabilities. U.S. policies in the Middle East continue to pose dilemmas to Southeast Asian states with significant Muslim populations. Many Muslims in Southeast Asia consider the U.S. stance in the Israeli–Palestinian conflict to be blatantly pro-Israel. It has become almost an endemic source of anti-American feeling that extremists exploit. A U.S. military attack on Iraq will also arouse anti-American feelings among sections of Muslim communities and pose some problems for Southeast Asian governments with large Muslim populations. While most of the governments affected are likely to manage the problem relatively easily, especially if the war is a quick and decisive one, extremist groups in Indonesia would have the opportunity to test the country’s fledging democracy even more.

THE THEASEAN-10 SETTING

ISLAM IN SOUTHEAST ASIA: AT THE CROSSROADS By Sharon Siddique

S

ince the 11 September 2001 terrorist attacks in the United States, a media blitz on terrorism has generally portrayed the world’s one billion Muslims as increasingly homogenous, uncompromising, and radicalized. These post-11 September pundits, who have only recently discovered the Muslim world, ignore historical contexts, ethnic complexities, social motivations, and national aspirations. This is unfortunate because it is certainly not how most Southeast Asian Muslims perceive their faith, or their future. Of course, there have been unsettling revelations about the Al Qaeda network in Southeast Asia being staffed and serviced by local Muslims. However, it is not tenable to argue that there has been a fundamental shift towards radicalism in all Muslim communities throughout the region in just one year. The violence that grabs headlines is perpetrated by a very small minority. Compromise and tolerance still remain the operative mode for Southeast Asian Muslims. Places in the regions where there are conflicts involving Muslims should not be reduced to a simplistic explanation that it is driven by an Islamic internationale. What is involved are usually complex, long-standing, and often not strictly religious issues. For example, ethnicity also plays a large role in the struggles in Aceh and the Southern Philippines. That said, the media spotlight on the global Muslim ummah (community) has found some resonance with Muslims in Southeast Asia, who are members of this ummah. But one year after 11 September, another trend is emerging. There appears to be a revival of interest in exploring the uniqueness of the region’s religious heritage. This revival has, in part, been catalyzed by negative media coverage, in part by a more general desire to reconnect with the past.

A deeper knowledge of Islam’s past in the region may help to lessen the misgivings about the present. Take the following hypothetical news report. The reader is asked to guess the location, and the date, of the described event: Radical Islamist, Peto Syarif bin Pandito Bayanuddin, has been captured by the authorities. According to a government spokesman, his arrest will herald the final chapter of his violent, bloody, Wahabist-inspired rebellion. Introduced to the Wahabist doctrine during a pilgrimage to Mecca over thirty years ago, he has advocated a purist, fundamentalist Islamic reform of Minangkabau society, thus pitting himself against the local traditional elite, as well as the central government. Place: West Sumatra. Correct? Correct. Time: Sept. 2002, Correct? Wrong. Time: Sept. 1837

The incident did occur in West Sumatra, but exactly 165 years ago. Peto Syarif was the birth name of the famous Tuanku Imam Bonjol (1772–1864), who was the leader of the Padri Rebellion (1821–38). He was captured by the Dutch in 1837, and died in exile in Minahasa in 1864. On a pilgrimage to Mecca in 1803, he was so impressed with the strict Wahabi governance of the Holy City that he returned to West Sumatra, determined to reform Minangkabau society, and free it from colonial rule. It is useful to place Imam Bonjol in some historical context. He embarked on his mission well before Raffles even set foot in Singapore. In 1837, the United States was still ten years away from discovering gold in California, and twenty-four years from the outbreak of the American Civil War. Today, Imam Bonjo is revered as a great Indonesian freedom fighter, and national hero.

7 © 2003 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

ISLAM IN SOUTHEAST ASIA: AT THE CROSSROADS (continued)

There are three lessons that we can draw from this example, which highlights just how long and complex the region’s encounter with Islam really is. •

•

•

Southeast Asian Islam has received reformist impulses from the Middle East for centuries — the current situation has clear historical precedents. Many such reform movements were led by charismatic local leaders who studied in Muslim centres of learning in the Middle East and South Asia. Again, there are parallels with the present. Finally, these impulses have enriched, but never supplanted, the Southeast Asian ethnic, social, and cultural contexts.

Southeast Asia has nurtured the great world religious traditions of Hinduism, Buddhism, Islam, and Christianity. Significantly, these religions, and many more, still coexist in relative peace and harmony. This is largely because religion was rarely brought with the sword. Forced conversion was the exception rather than the rule. Instead, the adoption of new cultural and religious influences was linked to the expansion of trade. Charismatic leaders have always been a feature of Southeast Asian life. The Sufi quest for an insan kamil (a perfect man) has a rich history in the region. Many charismatic Muslim leaders during the colonial period were referred to as ratu adil (just king), which was a Hindu concept transferred to Islamic reformers. These anti-colonial leaders, like Imam Bonjol, were named as national heroes after independence, and Indonesian school-children are very familiar with their stories. The interesting phenomenon to note is that the men who were advocating these ideas were seeking to reform their own societies, rather than to

8 © 2003 Institute of Southeast Asian Studies, Singapore

transform them into replicas of the Middle Eastern societies. Thus, Southeast Asian Muslims recognize a past that is distinctly regional, although it is also a part of the larger canvas of Muslim history. This Muslim world of Southeast Asia was profoundly affected by colonialism. The tale of Imam Bonjol is a case in point. Colonialism also facilitated the globalization of Islam because Sufi missionaries travelled freely throughout the British empire. An example was Maulana Abdul Aleem Siddiqui (born in Northern India in the late nineteenth century) who founded various missionary centres in South Africa, Singapore, British Malaya, Mauritius, and Canada. The Malauna and other early twentieth century reformers also focused on the need to bring Islam back into the historical mainstream. These reformers argued that it was possible to embrace modernity — in the form of science and technology — without accepting Western cultural values. Much discussion was devoted to harmonizing modernity and Islam, and to making a clear distinction between Westernization and modernization. These reformist initiatives were often connected to progressive Muslim traders, who funded publications that they themselves contributed to. This Muslim world’s engagement with the West has never been hegemonic. There is an Islamist theocratic, messianic, vision that rejects the possibility of accommodation with the forces of (Western-led) globalization. As such, Islamists have little to contribute to the struggle to fashion appropriate development models for the Muslim world in the twenty-first century. There are those who accept the possibility of accommodation with the West and, among them, is a diversity of views rather than a belief in a single, pan-Islamic development model.

THE THEASEAN-10 SETTING

Muslims have begun consciously to fashion development models within their own cultural spheres, and at the same time, establish working relationships with other players in the game of global development. Accommodation is something with which Southeast Asians have a long experience. In addition, trade and commerce, cornerstones of twenty-first century globalism, are familiar territory to Southeast Asian Muslims. The events of 11 September have placed the diversity in sharp focus. The U.S.-led “war on terrorism” has continued this process. In Southeast Asia, three broad groupings of Muslim opinion have emerged immediately since the 11 September tragedy: • • •

Vocal critics of U.S. foreign policy Staunch supporters of America The silent majority, who are waiting

It is becoming apparent that the spotlight on the Muslim world — including the Muslim world of Southeast Asia — will not quickly dim. How heavy will the American military intervention be

in regions that the U.S. government deems to be infiltrated with terrorists? Which countries and which groups will be identified as harbouring terrorists? Which countries will become involved, and on which side of the conflict? Equally important, will violence and terrorist attacks perpetrated by Muslim extremist organizations increase, and with what consequences? Southeast Asian Muslims are caught at the crossroads. From the perspective of the silent majority, support for the U.S.-led campaign against terrorism weighs on the one hand, while sympathy for Muslims facing the American action counterbalances on the other. How Muslim public opinion eventually swings depends on America’s response to the attacks on its people and resources — that is, how far it decides to take the “war on terrorism”. This depends on how much Muslim extremists are able to escalate the violence. Southeast Asia’s Muslims have successfully weathered similar storms in their long history. Therefore, one can be bullish on their ability to weather this one.

9 © 2003 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

THE ASEAN-10 Mohamad Yusop bin Awang Damit • Tin Maung Maung Than • Anthony L. Smith • Russell Heng • K.S. Nathan • Mely Caballero-Anthony • Derek da Cunha • John Funston • David Koh

Brunei

10

S

ome events in 2002 indicate that Brunei is turning yet another page on a few thorny political issues of recent years and moving on to deal with the future afresh. In August 2002, two ministers for the portfolios of Development and Health and three deputy ministers for the portfolios of Finance, Home Affairs, and Education respectively took office. In a break from tradition, these new members were sworn in rather than just appointed, as was the case with the 1984 Cabinet established in the wake of Brunei’s independence from Britain and the 1986 Cabinet reshuffle. The Sultan personally presided over the swearing-in ceremony. The Sultan, who is also the Prime Minister, appoints the Cabinet. The swearing-in was more than a ceremonial act. The Sultan, as the executive head of the State, added solemnity to the process, signalling that in the years to come, he is not only seeking full loyalty from the ministers but is also determined to drop any one of them for poor performance. The Health and Development portfolios had not been formally filled since the incumbents were removed in 1998 and 2001 respectively. These two ministerial changes built on the political curiosity first aroused when the Sultan replaced his brother Prince Jefri Bolkiah as Finance Minister in 1997. In the following year, the usually placid Brunei political scene witnessed the removal of the Health Minister and the Law Minister. Since then, the Law Ministry has been absorbed into the Prime Minister’s Office. It was also in 1998 that the Amedeo Development Corporation, owned by Prince Jefri, collapsed and incurred huge losses alleged to be diverted state funds. When the Amedeo scandal broke out, the sultanate was already looking to revamp its 1959 constitution, suspended since 1962 for internal security reasons. A high-powered committee was appointed in 1996 to review the constitution with a view to introducing a semi-elected Legislative Council. The long delay in new Cabinet appointments have fuelled speculations that the sultanate might proceed more forcefully with political reforms as part of the constitution review process. However, with the new ministers installed and no details released yet by the constitution review committee, it does seem that Brunei has decided for the moment not to carry out any political experimentation. This puts an end to the tentativeness and expectation of recent years. Another indication in 2002 of the desire to close the Amedeo chapter is the abolishing of the official Task Force to investigate the Amedeo Corporation. Pehin Abdul Aziz, who chaired the Task Force, remains as the Chairman of Global Evergreen, a company set up by the government to buy all the Amedeo’s debts from its creditors. Brunei has learnt a painful lesson from the Amedeo crisis; however, the sultanate seems to have emerged from it stronger.

Reproduced from Regional Outlook: Southeast Asia 2003-2004, edited by Russell Heng Hiang Khng and Denis Hew (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

THE ASEAN-10

Brunei Land Area:

5,765 sq. km.

Population:

332,884 (unofficial estimate from 2001 census)

Capital:

Bandar Seri Begawan

Type of Government:

Monarchical system

Head of State:

Sultan Haji Hassanal Bolkiah Mu’izzaddin Waddaulah

Currency Used:

Brunei dollar

US$ Exchange Rate on 15 November 2002:

US$1 = B$1.76

Although much of the Amedeo scandal has been laid to rest by the firm initiative of the government, the political after-effects will continue to be felt in the years ahead. People have become more vocal in criticizing issues that affect them most. This is manifest in the media and on the Internet. The authorities have become more tolerant of such expressions, which play an important part as a safety valve and to gauge public opinion. Another avenue by which the authorities seek to engage public opinion is through the village leadership system. The newly appointed Deputy Minister of Home Affairs, Dato Adanan, has been busy holding dialogues with village headmen and Penghulu, urging them to be more proactive in executing their duties as grass-roots leaders. The headmen and Penghulu are elected through secret ballot but approval for their candidature and appointment has to be sanctioned by the government. Thus, they are more often seen as representing government interests rather than acting as the people’s representatives. As a result, the Village Consultative Committee set up by the authorities to discuss matters affecting the people at the village level has failed to become the people’s assembly and a channel of public opinion to the government. In the immediate years ahead, the government will continue to seek ways to enhance dialogue and consultation with the citizenry but a level of political caution will prevail to ensure that public criticisms do not get out of control. The introduction of a new law in 2001 on the registration of newspapers is an example of that caution. Given this cautious mood, Brunei is unlikely to be holding elections in the immediate years ahead. Hence, the country’s two overtly active political parties will not make any headway. Both parties suffer from poor leadership, have unclear objectives, and scarcely attract sufficient members. The Parti Perpaduan Kebangsaan Brunei (PPKB, or Brunei National Solidarity Party), founded in 1986, has less than one hundred active members and

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the resignation of its secretary general in 2002 will not improve their plight. The other party, Parti Kesedaran Rakyat (PAKAR, or People’s Awareness Party) was founded in 2001 by some former civil servants. It has not been able to take off because it could not get enough supporters. Growing public criticisms notwithstanding, there is still insufficient pressure to force the pace of political change. Under the leadership of the Sultan, who is known as the “Working Monarch”, there has been improvement in the people’s standard of living. He takes a personal interest in the welfare of his people, which earns him the accolade of the “Caring Monarch”. The people are able to communicate directly with him by sending petitions, thus bypassing the bureaucrats. When some of these complaints come to his notice, the Sultan responds in various ways, which include asking the responsible ministries or departments to attend to them. Alternatively, he pays surprise visits to ascertain the workings of the ministries, departments, or any institutions that serve the public. The Sultan will continue with this personalized approach. This will serve to keep civil servants always on their toes and have contributed to the rise in civil service efficiency in recent years. Surprising political changes are unlikely. Occasionally, there may be minor events, such as the comings and goings of ministers and top civil servants. The profile of the Crown Prince, Pengiran Muda Al-Muhtadee Billah, will rise as he takes on more public engagements. Despite the lack of formal avenues for political expressions, Brunei has been spared the political and social upheavals experienced by a few countries in the region. A stable government and a strong economy are the main factors underlying the peaceful situation. The economy remains strong owing to the stable price of oil and gas, the mainstay of the economy. The government recognizes the urgency to diversify the economy and lessen its dependence on the oil and gas industry. Unemployment will remain the number one concern, particularly when few opportunities are available for employment for the young and educated people outside a government-driven economy. In foreign policy, Brunei will continue to place great store by its ASEAN membership. Like the rest of the region, there is a concern with the threat of terrorism. Unlike its neighbours, Brunei has been spared the problems of Islamic extremist activities. The calm of the sultanate will probably remain undisturbed. Nevertheless, the authorities are stepping up border patrol and weeding out illegal workers to ensure that the volatility of the country’s neighbours do not spill over into its territory.

Cambodia

C

ambodia will hold a general election in 2003. Going by recent trends in domestic politics, the outcome is likely to see a continued domination of Prime Minister Hun Sen and his Cambodian People’s Party (CPP) over the body politic. At the same time, its rival, the FUNCINPEC (National United Front for an Independent, Neutral, Peaceful and Co-operative Cambodia) led by Prince Ranariddh (President of the National Assembly and son of King Sihanouk) will continue to be mired in its own in-fighting. Notwithstanding the mutual rivalry and distrust, the FUNCINPEC is part of the coalition government led by the CPP.

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The waning electoral fortune of the FUNCINPEC was seen during the 2001 commune elections for local government. The party’s share of the popular votes, compared with its performance at the 1998 general election, showed a decline in contrast with the impressive rising trend for the CPP. The decline of electoral support for the FUNCINPEC placed it only marginally ahead of the SRP (Sam Rainsy Party), a prominent opposition party. In fact, the SRP ended up with thirteen of the elected commune chief positions, which was more than the ten won by the FUNCINPEC. Thus, for the 2003 general election, the FUNCINPEC may lose its position as the foremost rival to the CPP. Disputes continue to plague the FUNCINPEC and have led to the resignation of the party’s Minister of Interior in May 2002 from the coalition government. Another indication of the divisions in this royalist-led party is the formation of the (Prince) Norodom Chakrapong Khmer Soul Party (NCPK). Another dissident faction of the FUNCINPEC, led by Hang Dara, formed the Hang Dara Movement Democracy Party in June 2002. In August 2002, a CPP-sponsored amendment to the Election Law has changed the National Election Committee (NEC) and raised concern among the opposition parties that the changes would favour the CPP. The five (previously eleven) members of the new NEC has to be selected by the Ministry of Interior and approved by a simple majority in the Parliament, which the CPP dominates. However, Cambodia’s democracy does have to satisfy the country’s Western aid donors and premier Hun Sen has suggested that the European Union (EU) send election monitors. This will not guarantee pristine behaviour from the CPP but it can serve as a check against any blatant attempt to influence the outcome in its favour. Another difficult political problem to resolve is the royal succession. The ailing 79-yearold King Sihanouk is said to have expressed concerns over the lack of an operating code for the Throne Council in the event of his demise. Critics note that the CPP holds a clear majority in the nine-member council. No successor to the king has been clearly identified yet. Prince Ranariddh says that both he and the king’s brother Prince Sirivudh (SecretaryGeneral of FUNCINPEC) do not wish to contend for the throne. Instead, Prince Ranariddh supports his half-brother Prince Norodom Sihamoni (Ambassador to UNESCO) for the succession. Another prince, the maverick Chakrapong, has joined the foray by suggesting that the king should be chosen by popular vote. This drew a sharp rebuke from Hun Sen. It appears that the royal succession issue will continue to complicate the political calculus of Cambodia until and unless a clear and acceptable (to the royalty as well as the polity) procedural code is legislated. Cambodia will have to continue managing its relationship with Western governments and international agencies to ensure a sustaining level of foreign aid that the country needs. This revolves round three major issues: the contentious Khmer Rouge trials, donor disenchantment with poor governance, and the oft-delayed military demobilization exercise. The longstanding dispute between the Cambodian Government and the United Nations (UN) on putting former Khmer Rouge leaders on trial for genocide will not see any quick resolution. The Khmer Rouge is accused of killing millions of Cambodians when it ruled the country from 1975 to 1979. Apparently, both the UN and Western countries do not believe the CPP leadership wants to bring senior Khmer Rouge leaders to trial because of its own

13 © 2003 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

Cambodia Land Area:

181,040 sq. km.

Population:

12.5 million (2002 estimate)

Capital:

Phnom Penh

Type of Government:

Parliamentary democracy with constitutional monarch

Head of State:

King Norodom Sihanouk

Prime Minister:

Hun Sen

Next Election:

27 July 2003 (national)

Currency Used:

Riel

US$ Exchange Rate on 15 November 2002:

US$1 = 3,829 riel

progeny from the Khmer Rouge. In February 2002, the UN withdrew from negotiations on the prospective trial procedures with the Cambodian Government, which had earlier invited the UN to help draw up the trial legislation. The Hun Sen government has shown some willingness to prosecute Khmer Rouge field commanders for specific crimes, such as the 1994 kidnapping of foreign tourists, but whether it would prosecute top leaders such as former Foreign Minister Ieng Sary, “Brother No. 2” Noun Chea, and former head of state Khieu Samphan remains to be seen. As Cambodian social and economic problems fester alongside a fractious ineffectual political system, foreign donors will continue to mount pressure on the government to speed up the economic, legal, and judicial reforms to tackle inefficiency, corruption, and social problems. The World Bank country director has warned that unless significant progress is made in reforms, the current level of donor support cannot be maintained. Security and stability in Cambodia will continue to be endangered by the large number of soldiers waiting to be demobilized since the UN-funded exercise began in 2000. Most of the 15,000 demobilized troops have yet to receive the UN-sponsored severance package (worth up to US$1,500 each) reportedly because of logistic problems with the suppliers. In July 2002, senior defence officials said that the second phase of the demobilization programme would be delayed, given the delivery problems of Phase I. In early September, Hun Sen accused the World Bank of withholding its promised assistance (some US$18 million), warning that unless the UN paid up he would stop the demobilization process. The UN spokesman denied holding up the funds and instead put the blame on the Cambodian side.

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This squabbling does not bode well for the demobilization effort and may lead to the loss of momentum and disenchantment on the donor’s side as well as the erosion of the government’s political will as dissent mounts among the affected soldiers. Cambodia’s relations with its neighbours have improved recently as more border gates with Thailand and Vietnam were opened. The Vietnam–Cambodia border, however, will continue to be the focus of political sensitivities in Phnom Penh and Hanoi. On the Cambodia side, the CPP leaders will continue to have to balance longstanding grass-root anti-Vietnam sentiments with their close personal relationship with Vietnam’s leaders dating back to when they were ideological allies. This dilemma is made more acute by the popular Cambodian belief that the Vietnamese frequently encroach on their territory. On the Vietnamese side, there is a concern that Cambodia is a sanctuary for elements such as disgruntled ethnic minorities from Vietnam and anti-communist overseas-Vietnamese. The 2002 resettlement in the United States of Hmong refugees against Vietnam’s wishes (Vietnam earlier sought their repatriation) is a case in point. The situation is made more complex by the need for Cambodia to heed the Western governments’ human rights concerns with regard to resolving refugee issues. Both Phnom Penh and Hanoi will not want to make too much out of the Hmong issue and will move on, but Cambodian leaders will have to continuously assure Vietnam that they will not support anti-Hanoi elements. In May 2002, following a visit to Vietnam by the Cambodian Deputy Premier Sa Kheng, Phnom Penh made such a pledge. In July 2002, the Phnom Penh government warned that it would take firm measures against a newly formed U.S.-based anti-Vietnamese movement called the Kampuchea Krom Liberation Front. Viewed in its totality, Cambodia will continue to be a volatile place. The period leading to the 2003 election may be marred by violence and confrontation, given the festering dissent among the ex-soldiers and the populist tactics of some opposition parties to highlight issues such as border disputes with Vietnam, illegal logging, internal displacement, (alleged) state-sanctioned violence, and poverty. Reports of secret arms caches and the presence of 110,000 factionalized and poorly-paid soldiers are a cause for concern, raising the spectre that the polling may entail violence.

I

t is a truism to say that Indonesia remains in a deep political and economic crisis, and has never fully recovered from the serious impact of the 1997 Asian financial crisis. The October 2002 bomb blast in Bali that killed close to 200 people has raised serious concerns about Indonesia’s ability to contain the threat of terrorism. Furthermore, President Megawati Soekarnoputri’s leadership is now assessed by most commentators to be uninspired. Despite hopes after her selection as President, raised in particular by the 2001 announcement of a strong Cabinet (or the “Dream Team” as it was dubbed) comprising technocratic and multi-partisan elements, expectations of what the Megawati government can achieve have been lowered once again. The military’s power within Indonesia has not dissipated in spite of the decision that they will relinquish all seats in the Lower House (DPR) of Parliament at the 2004 elections. Nevertheless, there are bright spots in the economy, and

Indonesia

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POLITICAL OUTLOOK

constitutional reform will help sort out some of the political ambiguities that have hitherto beset the Indonesian political system. Members of Indonesia’s political élite are now preparing themselves for the 2004 general election, yet much uncertainty remains about the composition of the parties that will ultimately contest. Indonesia’s bleak economic situation has some positive indicators. For 2002, economic growth may be 3 per cent, domestic demand is up, the budget deficit is only 2.5 per cent, and inflation is under control. However, failure to make significant headway into the wider economic problems of the banking industry, and general indebtedness, has led to calls for a Cabinet reshuffle. In August 2002, the faction head of Megawati’s own party, the Indonesian Democracy Party-Struggle (PDI-P), Roy B.B. Janis, publicly demanded a reshuffle (although this was opposed by the Vice-President and others from smaller parties who stand to lose from a clean-out of the Executive). Speculation has been rife that certain Cabinet ministers may be in trouble, including: Co-ordinating Economics Minister, Dorodjatun Kuntjoro-Jakti, who may be made a scapegoat for the general economic malaise; Minister of Religious Affairs, H. Said Agil Munawar, who attracted ridicule for claiming that an ancient prophesy had shown him where he could find enough treasure in the ground to pay government debts; and Cabinet Secretary, Bambang Kesowo, who has been accused by PDI-P members of restricting access to the President. In August 2002, the Upper House (MPR) of Parliament made some important constitutional amendments. This included, inter alia, a direct two-round presidential election, the creation of a Constitutional Court to interpret the Constitution, and changing the nature of the MPR to include the Regional Parliament (alongside the Lower House members). This gives Indonesia a more orthodox presidential system, rather than the eclectic mixture of presidential and parliamentary systems that it had before. Based on the results of the 1999 election, no one presidential candidate is expected to win fifty plus one per cent of the votes, and a second round will be necessary. Barring the unexpected, the second round will feature Megawati against one other candidate. The 2004 election results may see votes cast according to sectoral interests, determined by habitual religious, ideological, or institutional affiliations. No single leader or group has electoral appeal that transcends this segmentation. Indonesia’s political parties are mostly fractured, with Megawati’s PDI-P being the most stable at present. The Muslim parties have all split on grounds of politics and/or personality, and some realignment may well occur before the next election. An attempt by the National Mandate Party (PAN) leader, Amien Rais, to re-forge a Muslim alliance, like the one that denied Megawati the presidency in 1999, has not come to much — nor is it likely to, given the divisions evident among the Muslim-based political parties. It would seem highly unlikely that the National Awakening Party (PKB), for example, will co-operate with Rais after his pivotal role in removing Abdurrahman Wahid as President. Vice-President, Hamzah Haz, has emerged as the other potential challenger to Megawati. Haz for some time has attempted to undermine Megawati by using the events surrounding the 11 September terrorist attacks in the United States to his advantage. He was very critical of the war on terrorism, and poured scorn on attempts to investigate those suspected of links to Al Qaeda in Indonesia. He publicly courted such extremist elements as Ja’far Umar Thalib (Laskar Jihad) and Abu Bakar Ba’asyir (Jemaah Islamiyah). Haz’s flirtation with extremists is

16 © 2003 Institute of Southeast Asian Studies, Singapore

THE ASEAN-10

Indonesia Land Area:

1,919,443 sq. km.

Population:

225 million (July 2000 estimate)

Capital:

Jakarta

Type of Government:

Presidential; based on the 1945 Constitution

Head of State:

President Megawati Soekarnoputri

Next Election:

June 2004 (parliamentary) November 2004 (presidential)

Currency Used:

Rupiah

US$ Exchange Rate on 15 November 2002:

US$1 = 9,022.5 rupiah

now his greatest weakness. In particular, the bomb blast in Bali has forced Haz to renounce his links to Ba’asyir. During 2002, more mainstream Muslim groups denounced the radical fringe, and the terrorist attack in Bali has strengthened the moderate cause and dramatically brought home the nature of the threat. Indonesia’s Cabinet quickly cited Al Qaeda as the culprit for the blast. Laskar Jihad has now been disbanded, and the government has acted quickly to tighten anti-terrorist legislation. In terms of the role of political Islam, the prospect of Indonesia becoming an Islamic society does not seem realistic. While Rais and a number of other Muslim leaders do not support the implementation of the “Jakarta Charter” (referring to a proposed amendment to the Constitution that specifies that Muslims must obey Shariah), Haz promotes this cause. However, during the 2002 MPR session, the Jakarta Charter was withdrawn when it could not gain the support needed, even among Muslim parliamentarians (at least a third of parliamentarians must agree for an amendment to be considered). The issue of an Islamic state in Indonesia is thus a non-starter regardless of who wins the presidency in the 2004 elections. Democracy has capped the ability of the political élite to engage in the type of corruption seen with the Soeharto family. However, corruption and patronage are still serious issues within Indonesia. Aid money still experiences “leakage”, while regional autonomy revenues have also been shown to have disappeared at an alarming rate. The light sentence of three years for Akbar Tandjung, Golkar leader and speaker of the DPR (currently appealing his sentence for embezzling Rp40 billion) and Tommy Soeharto’s thirteen-year jail term,

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POLITICAL OUTLOOK

represent hesitant steps forward. Akbar’s failure to resign as House Speaker is an ongoing political embarrassment. The power of the military remains a feature of life in Indonesia, with no headway made (nor likely in the short term) in dismantling the military’s business empire or the territorial system of parallel administration throughout Indonesia. Although the military have voluntarily renounced their allocated seats in Parliament, there is nothing to stop them running for office in the House of Regional Representatives (DPD). Megawati has broken with the intention of her predecessor to rotate the Commander-in-Chief of the military between the service branches. In June 2002, General Endriartono Sutarto assumed leadership of the military, re-establishing the pre-eminence of the army within the military. Both Endriartono and new army chief, Lieutenant General Ryamizard Ryacudu, are considered hawks and will seek to pursue a tougher stance against separatism. The ad hoc trials for human rights abuses in East Timor were never expected to yield results, which again represents the military’s strength. That said, the military seem content to give political space to the civilian leadership, and there is little prospect of a return to military rule. The issue of the military continues to dog relations between Indonesia and the United States. The Bush Administration had considered re-establishing military-to-military links before 11 September, and the terrorist attacks have provided the impetus to move forward. The White House will try to steer this through Congress. Already, U.S. aid has gone to the Indonesian police. U.S. officials have commented that the Indonesian Government is increasingly showing co-operation in investigating Al Qaeda-linked cells (given a new impetus by the Bali bombing) — even though the Indonesian Government had initially preferred not to accept such reports and then refused to acquiesce to foreign criticisms. The Megawati administration, like its predecessors, continues to view ASEAN as crucial to its foreign policy. A serious dispute has emerged between Indonesia and Malaysia over the issue of Indonesian workers in Malaysia. Anti-Malaysian sentiments were very evident in 2002, especially within the political élite; however, this should not upset broader intraASEAN relations. Megawati’s government has not undertaken the drastic changes needed to reform the Indonesian economy, and the President has revealed herself to be a cautious administrator. By virtue of having the largest party in Indonesia, Megawati does bring a measure of stability into the political system. Positioning themselves for the 2004 general election, various political parties have begun campaigning in earnest. The 1999 election was largely driven by prominent personalities, none of whom really campaigned on policy platforms beyond vague references to the theme of reformasi. The 2004 elections will see the same pattern emerging, with some minor fluctuations in voting behaviour.

Laos

I

n 2003, Laos is expected to benefit from a new National Assembly elected in February 2002. Why should there be any special anticipation for this set of elected lawmakers? For a start, they were voted in with unusual haste. As the official

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explanation went, the February 2002 election was brought forward by ten months so that the new slate of Assembly members could get down quickly to the business of legislating the 2001 Party Congress socio-economic recommendations into proper laws. Party Congress here refers to that quinquennial big meeting where the ruling communist party, the Lao People’s Revolutionary Party (LPRP), set down new policy directions. In normal democratic parlance, the hurried National Assembly polls would have been called a snap election but Laos, being a socialist republic, the reality is less exuberant. Calling an early election was not meant to be an exercise in democratic dynamism. It is more in keeping with the LPRP’s own logic of political reforms. In recent years, the LPRP leadership has worked to give the country’s National Assembly a bigger role in running the country. Therefore, much public effort is expended on advertising the electoral process as a determined effort to find a new generation of capable well-qualified leaders. Indeed, going by the contestants for the election, the National Assembly will be delivering a more erudite level of debating. At a glance, the new Assembly has experienced quite a turnover in personnel. About half of the lawmakers of the previous Assembly did not run for re-election. In the new chamber, the average age has dropped a good ten years to 51 years old. About 63 per cent of the elected members now have tertiary education. These features point to an injection of new, younger and better-qualified manpower into the country’s political establishment. A sterling example of this new breed of Lao politicians is Deputy Foreign Minister Bounkeut Sangsomsak, who has degrees from the Sorbonne in Paris and Georgetown University in the United States. Trouble-shooting of policies will be sharper and more learned. However, do not hold your breath in anticipation of a brave new Laos in 2003 surprising everybody with a bout of forceful, enlightened reformist lawmaking. The National Assembly is not up to solving the many issues of bad governance in this socialist republic. Any hard-headed Laos observer would know that the country’s National Assembly is a rubber-stamping body. At best, it has become, in recent years in the name of the LPRP’s liberal reforms, a venue where corruption, bureaucracy, and official ineptitude get a public airing. However, this is an officially-endorsed and managed public face of the real politics hidden in the inner sanctum of the LPRP. Hence, for the immediate years ahead, we can expect the old paradigms of politics to be maintained. The established élites based on revolutionary, ideological, and military credentials will still hold the reins of power in the party. The habits of power will change but only slowly. There are other reasons why change will be slow. Given the nature of Laos, with a small population scattered over a large land area, poverty can easily be held at a subsistence level. Only a small quantum of foreign aid is needed to keep the country running and this can usually be mobilized, thus allowing the LPRP more leeway to muddle through. All these factors contribute to a longstanding lack of urgency for far-reaching reforms. One prominent problem that will preoccupy policy-makers is the slide in value of the kip in 2002. Another issue needing attention is the divestment of money-losing state-owned enterprises in order to satisfy international aid agencies. As of now and into the foreseeable future, senior leaders will speak in unison about their commitment to liberal market reforms when addressing economic problems. However, progress will be piecemeal, and the outcomes

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POLITICAL OUTLOOK

Laos Land Area:

236,800 sq. km.

Population:

5.7 million (2002 estimate)

Capital:

Vientiane

Type of Government:

Socialist Republic

Head of State:

General Khamtay Siphandone

Party Secretary:

General Khamtay Siphandone

Prime Minister:

Bounnyang Vorachit

Next Election:

2006 (Communist Party Congress) 2007 (National Assembly)

Currency Used:

Kip

US$ Exchange Rate on 15 November 2002:

US$1 = 10,770 kip

are likely to depend on how strongly entrenched vested interests within the political élite negotiate decisions on a case-by-case basis. Tackling corruption will also be high on the agenda but the bold political measures needed to weed out this problem are not likely to happen. The external strategic environment for Laos will remain relatively unchanged. Its three large neighbours — Vietnam, China and Thailand — will continue to play dominant roles in the country’s economic and political affairs. Vietnam will continue to occupy its position as Laos’ closest ideological ally, given the deep and long relationship between the leaders of both countries. The cornerstone of this tight relationship is Vietnam’s willingness to underwrite the security of the LPRP regime, protecting it from any challenge to its legitimacy. This may give the impression that the regime faces many grave threats. In fact, it does not. The perennial insurgency troubles faced by the LPRP, while not disappearing altogether, is not expected to grow notably. Thus, security tensions in Laos will be at a low level. In the aftermath of the 11 September terrorist attacks and the global anxiety over terrorism perpetuated by Islamic extremists, Laos may in fact stand out as a relatively peaceful haven. Vietnam’s influence in Laos will continue to contend with those of China and Thailand. As Yunnan, the southern Chinese province bordering Laos, pushes ahead with its plan to be

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a regional powerhouse in that part of the world, Chinese economic presence will become more visible, particularly in northern Laos. Vietnam has been stepping up its economic activities in Laos but does not have the resources to match those of Thailand or China. In the coming years, China’s economic presence in Laos may overtake that of so far pre-eminent Thailand. However, Thailand will retain its dominant cultural influence by means of the linguistic similarity it shares with Laos. Thai lifestyles and values purveyed by television programmes and other cultural products find a receptive market in Laos. As much as the Lao people relish this, they also resent it. This old love–hate factor will continue to be an irritant in Thai–Lao relations. The LPRP leadership will continue to be irked by Lao dissidents seeking refuge in Thailand, with the latter seeming unwilling or unable to return them to Laos. Laos is also unhappy with the big deficit in Thai–Lao border trade. However, looking at the situation as a whole, none of these problems are great enough to threaten the stability of Laos, and its leadership will not be particularly driven to alter the country’s relationship with Thailand in any fundamental way. The dynamics of the immediate future are likely to consolidate a trend whereby all these three big neighbours of Laos — Vietnam, China and Thailand — will enjoy pre-eminence in its own field of political, economic, and cultural influence respectively. Laos’ leaders will continue to maintain this balance of foreign interests to preserve the country’s independence. Managing competitive levels of strategic influence is not the only preoccupation of the political leaderships in Laos, Vietnam, China, and Thailand. There is a need for all of them to come to grips with a growing drug menace in this part of the world. Laos itself is a source of and a conduit for drugs, in the course of which, it has also witnessed a growing drug problem among its own people. The issue of drugs smuggling is also related to that of growing criminal activities and corruption. These are serious social problems that may not be related to conventional issues of security but can be just as destabilizing.

G

iven Prime Minister Mahathir Mohamad’s statement in 2002 that he will be retiring, the focus of attention in 2003 will be on the evolving dynamics of a post-Mahathir political landscape. Speculation has grown over who exactly will fill his very big shoes. Having nominated his deputy, Abdullah Badawi, as his successor, Mahathir himself has indicated a preference for Najib Tun Razak, one of three vice-presidents, as Badawi’s deputy. Najib is the current Defence Minister and son of the second Prime Minister of Malaysia. Yet, the succession formula remains unclear as Mahathir is firmly in the saddle, and could be asked to stay on by his party, the United Malays National Organization (UMNO), as well as by other leaders of the UMNO-led Barisan Nasional (BN) coalition should the political-economic situation by mid-2003 require his continued stewardship. Mahathir’s decision to leave politics shocked and dismayed his colleagues, and key members of the Cabinet were instrumental in coaxing him to stay on and attend to unfinished business that none of them wished to handle immediately. After much

Malaysia

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persuasion, Mahathir relented, and will remain in office until the Organization of Islamic Conference summit meeting in October 2003. He is likely to call an election in early 2003 well before his retirement to ensure a two-thirds majority in Parliament for the BN and to enable his deputy to take over leadership in an environment marked by political stability and economic growth. A resounding BN victory in the next general election will underscore the basic tenets of Mahathirism: multiracial coexistence without threatening Malay political predominance, a moderate and progressive Islam in contrast to Parti Islam SeMalaysia’s (PAS) conservative and arguably regressive Islam, and economic growth based on equity and partnership both internal (between Malays and non-Malays) and external (between Malaysia and its major trading partners, such as the United States, Japan and Singapore). Electoral performances by the BN in 2002 give Mahathir cause for confidence. The BN’s commanding strength in East Malaysia was reflected by the resounding victory in the Gaya parliamentary by-election on 13 October 2002. Preceding this were election victories in Perlis (state seat of Idera Kayangan, January 2002) and Kedah (Pendang parliamentary seat, July 2002), all of which were indicative of the success of Mahathir’s efforts to re-engineer UMNO and revitalize the BN. The ongoing leadership struggle between two rival factions within the Malaysian Chinese Association, a component party of the BN, seems to have made little or no mark on the BN’s political performance. The issue relating to the arrest and detention of Mahathir’s one-time ally and now political foe,

Malaysia Land Area:

330,434 sq. km.

Population:

24 million (2002 estimate)

Capital:

Kuala Lumpur

Type of Government:

Federated parliamentary democracy with constitutional monarch

Head of State:

Yang di-Pertuan Agong Tuanku Syed Sirajuddin Syed Putra Jamalullail

Prime Minister:

Dato’ Seri Dr Mahathir bin Mohamad

Next Election:

By November 2004

Currency Used:

Ringgit (RM)

US$ Exchange Rate on 15 November 2002:

US$1 = RM3.8

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Anwar Ibrahim, is being pushed further into the background by security concerns after 11 September 2001. PAS will continue to be the main political challenge to UMNO. Although PAS has had its credibility somewhat dented by the 11 September incident, one year on, the party is adopting a more assertive stand against the Mahathir government’s claim that the Kumpulan Mujahidin Malaysia (KMM) and Jemaah Islamiah (JI) are fronts for Al Qaeda militancy in Malaysia and Southeast Asia. In disputing this contention as well as the arrest of suspected militants, PAS is calculating that public sympathy for the U.S.-led war against global terror (which PAS claims to be a war against Muslim countries) has begun to wane, with Muslim support for PAS being strengthened by American policies on Israel–Palestine and Iraq. PAS is also experiencing its own internal problems. The death of the relatively moderate PAS president, Fadzil Noor, on 23 June 2002 has not been helpful to the party’s political fortunes, as his successor, Abdul Hadi Awang, is reputed for his assertive brand of religious fundamentalism and determination to make Malaysia an Islamic state. It was this uncompromising stand that caused the collapse of the Barisan Alternatif (BA), a coalition of several opposition parties. In September 2001, the Chinese-based Democratic Action Party withdrew from the BA on the grounds that PAS’s religious agenda conflicted with the secular Malaysian Constitution. Since then, opposition politics have remained weak and fractured amidst a systematic consolidation of power by the BN. For example, the Parti Bersatu Sabah (PBS), a component party of the BN prior to the 1990 general election, rejoined the BN in January 2002 after a twelve-year period in opposition. The return of the PBS to the BN fold helped the ruling coalition to win the Gaya by-election in Sabah with an overwhelming majority. The year 2003 will see the implementation of the controversial policy to have all schools teach science and mathematics in English for students attending the first grade of primary, secondary, and upper secondary schools. This move has raised a storm of protests from very diverse segments of Malaysian society not normally allied with each other. A Malay language lobby fears that the increased use of English would undermine the pre-eminence of Malay as the national language, used by all the races. Lobbies in Chinese and Tamil schools argue that more English will lower the proficiency of the languages they are teaching. For the government, some grim economic realities drive its determination to upgrade English proficiency. This international language is the key to the professional and technical expertise that is needed for the country to compete with the world and prosper. The high level of unemployment among Malay Malaysians, most of whom hold degrees and diplomas in Islamic studies — a qualification not highly sought on the job market — has raised official concern over the value of over-emphasizing religious studies in the education system. Additionally, the lack of English proficiency, especially among Malays, is having the effect of reducing their economic opportunities in the job market. Official figures released in April 2002 indicate that of the 44,000 unemployed university graduates, 90 per cent were ethnic Malay, largely because of their poor English language skills. In its foreign relations, the major challenge since 11 September is for Malaysia to balance its desire to co-operate with the United States in the fight against international

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terrorism with domestic sensitivities about U.S. policy in the Middle-East. The political challenge from the opposition PAS complicates matters but is unlikely to force Mahathir into backing down from the current policy of being part of an international effort to fight terrorism, even if it puts Malaysia on the same side as the United States. This is evident from the Malaysian Government’s willingness to deport Ahmed Ibrahim Bilal, a U.S. citizen studying at the International Islamic University Malaysia, and its readiness to co-operate with U.S. authorities within the framework of the bilateral anti-terrorism pact signed during Mahathir’s visit to Washington in May 2002. The 12 October 2002 terrorist bombings in Bali, which claimed nearly 200 lives, will make it even harder for PAS to discredit Mahathir’s readiness to take action against Islamic militants suspected of abetting international terrorism. Malaysia’s relations with its neighbours — Singapore, Indonesia, and the Philippines — did undergo some strain in the latter part of 2002. While Malaysia–Singapore relations remain generally good and cordial, they continue to be affected by the yet unresolved package of issues, with water as its main problem. The delinking of the issue of water from the rest of the package (Malayan Railway land, pension funds of Malaysian workers, bridge to replace the Causeway, and use of Malaysian airspace by Singapore’s air force), raises questions pertaining to future pricing arrangements for the supply of raw water from Malaysia and treated water from Singapore. Despite the lack of progress, both governments have found a common basis to co-operate in the war on global terror, manifested by the arrests of scores of suspected Jemaah Islamiah (JI) militants on both sides of the Causeway. Nevertheless, the negotiations on water are likely to be complex and protracted although both premiers, Mahathir and Goh Chok Tong, in their 8 October 2002 meeting in Kuala Lumpur, have expressed a desire to end the stalemate as soon as possible. Relations with Jakarta and Manila were affected by Kuala Lumpur’s decision to address the issue of foreign labour by deporting illegal immigrants — many from Indonesia and the Philippines — in July 2002, with penalties including caning and jail sentences for those caught violating immigration laws. Of the estimated two million foreign workers in the country, only 750,000 are legally registered, with Indonesians comprising over 80 per cent of the illegal portion. This decision led to a massive outflow of foreign labour, with dire consequences especially for the construction and manufacturing industries which rely heavily on such cheap foreign labour. The government was subsequently obliged to relax restrictions two weeks later to facilitate the readmission of Indonesian workers. Given the role of the construction sector (accounting for 4 per cent of gross domestic product [GDP]) in the government’s pump-priming efforts to stimulate the economy, Kuala Lumpur can be expected to adopt a more sober view of the Malaysian economy’s massive dependence on illegal labour, besides the need to ameliorate diplomatic tensions with the sources of supply, Indonesia and the Philippines.

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MALAYSIA: RE-EXAMINING MALAY SPECIAL RIGHTS By Lee Hock Guan

A

n interesting phenomenon is raising its profile in Malaysia. After being held as a sacred cow for three decades, the policy of special rights for the Malays is facing growing criticisms from the Malays themselves. This policy is embedded in the country’s New Economy Policy (NEP), which states that bumiputras — Malays and other indigenous communities of the country — have special rights because of their special position as the original owners of the country. Under the NEP, ethnic quotas and government assistance give indigenous communities easier access to education, the professions, investment, and business opportunities. This policy has traditionally created disgruntlement among the country’s non-indigenous communities, but economic realities are forcing the Malays themselves to take note of its negative side-effects for the economy as a whole as well as for the Malay community. By tackling inequality in society in terms of ethnicity rather than class, the NEP has closed the gap between the Malay and Chinese communities. Ethnic quota policies have successfully lifted the socioeconomic status of Malays, created a noticeable Malay middle class, and raised the number of Malay entrepreneurs. However, the same policies have also sown the seeds for other problems that are beginning to catch up with the country. The 1997 financial crisis and the 1998 split within UMNO, the ruling coalition’s Malay party, have sharpened the focus on these shortcomings of the NEP. Malaysia’s political leadership will have to address this developmental dilemma that threatens to hobble overall economic growth as well as undermine Malay solidarity. UMNO’s concern with this issue is partly driven by how it can affect the party’s electoral fortunes. State-initiated efforts to expand privatization and create a Malay corporate class in the 1990s resulted in a growing concentration of wealth in the hands of

politically well-connected Malay individuals. In the 1990s, socio- economic disparity between rich and poor Malays had grown to an extent as to cause class friction within the community and weaken its solidarity. Malay resentment against the Malay corporate class worsened in the aftermath of the 1997 financial crisis when the latter were bailed out by the state with huge public resources. While supporters of the bailouts rationalized this action in terms of preserving the community’s share of the wealth, Malay critics viewed it as abusing the special rights policy to benefit and protect the rich and politically-favoured Malays at the expense of the suffering Malay majority. Charges of political cronyism levelled against UMNO gained wide support and weakened the party’s traditional image as the protector and benefactor of the ordinary Malay. The end result was a decline in Malay support for the party in the 1999 general election. A broader concern is that the existing manner of using special rights to increase and promote Malay participation in education and the economy may have the undesirable effect of weakening both the Malays’ and the country’s economic competitiveness. A certain segment of the Malay middle class has argued that their community has become complacent and developed a “subsidy mentality” because the special rights reinforce the idea that something is owed to the Malays. Prime Minister Mahathir Mohamad has also expressed similar views. While ethnic quotas have helped to raise Malay participation in the economy and education, they have also instilled a mentality among the beneficiaries that they do not have to try too hard to do well. The fear is that this stymies their will and ability to compete in a globalized economy. Where admission to tertiary institutions is concerned, ethnic quotas have led to a situation where

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MALAYSIA: RE-EXAMINING MALAY SPECIAL RIGHTS (continued)

human resource development is not optimized. Wellqualified Malays are usually given scholarships to study abroad, thus leaving local universities with the bulk of Malay students who are admitted on lowered entry qualifications. This situation has led to an undesirable reality where employers are reluctant to hire Malay graduates from local universities. Partly due to the ethnic quota system, the country is now facing a shortage of skilled labour because over the years many nonMalays who went to study overseas did not return. Skilled labour has become more important as Malaysia has to move up the value-added chain to become competitive and plans to become a knowledge economy. Thus, a policy that continues to favour Malays does not always serve the government’s larger economic vision to put Malaysia on the fast-track to developed country status. In the corporate sector, when politically wellconnected Malays are awarded most of the investment and business opportunities, it does not necessarily translate into enhancing the community’s economic competitiveness, a weakness that was exposed by the 1997 financial crisis. While the whole business sector was badly affected by the crisis, Malay businesses were less resilient largely because they were too dependent on state largesse.

Myanmar

B

Thus is the dilemma shaped for policy-makers if they want to tackle the problems head-on in the immediate years ahead. Abolishing the special rights policy is out of the question because a majority of Malays, including the political élite, still want it. However, continuing with this policy does not augur well for the economy as a whole. Efforts will have to be made to modify the policy to ensure that Malay beneficiaries in business and education are better candidates who will deliver a higher level of performance. However, policy revisions will continue to take place within certain given parameters. In the business sector, the effort to cultivate new capable Malay entrepreneurs and professionals should not reverse the goal of increasing the Malays’ share of the wealth. In the education sector, efforts to improve the quality of graduates may include modifying the university admission system but not to the extent of reducing the number of Malay students drastically. Thus, Mahathir’s dilemma before he retires is how to introduce measures to improve Malay economic competitiveness in the long run but without further eroding his party’s Malay support in the short run. This will also be a sensitive political issue that his successor has to manage.

arring any unforeseen change in plans, come May 2003, the Myanmar Government would have had a year of living with the de facto opposition leader Aung San Suu Kyi being released from house arrest. How the country’s leaders came to terms with this experience has become a barometer of political reforms in the country. Based on what has happened in 2002, the prognosis for a political agreement between the opposition and the government has to be a cautious one because the gap between the positions on both sides remains visible. As with most things in Myanmar, observers are equally expectant and dismissive of anything substantive emerging from the current situation. From the optimist’s perspective, it is a reasonable claim that the government, in releasing Aung San Suu Kyi, is prepared to

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suffer a certain level of political activism on her part, something which was unacceptable before. In the months following her release, Aung San Suu Kyi made several unprecedented visits to aid projects sponsored by non-governmental organizations (NGOs) and her party — the National League for Democracy or NLD — offices in Yangon and its environs, as well as three trips to other towns and cities. She was allowed to meet the visiting foreign ministers from Japan and Australia. Meanwhile, dozens of NLD activists and other dissidents have been released from prisons in batches and more NLD offices (virtually all closed down during the 1998–2000 period) were allowed to re-open. On her part, Aung San Suu Kyi has repeatedly promised that she would be flexible and willing to “co-operate” with the government for the good of the polity. For sceptics, the release of prisoners was still too little and too slow, with hundreds of “political prisoners”, including key NLD leaders, remaining in prison, and the re-opened NLD offices constituting only a small fraction (about 10 per cent by mid-2002) of the total that closed down. As for the “freedom” accorded to Aung San Suu Kyi, the regime’s critics contended that it was cosmetic and pointed to the cancellation of her scheduled August meeting with visiting Malaysian Prime Minister Dr Mahathir Mohamad as evidence. Furthermore, no further “dialogue” (reportedly started in October 2001) between Aung San Suu Kyi and the government has taken place, with various government representatives indicating that they were in no hurry to resume the secret talks. General Khin Nyunt, Secretary-1 of the ruling State Peace and Development Council (SPDC) was reported to have said in mid-August 2002 that “a transition [to democracy] cannot be done in haste”. However, to Aung San Suu Kyi, “change could not come fast enough” and she could not accept the military’s notion that democracy “if not tackled properly” could become anarchy. Thus, she holds a position still at odds with the ruling junta’s road map for political transition. Nevertheless, if neither side does anything dramatic to up the ante, the present reconciliatory mood may last a while. Domestic politics in 2003 will hinge on how both sides will manage this less acrimonious impasse and use it to their advantage. The outlook for the resumption of substantive dialogue appears to be positive, as reflected in the “cautious optimism” of Aung San Suu Kyi, although it is unlikely to be soon. Parties representing the country’s restive ethnic minorities have also called for the dialogue to be expanded to include them in a “tripartite” format, but the government is disinclined to do that. It will take a while for the ethnic issue to be included in the reconciliation agenda even if talks were to resume. As it is, the reconciliation talks face a long and bumpy road ahead. In the midst of reconciliation politics, the ruling SPDC junta conducted a promotion exercise in September 2002. The junta vice-chair and army chief General Maung Aye was reportedly promoted to a newly-created rank of Vice Senior General. Secretary-1 and military intelligence chief Khin Nyunt was upgraded from Lieutenant-General to General. Ten junta members who had relinquished their regional commands in November 2001 became Lieutenant-Generals. Many more command and staff positions are also expected to be upgraded in rank. These promotions are seen as a response to two key political events. One was the release of Aung San Suu Kyi. The other was the foiled coup attempt by the clan of the former leader U Ne Win. In the wake of these incidents, the junta probably feels the need to ensure corporate loyalty within the military leadership. Again, one can end up with

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a positive or a cynical reading. Those seeing the positive side believe that the promotions will help to ensure unity and stability at a time when the country is carrying out a difficult experiment with returning to democracy. For the cynics, these are just tactics to consolidate the military’s grip on power and to enhance the top leader’s authority. Foreign affairs for Myanmar will continue to be dominated by its testy relations with Thailand and contention with the West over democracy and human rights. A crisis with Thailand erupted in May 2002 that apparently diverted much of the junta’s attention and resources from the political reconciliation process although it appeared to have no lasting consequences for the government–opposition dialogue per se. Myanmar–Thai border tensions began when forces of the Shan United Revolutionary Army (SURA) overran border outposts and the Myanmar Government claimed that these rebels received artillery support from the Thai side. Despite Thai denials, this border incident developed into an angry exchange of words between the media and leaders of both countries. Myanmar unilaterally closed down border checkpoints, resulting in huge losses of income for Thai merchants. Myanmar held mass rallies across the country condemning the SURA as well as their Thai supporters. Bilateral relations sank to the lowest point when Thailand vehemently objected to the alleged insult of the Thai monarchy by the Myanmar media. The mood improved when the Thai Army chief, who was seen as confrontational towards Myanmar, was promoted out of the command and the Thai authorities cracked down on Myanmar dissidents on its soil. With an exchange of visits by the foreign ministers of both countries, the tension appears to have been defused. Relations further improved with the opening, in mid-October 2002, of the major border crossing point at Myawaddy/Mae Sot. However, Myanmar’s sensitivity to perceived

Myanmar Land Area:

678,675 sq. km.

Population:

51 million (mid-2001 estimate)

Capital:

Yangon

Type of Government:

Military

Head of State:

Chairman of the State Peace and Development Council, Senior General Than Shwe

Currency Used:

Kyat

US$ Exchange Rate on 15 November 2002:

US$1 = 6.36 kyats US$1 = 1,055 kyats (parallel market rate)

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affronts by the highly-independent Thai media, academics and opposition politicians can still lead to further “misunderstandings” as long as the border remains undemarcated, narcotics continue to flow into Thailand, ethnic rebels maintain their presence on the border, and trafficking of illegal Myanmar workers persists. Accusations of human rights abuses will continue to bedevil the junta. In June 2002, ethnic-Shan non-governmental organizations (NGOs) released a damning report. Citing 173 cases of sexual violence in the Shan State during the period 1996-2001, it alleged that rape was “officially condoned as a ‘weapon of war’ against the civilian population in Shan State” and that victims who complained were frequently “fined, detained, tortured or even killed by the military”. With the Thai and Western media highlighting the allegations, American politicians condemned the Myanmar Government and called for punitive measures. The U.S. State Department also revealed that it had raised these concerns with the Myanmar Government. The latter denied this categorically, saying that its own fact-finding missions to the area concerned found no evidence supporting the accusations. The government believed that the allegations were fabrications used by the “drug-trafficking [Shan] terrorist insurgents” in a “desperate” attempt to gain political points. Nevertheless, this rape issue is likely to linger into 2003, given that the anti-regime lobbies in the West are determined to have their governments press the issue in Yangon. Although the NGOs and activists are expected to keep up their pressure for the international community to isolate and boycott Myanmar, such advocacy has lost some of its bite as many Western governments and multinationals are waiting to see where the positive political developments of recent months will lead to. Given that Aung San Suu Kyi has said that she would leave the sanctions issue to the discretion of the concerned governments, it is unlikely that more punitive measures would be introduced short of a complete collapse of the secret talks. For the year 2003, the international community will be preoccupied with monitoring how the reconciliation is making progress. Some form of humanitarian aid tacitly approved by Aung San Suu Kyi is likely to be forthcoming within a year or so to redress the so-called “humanitarian crisis” in Myanmar. Following Dr Mahathir’s visit to Yangon, closer economic and technical co-operation with Malaysia is expected in the near future.

A

fter two years of Gloria Macapagal-Arroyo’s presidency, the Philippines appears more confident in meeting current and future challenges head-on. In spite of several setbacks, Arroyo’s administration has chalked up an encouraging list of achievements. She has made some gains in jump-starting the Power Sector Reform Law that would lower the cost of electricity. Agricultural funding and health insurance are reaching out to more people. Land tenure for the urban poor has been introduced. Consumer price inflation is controlled at a low of 3 per cent. A couple of country-wide surveys taken earlier in the year showed that 55 per cent of the respondents are satisfied with the President’s performance — her highest net satisfaction rating since she took office in January 2001. Therefore, it seems reasonable to say that the outlook is positive for the Philippines.

Philippines

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Philippines Land Area:

300,000 sq. km.

Population:

76,504,877 (2002 official statistic)

Capital:

Manila

Type of Government:

Presidential democracy

Head of State:

President Gloria Macapagal-Arroyo

Next Election:

May 2004 (national and local)

Currency Used:

Peso

US$ Exchange Rate on 15 November 2002:

US$1 = 53.38 peso

In the nature of the Philippines’ rambunctious democracy, the Arroyo presidency is likely to run into political challenges but it has a relatively sound record of defusing such crises. The administration survived its loss of the Senate majority in June 2002 as well as two high-level resignations: Teofisto Guingona, Secretary for Foreign Affairs (who also happened to be the Vice-President of the Philippines), and Raul Roco, Secretary of Education. Deft handling of the political deadlock in the Senate resulted in two opposition senators switching sides. The appointment of an opposition senator as the new Foreign Secretary also strengthens the Arroyo administration. The quick resolution to the political challenges has increased the chances of the current leadership to remain in power until the next presidential and congressional elections in 2004. Despite the optimistic outlook, some destabilizing snags are possible. One of these is the implementation of the new internal security campaign. This campaign seeks to streamline the operations between the Armed Forces of the Philippines (AFP) and the Philippine National Police (PNP). This will require, among other things, the modernizing of the armed forces’ doctrine to deal with new and unconventional threats to national security. These new threats include illegal drugs and terrorism. The Arroyo administration has adopted a “total offensive” approach that combines socio-economic programmes with military/police operations to fight communist insurgents, extremist groups, criminal syndicates, and economic saboteurs. President Arroyo has taken a personal interest in pushing such efforts along and in September 2002, she declared that she would personally take full strategic control of the internal security campaign. So far the campaign has had mixed results. Through the government’s Anti-Crime Task Force, rampant incidents of kidnapping have been on the decline. The capture of criminal

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elements and drug-trafficking syndicates has received full media coverage and offenders have been publicly shamed. However, the government’s tough stance on criminals has drawn diverse public reactions. On the one hand, there is relief that the administration is finally getting its act together in combating crime. On the other, there is disquiet over what is perceived as an official preference for strong-arm military tactics to address internal security matters. Public disquiet with this “militaristic” approach is most visible in the responses to the government’s efforts to tackle the problem of Muslim separatists in the southern Philippines. The problem with the Muslim separatist groups — the Moro National Liberation Front (MNLF) and the Moro Islamic Liberation Front (MILF) — is complicated by the atrocities committed by the militant Abu Sayyaf Group (ASG) that is reported to have links with the Al Qaeda terrorist network. The ASG is on the U.S. list of terrorist organizations and was responsible for kidnapping and murdering Filipinos and foreign tourists both in and outside the country. Manila has taken advantage of the U.S.-led global war on terrorism to boost its antiterrorist efforts at home. U.S. troops headed for the war in Afghanistan are allowed to be based at their former Clark Air Base and Subic Naval Base in the Philippines. In return, Washington has pledged to grant Manila US$100 million in development aid and another US$55 million for the country’s anti-terrorism campaign. Working within the framework of bilateral military training exercises, U.S. soldiers not only took part in joint training exercises with their Filipino counterparts but also helped to pursue members of the ASG in the southern Philippines. The deployment of American troops on Philippine territory has become controversial. While it has helped to rescue an American kidnap victim in June 2002, this did not result in more dead or captured terrorists. More significantly, there is a growing unease that the continuing involvement of American troops in fighting local terrorist groups will endanger the prospects of the fragile peace talks between the government and the MNLF/MILF. These Muslim separatist groups regard the past and present administrations in Manila as lacking sincerity in seeking a political solution. A military offensive against the MILF in July 2000 scuttled the realization of the 1996 Peace Agreement. Against this background of distrust, the Philippines–U.S. military exercises on counter-terrorism have raised the suspicion of the MNLF and MILF that these joint operations were directed not only at the ASG but also at them. Closely related to this is the problem of communist-inspired insurgency. The New People’s Army (NPA) of the Communist Party of the Philippines (CPP) remains a serious security threat. The CPP/NPA has always accused Manila of being a “puppet” of America and has branded the bilateral counter-terrorism exercises as a “Trojan Horse” to allow a U.S. military presence back into the Philippines. Moreover, the U.S. announcement that the CPP/ NPA is a terrorist organization has heightened the latter’s resentment and caused it to threaten to destroy American installations in the country. A debate on the planned U.S. military strike on Iraq has added a new dimension to the problems. The country’s open support for the U.S. position has earned the President severe criticisms on several fronts so that the Arroyo administration has had to revise its stance

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several times. Its most recent pronouncement was that the Philippines would consider allowing American planes to use its air space only “for humanitarian purposes”, and only if the UN Security Council supports the U.S. action. Apart from the concern about the Philippines’ close alliance with the United States, the more pressing issue is the tremendous impact that the war will have on the 1.4 million documented Filipinos working overseas in the Middle East. Repatriating the overseas workers in the event of a war will cost the Philippine Government an estimated US$162 million. The remittances from the overseas workers make up 10 per cent of the country’s gross domestic product (GDP). There is also concern about the war’s impact on oil supply because the country imports most of its oil supplies for manufacturing and other major industries. A displacement of Filipino workers in the Middle East will jeopardize the tentative recovery of the country’s economy. The depressed labour market will not be able to absorb the millions of repatriated workers. One of the many consequences of this scenario will be a surge of displaced workers into the neighbouring ASEAN states. This can strain Manila’s relations with these countries. As it is, Philippine–Malaysia relations have been aggravated by the repatriation of hundreds of illegal workers from the East Malaysian state of Sabah. This has led to charges that the Malaysian authorities treated them inhumanly. Against this background of unhappiness, Manila has revived the Philippine claim to Sabah. The Arroyo administration faces the task of managing these differences with Malaysia. In her 2002 State of the Nation address, Arroyo has pledged to build a “strong republic”. In the light of these challenges, her administration will have a difficult task ahead to make sure her vision does not get derailed.

Singapore

T

he 11 September 2001 terrorist attacks in New York and Washington D.C. had an impact on Singapore during 2002, an impact that is expected to continue to be felt in the city-state in the years ahead. In January 2002, the Singapore Government announced the arrest of thirteen Muslims (most of whom were Singaporeans) belonging to a then unknown group, Jemaah Islamiah (JI). That group is alleged to be linked to Osama bin Laden’s Al Qaeda network. The thirteen, who were arrested in December 2001 were held under Singapore’s Internal Security Act, which allows for indefinite detention without trial. The thirteen were accused of plotting to bomb American and other Western interests, including diplomatic missions, in the island-republic. The discovery of the plot shocked Singaporeans, but a greater shock followed in September 2002 when the Singapore authorities announced that twenty-one Muslim Singaporeans had been arrested in the previous month. According to the authorities, the second group of detainees had intended to attack key Singapore installations, such as its international airport and the pipes carrying water between Malaysia and Singapore. The apparent aim was to cast suspicion on Malaysia, causing animosity, and possible conflict, between Chinese-dominated Singapore and Malaydominated Malaysia. The longer-term objective of the JI was to establish a pan-Islamic supra-state, geographically covering Indonesia, Malaysia, Singapore, Brunei, South Thailand, and the southern Philippine province of Mindanao.

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Singapore Land Area:

660 sq. km.

Population:

4.1 million (3.3 million residents and 0.8 million non-residents; June 2001 estimate)

Capital:

Singapore

Type of Government:

Parliamentary democracy

Head of State:

President S.R. Nathan

Prime Minister:

Goh Chok Tong

Next Election:

By 2007

Currency Used:

Singapore dollar

US$ Exchange Rate on 15 November 2002:

US$1 = S$1.76

The relatively large number of JI operatives arrested highlights a number of disquieting developments and implications for Singapore. One of these implications is a perception that the tentacles of bin Laden’s Al Qaeda network — with its militant Islamic orientation — has spread far and wide enough to appeal to even a small section of what has always been viewed as an essentially moderate Muslim community. Malay/Muslims comprise some 15 per cent of Singapore’s population and for years had been viewed as fairly docile and not susceptible to the kind of Islamic militancy that has taken hold in parts of the Middle East. Another implication of the Singapore arrests is that beneath the surface of an otherwise orderly and disciplined society, some of its members can still plot to carry out the kind of spectacular terrorist attacks that would have grabbed international headlines and shattered the city-state’s surface calm. This has unnerved some Singaporeans as it has revealed certain hidden vulnerabilities in Singapore’s body politic. The political leadership may have been aware of these vulnerabilities but were disinclined to address them publicly, and they are now out in the open. Related to this, another implication of the 2002 arrests is the re-ignition of long-held, but generally dormant, suspicions by a section of Singapore’s ethnic Chinese population that their Malay/Muslim compatriots cannot be trusted and their loyalty as Singaporeans is in doubt, and that if it comes to a choice between country and religion, many Malays are likely to opt for the latter. Clearly, Singapore’s Malay/Muslim community finds it very uncomfortable being under scrutiny. Indeed, members of the community began to voice concerns that the arrests of 2002 would lead to a greater incidence of discrimination against Malay Singaporeans, especially where jobs are concerned, and more so in the midst

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of recessionary economic conditions. If only for that fact, the Singapore Government will have to expend greater effort in maintaining and enhancing harmonious inter-ethnic relations in Singapore. Not to do so will leave an undesirable situation to fester, having a corrosive effect on social cohesion. The above implications of the arrest of terrorist suspects are likely to endure for the foreseeable future. The arrests highlight the fact that even in a tightly controlled society like Singapore, those inclined to radicalism, if given the right ideological motivation, can be homegrown. However, the arrests also demonstrate the apparent efficiency and effectiveness of the domestic intelligence and security agencies in being able to root out terrorist cells and disrupt their operations. Here, the co-operation and co-ordination between those agencies and their counterparts in the United States and in neighbouring Malaysia cannot be overstated. Beyond the spectre of the existence of terrorist cells in Singapore, the likelihood of follow-up arrests, and their near-term implications, no major significant political developments are likely to occur in Singapore in the year ahead. This conclusion is extrapolated from the patterns and trends observable in 2002. However, the one major political development that will occur in Singapore over the medium-term is the stepping down of Goh Chok Tong as Prime Minister and the likely elevation of Deputy Prime Minister Lee Hsien Loong to the post. Mr Goh had earlier intimated that he might step aside shortly after the November 2001 general election if his ruling People’s Action Party (PAP) was returned with its usual overwhelming majority and if Singapore pulled itself out of an economic recession. However, from subsequent remarks, Mr Goh seemed to suggest he would stay on as Prime Minister a while longer as he saw no pressing need to vacate the position. Mr Goh’s years as Prime Minister have been characterized by tighter PAP control of the political system, while accompanied by a gradual social loosening up. The main manifestations of the latter phenomenon have been the greater tolerance of dissenting views expressing disquiet or dissatisfaction with a host of government policies. These views are frequently articulated in the letters column of local dailies, and the freer rein given to arts and cultural groups to indulge in the kinds of artistic expression at variance with established norms, such as the highlighting, if not flaunting, of alternative lifestyles. The apparent rationale for the government in allowing such relative “liberalism” is that those who are enraptured by it are largely confined to the so-called “chattering” classes (that is, intellectuals and the like) and the cultural élite. Both of these groups are relatively small in numbers, with no perceived possibility of their influencing the PAP’s main constituency — the largely conservative and traditionally-inclined Chinese-speaking and Chinese-educated classes. It remains to be seen whether Mr Goh’s successor will continue with such an approach. The underlying premise of that approach is that any kind of political or social debate in Singapore is conducted largely, if not completely, on government terms. The government sets the ground rules and parameters for debate, and those who wish to involve themselves in that debate have to play by those rules. In that regard, this state of affairs has tended to result in the ground being largely infertile to the development of civil society. Indeed, if anything, the last few years have seen civil society in Singapore — which was not much in evidence in the first instance — experience setbacks. The enthusiasm which civil society

34 © 2003 Institute of Southeast Asian Studies, Singapore

THE ASEAN-10

activists had in trying to nurture civil society as an organizational principle and activity, to have an impact on policy, was very apparent during 1997–99. However, by the turn of the new millennium, much of that enthusiasm had waned. A combination of factors was responsible for that. One of the factors was the stark reality faced by civil society activists that an overwhelming proportion of the population was generally politically apathetic. This has largely been the consequence of some four decades of depoliticization of the population by the PAP government. The significant reverses which the opposition political parties suffered in the November 2001 general election (which saw their overall popular vote plunge by some ten percentage points) was a further factor in dampening what little vibrancy that remained in civil society. With the perception that there is not much scope for the development of civil society in Singapore, a number of prominent activists who were involved in that process have since thrown in the towel even if others have continued to soldier on. This, in sum, is likely to be the generally quiescient political environment Singapore will find itself during the next twelve months, barring any unforeseen shocks of both an internal or external nature.

A

t a meeting of the ruling Thai Rak Thai (TRT) in August 2002, Prime Minister Dr Thaksin Shinawatra told delegates to set sights on four consecutive terms in office — an audacious claim in a country where no democratically elected government has yet completed a full term in office. However, several pundits, including Thaksin critics, have agreed that such a possibility cannot be ruled out. The year 2002 did not begin well for Thaksin. In the preceding December, the King had warned that government policies threatened catastrophe, an unprecedented royal rebuke. About the same time, civil society supporters began questioning Thaksin’s commitment to the poor, and accountable government. Sections of the media and public intellectuals also became increasingly critical of the government’s economic and political agenda. They questioned the effectiveness of populist economic policies, and alleged several conflicts of interest between the business and political interests of Thaksin and other Cabinet members. They also highlighted a retreat from political reform, particularly dependence on traditional politicians and the military, meddling with the bureaucracy, and lukewarm support for independent institutions such as the National Counter Corruption Commission (NCCC) and the Constitution Court. In January and February, Thaksin came under both domestic and international scrutiny when he clashed with the Far Eastern Economic Review and the Economist over articles touching on the government’s relations with the monarchy. One issue of the Review was taken from the news-stands and its journalists threatened with expulsion, and the Economist opted not to distribute a special Thailand focus issue. Conflict with the media escalated in March when leading local journalists — all critics of the government — found their bank accounts under investigation by the Anti-Money Laundering Organization (AMLO). (Subsequently, non-governmental organizations [NGOs] and members of the opposition Democrats made the same discovery.) Thaksin denied any government involvement, but

Thailand

35 © 2003 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

dismissed AMLO actions as “not serious”. A government committee later ruled against any disciplinary action. Public opinion polls tracked a decline in government support from more than 70 per cent to less than 50 per cent. In March 2002, TRT won only four out of fourteen parliamentary by-election seats, after Thaksin had confidently predicted at least ten. The Democrats gained two seats, including one in Bangkok, indicating a middle-class move away from the government. The Democrats also defeated TRT in the Bangkok assembly and district council elections in June, again defying TRT expectations of a win. Nonetheless, even as public concerns increased, Thaksin was consolidating political control. He brought Chat Patthana into the ruling coalition in March, and increased TRT’s parliamentary representation by more than thirty, after absorbing the New Aspiration Party (NAP) in April. This left the Democrats, with 128 seats, as the only effective opposition. Then, in the second half of 2002, economic and political developments suddenly appeared to move in Thaksin’s favour. Buoyed by government pump priming and low interest rates, consumers began spending — particularly in areas such as property and cars — improving economic growth to about 4 per cent. Ratings agency Standard & Poor’s upgraded Thailand from neutral to positive, and a favourable report by the International Monetary Fund (IMF) declared that the Thai economy had recovered from the losses following the 1997 crisis. Thaksin intervened to stand down a senior official implicated in a racket linked to the supply of school milk. This was welcomed as strong action against corruption. It was also seen as a demonstration of Thaksin’s dominance over factions in the TRT, since the official was linked to Sanoh Thienthong, head of the party’s conservative faction and hitherto untouchable. Thaksin also increased his influence over the military, arranging for the replacement of the respected, politically neutral army head General Surayud Chulanont with General Somdhat Attanant, considered close to the TRT. Whereas the previous government had ensured that the annual promotions in October were managed by the military without political intervention, current government leaders have handpicked key appointments. Visiting the Northeast in August, Thaksin demonstrated that his ability to bring out the rural crowds and win their support had not declined. Tens of thousands came to hear and applaud his promises to help them overcome their problems and to ensure that all would enjoy an annual income of at least Bt10,000. The opposition Democrats, meanwhile, remained in the wilderness as Chuan Leekpai confirmed his intentions to resign in April 2003, and party members jostled for a replacement. Party strongman Sanan Kachornprasart, found guilty of concealing assets of US$1 million in March 2000 and forced to manoeuvre from behind the scenes, muddied the waters when he spoke of the need for another party, and met with senior TRT members. Subsequent accusations that he had harassed a female reporter provided the Democrats with further unwanted publicity. Nonetheless, the closing days of August 2002 saw another pendulum swing, this time away from the Prime Minister. Thaksin’s former Education Minister, now a Privy Councillor, condemned the administration’s failure to improve the quality of education. Thaksin’s son

36 © 2003 Institute of Southeast Asian Studies, Singapore

THE ASEAN-10

Thailand Land Area:

514,000 sq. km.

Population:

60.6 million (2000 census)

Capital:

Bangkok

Type of Government:

Parliamentary democracy with constitutional monarch

Head of State:

King Bhumibol Adulyadej

Prime Minister:

Dr Thaksin Shinawatra

Next Election:

2005

Currency Used:

Baht

US$ Exchange Rate on 15 November 2002:

US$1 = 42.25 baht

was reportedly found cheating during a university examination, although authorities finally announced that notes in his pocket were not relevant to the examination in question. Thaksin was also strongly criticized for supporting the Deputy Industry Minister’s right to remain in office after the NCCC found that he had failed to list his debts in an asset declaration. (A final verdict awaits consideration by the Constitution Court.) Foreign policy difficulties also embarrassed the government. Myanmar closed its border with Thailand for the second time in two years, after a military skirmish on 20 May 2002, and did not reopen it until mid-October. Poor co-ordination between the respective agencies also led to the late cancellation of a visa for a Taiwan minister to witness an important labour agreement — provoking an angry reaction from Taiwan, and putting on hold improvements in the labour condition of 124,000 Thais there. Government efforts to implement a major bureaucratic re-organization — promised by 1 October — also ran into problems. Legislation was prepared without significant public input, rushed through Parliament, and provided few details (empowering ministers to settle this by decree). Critics asked how increasing ministries from fourteen to twenty and departments from 125 to 162 could result in a leaner and more efficient administration. In a clear message of disapproval, the King delayed signing the legislation until 2 October, and told the incoming Cabinet to co-operate and not succumb to a one-man show mentality. The new Cabinet had eight personnel changes, but received a cool public reception. It reflected, media reports agreed, a trade-off between major factions within the TRT and its allies, rather than a movement towards political reform — showing Thaksin’s continuing

37 © 2003 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

difficulties in controlling a fractious coalition. Thaksin insisted that he had done his best, but said his choices were limited. During the two years in office thus far, the Thaksin administration has consolidated its control over Parliament, and other institutions such the bureaucracy, military, and government media — seeking to emulate countries such as Malaysia and Singapore. Skilful handling of public relations, and Thaksin’s personal charisma, have ensured that most rural Thais still support the government. Recent economic gains have also kept some middle-class supporters on his side. Nevertheless, even in these favourable times, the retreat from promised political reform, and continuing questions of conflict of interest, have provoked strong opposition from sections of the media, civil society, and the middle class. They remain influential, as the government’s recent abandonment of plans for Draconian restrictions on public demonstrations illustrated. Independent institutions, such as the NCCC and the National Advisory Council on Economic and Social Affairs, headed by former Prime Minister Anand Panyarachun, still act as a check on government authority. With such countervailing forces, and divisions within the ruling coalition, the concentration of power in the hands of Thaksin and the TRT is not as absolute as many believe. To ensure its longevity, the government needs the acquiescence, if not support of, civil society and the monarchy. Among the immediate imperatives, it will need to demonstrate greater finesse in managing the vexed issue of administrative reform than it has hitherto. It must do more to promote sustainable economic growth; pump priming and consumer spending must be supplemented by more investment, which in turn is dependent on reducing bank bad loans and improving financial regulations. It must also move carefully on constitutional change after October 2002, when the five-year ban on amendments expires. Any attempt to turn back political reform further would provoke strong public opposition.

Vietnam

V

ietnam had National Assembly elections in 2002 but the one spot of excitement during the hustings was when the Elections Council withdrew three candidates at the last minute, and announced that two among the three were implicated in the Nam Cam corruption case. Nam Cam is a Mafia character who has bought patronage at very high levels of the leadership, and the scandal continues to cast a long shadow over the political élite. The two candidates tainted by Nam Cam were also members of the Vietnam Communist Party (VCP) Central Committee, from which they have now been dismissed. Electoral results are not a major barometer of political ups and downs in Vietnam. A more interesting development came after the elections when the National Assembly appointed Truong Quang Duoc, a Politburo member, as its Vice-Chairman. It is unusual to have two Politburo members occupying the top two seats in the National Assembly. Does this mean that Truong Quang Duoc is poised to replace the chairman, Nguyen Van An, a more senior member of the Politburo? Is Nguyen Van An going to retire soon? What are the reasons for his retirement when he has only been in the National Assembly position since mid-2001? An ranks fourth in the Politburo. In the nature of élite politics in

38 © 2003 Institute of Southeast Asian Studies, Singapore

THE ASEAN-10

Vietnam Land Area:

330,000 sq. km.

Population:

80 million (2002 estimate)

Capital:

Hanoi

Type of Government:

Socialist republic, a one-party centralized state that increasingly decentralizes administration and devolves decision-making power to the provinces.

Head of State (President):

Tran Duc Luong

Party General Secretary:

Nong Duc Manh

Prime Minister:

Phan Van Khai

Chairman, National Assembly:

Nguyen Van An

Next Election:

By mid-2004 (Local authorities) By April 2006 (Communist Party Congress) By mid-2007 (National Assembly)

Currency Used:

Dong

US$ Exchange Rate on 15 November 2002:

US$1 = 15,400 dong

Vietnam, this raises the question about An’s position relative to his rivals at the top of the party. The speculation about National Assembly Chairman An also raises the issue of how long another top leader — Prime Minister Phan Van Khai — will stay in office. The 67-year-old Khai, third-ranking in the Politburo, is older than Nguyen Van An. When he was reappointed Prime Minister in May 2002, many believed he would not stay longer than two years to make way for younger leaders. On his part, Khai had been angling to stay longer on the job. If he succeeds, it will be harder to retire the younger An on grounds of age. One can reasonably conclude that Khai’s position is now stronger than before the National Assembly elections, when there was frequent speculation about his impending retirement. Hovering in the background of these leadership manoeuvres is the continuing investigation into Nam Cam’s connections with the political élite that may sully the names of a few top people. One indicator of important personnel changes at the top is the holding of a special

39 © 2003 Institute of Southeast Asian Studies, Singapore

POLITICAL OUTLOOK

congress of the VCP. By new party statutes enacted in 2001, the holding of a mid-term congress is no longer compulsory but the statutes allow for an extraordinary meeting if party leaders deem it necessary. If there is such a meeting, likely to be held mid-term in late 2003, then the issue of whether Khai (and Nguyen Van An) would be staying the full term will be on the agenda. Otherwise, Khai will probably serve a full term. One key point in Khai’s favour is that there is yet nobody with similar stature or work experience lining up behind him. As for the new party General Secretary Nong Duc Manh, he would have barely served two years of his first term when 2003 begins. His political standing rests largely on his successful nine-year tenure as National Assembly Chairman and a reputation that is not yet sullied by any allegation of corruption. In the event that the party holds an extraordinary meeting, his position is not likely to be threatened. He is not linked to Nam Cam and neither is he of retirement age. Manh’s consensual leadership style does not provide the fractious polity with the strong leadership it needs but it does guarantee his stay in office. Whatever the personnel changes at the top, no big political issues appear to confront the Vietnamese leadership except for those aspects of politics that need to complement economic growth and equitable and sustainable development. Raising the efficiency of the public administration system is one such issue. Its ineptitude has been in existence for quite awhile and very broad-ranging. For now and the immediate future, the government seems to want to focus on specific goals. These include making government bodies take responsibility for what they are tasked with doing, and imposing greater organizational discipline, which would include weaning bureaucrats off corruption as a means of sustenance. The current bout of bureaucratic reforms comes within the rubric of an Action Plan presented in mid-2002. Part of this plan is the Individual Responsibility System whereby heads of all government departments will take responsibility for everything that happens in their areas of jurisdiction. For those familiar with the bureaucratic reality of Vietnam, this may sound like a very ambitious goal. At most, it can be said that the leadership has articulated a greater resolve to deal with a long-abiding problem. As it is, public administration has been on the government agenda for quite a number of years already and the announcement of yet one more initiative is not likely to cause any excitement. The ultimate objective is not to let ineptitude limit economic development. So long as the economy grows at a respectable pace, and so long as media pressures do not get out of hand, the public will continue to suffer the ineptitude and inefficiencies. Other issues of bureaucratic reform will remain difficult to tackle. To reduce the endemic corruption in the bureaucracy, bureaucrats’ salaries will have to be increased four to five times to cover their living expenditure and allow for some savings. How should that be funded? There has been a suggestion to reduce the number of employees paid through the state budget by half and using the same budget to pay the remaining half. Laying off these people will also make the bloated public service more lean and efficient. However, this may intensify social discontent, with risky political consequences for the VCP. Vietnam’s leadership still does not have the group cohesiveness and political will to act forcefully on this problem. Indeed, factionalism within the party and the government will continue to hobble policy-making and implementation. This factionalism has created a

40 © 2003 Institute of Southeast Asian Studies, Singapore

THE ASEAN-10

gridlock of competitive political interests that hobbles policy-making and implementation. For most things, there is a need to strike compromises. The clearest example of this is the slow progress made in divesting state ownership of many loss-making enterprises despite a declared policy to equitize (corporatize and sell the shares to the public) all state enterprises as quickly as possible. In foreign relations, Vietnam’s primary preoccupation will continue to be with its neighbours: Laos, Cambodia, and China. Efforts will continue to be made to consolidate the traditionally strong ties with Laos, and no problem is foreseen in this area. The relationship with Cambodia has always been more testy because of the significant anti-Vietnamese sentiments among the Cambodian public. The Vietnam–Cambodia border is also the site of a range of problems such as border demarcation, restive ethnic minorities, drug trafficking, and smuggling. In recent times, the relationship with China has run into domestic criticisms and bad publicity. A land border treaty being implemented has resulted in Vietnamese dissidents charging that the VCP leaders have allowed the Chinese to appropriate Vietnamese territory. This is an emotional issue in Vietnam and the party has moved quickly to contain public opinion by coming down hard on a few of the dissidents. The public discontent will simmer but is unlikely to cause any major crisis in Sino-Vietnamese relations.

41 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK 2003 –2004

00 SEAsians_ASEM.indd 10

9/18/14 10:52:23 AM

ECONOMIC OUTLOOK REGIONAL ECONOMIC TRENDS By Denis Hew

F

rom a regional economic slowdown in 2001, a moderate rebound is expected in the Southeast Asian economies in 2002, buoyed by an improvement in export performance and domestic demand. However, excess capacity remains a problem in some Southeast Asian countries, resulting in sluggish growth in private investment. Since inflation is relatively modest in most countries in the region, their governments are likely to maintain accommodative monetary policies. As regional economies recover, fiscal policies in countries such as Thailand, Malaysia, and Singapore are expected to be less expansionary. On the external front, exports have improved significantly since early 2002, not just to the United States but also to countries within East Asia. In fact, intra-regional trade (East Asia) has been rising faster than trade with the United States and Europe. There has been significant progress made in bank and corporate restructuring during the past year in the crisis-affected countries. However, corporate sector reforms continue to lag financial reforms. Nevertheless, Malaysia and Singapore are at an advanced stage of consolidating their domestic banks. In the Philippines, however, bad loans in the domestic banking system have become a serious problem. Hence, the establishment of asset management companies (AMCs) is planned for 2003 to deal with rising non-performing loans (NPLs). Since the Asian financial crisis of 1997–98, AMCs have played a significant role in reducing NPLs in the banking systems of Indonesia, Malaysia, and Thailand. The economic outlook for Southeast Asia in 2003 and 2004 is cautiously positive. Private consumption — which has been the main driver of domestic demand — should continue to strengthen in the next two years. However, growth prospects may be limited if excess capacity and weak bank-lending continue to persist, while progress in corporate restructuring remains sluggish. Furthermore, the ongoing economic revival in the region is extremely fragile because of several possible external risks. The first risk is that the U.S. economy — the leading engine of growth in the global economy — may be on the brink of a “double-dip” recession. The U.S. economy shrank for the first three quarters of 2001. Despite near-zero growth in 2001 and the terrorist attacks on 11 September 2001, the U.S. economy (particularly consumer demand) has proven to be surprisingly resilient and is expected to rebound in 2002. However, economic recovery may falter with the prospect of military conflict in the Middle East as well as further corporate scandals and stock-market deterioration in the United States. Certainly, a long drawn-out war could undermine consumer confidence and disrupt business investments worldwide. The second risk arises from the escalation of oil prices in anticipation of war in the Middle East. Sustainable oil price increases could trigger an economic slowdown in the industrial countries (which are mostly net oil importers), which in turn would reduce demand for non-oil exports from Southeast Asia. The third risk is the effects of the recent bomb blast in Bali in October 2002 which may adversely impact the economies of Indonesia and neighbouring countries (especially the tourism industry).

44

Reproduced from Regional Outlook: Southeast Asia 2003-2004, edited by Russell Heng Hiang Khng and Denis Hew (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

REGIONAL ECONOMIC THE ASEAN-10 TRENDS

The final risk is the threat of global deflation. Deflation can stifle economic activity by suppressing consumption (as consumers delay purchases in anticipation of lower prices) as well as increase the real burden of debt. In recent years, there has been an increasing trend towards falling prices in the United States, Europe, and East Asia. There is also the uncertain outlook for the information technology (IT) sector. Poor corporate performance by leading companies in the sector raises doubts of a strong upturn in the IT cycle. Hence, Southeast Asian countries such as Malaysia, the Philippines, and Singapore may not get the much needed boost from electronic exports. Nevertheless, global demand for semiconductors may gain momentum with the launch of the latest digital consumer products, mobile phones, and personal computers. Amid all these uncertainties, policy-makers across the region have begun to re-examine their economic development strategies. The rapid economic growth experienced particularly by the ASEAN-4 countries (Indonesia, Malaysia, Singapore, and Thailand) during the past three decades was largely driven by foreign direct investments (FDI) from multinational corporations (MNCs). This re-evaluation of development strategies will include seeking new sources of economic growth which are more domestic-based. Within this context, Southeast Asian policy-makers have also been re-examining the development of domestic small and medium-sized enterprises (SMEs), which were largely neglected during the period of rapid economic expansion. By ignoring this important sector, it under-utilizes domestic demand and impedes economic development in Southeast Asia. In fact, SMEs can play an important role in economic development, contributing to employment, production, and national income as well as providing opportunities to alleviate poverty. The ASEAN countries have also been strengthening its economic linkages via trade agreements with countries outside the region. The most promising is the Free Trade Agreement (FTA) between China and ASEAN, which was first mooted by Chinese Premier Zhu Ronji at the Fourth Informal ASEAN Summit Meeting in Singapore in November 2000. If the China–ASEAN FTA materializes, it would potentially be the world’s largest FTA. A framework agreement on Comprehensive Economic Co-operation between ASEAN and China was signed in Cambodia in November 2002. As part of this agreement, FTA arrangements will be implemented between China and the ASEAN-6 by 2010, and the newer ASEAN member countries (Cambodia, Laos, Myanmar and Vietnam) by 2015. Japanese Prime Minister Junichiro Koizumi had also proposed a Japan–ASEAN Comprehensive Economic Partnership (CEP) in January 2002 which will include elements of an FTA. A joint declaration by Japan and ASEAN was signed in November 2002 on the CEP. In September 2002, ASEAN also signed a trade pact with Australia and New Zealand to reduce tariffs and increase trade and investment between their two free trade areas, that is, the ASEAN Free Trade Area (AFTA) and the Closer Economic Relations (CER). Korea and India are also planning trade pacts with ASEAN in the near future. During the APEC Summit in October 2002, U.S. President George W. Bush announced the “Enterprise for ASEAN Initiative” (EAI). The Initiative provides a road map that would make it easier for ASEAN countries to form free-trade agreements with the United States.

45 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

Although the initiative offers no new measures, it nevertheless sends positive vibes to foreign investors that the United States is still committed to the region. Furthermore, in the mid to long term, the initiative may pave the way for an ASEAN–U.S. FTA. Looking forward, should Southeast Asia worry over China’s rapid economic rise? China is now widely considered the country of choice for foreign investment, especially in manufacturing. According to the United Nations Conference on Trade and Development (UNCTAD), China is now the largest recipient of foreign direct investment (FDI) flows in the Asia-Pacific region and the developing world. China’s FDI inflows rose 14.7 per cent from US$40.8 billion to US$46.8 billion in 2001. In contrast, FDI inflows to Southeast Asia remained relatively stagnant at US$13.2 billion in the same year (less than a third of China’s FDI), with Indonesia continuing to report divestments for the fourth consecutive year. At present, China’s comparative advantage lies in its low-cost labour-intensive manufacturing platform. However, China, with its huge pool of skilled labour, has been catching-up fast on the technological ladder. It has begun to attract more investments from high-technology industries, competing not only with Southeast Asia but also with the more developed East Asian countries, such as Taiwan and Korea. Competition for foreign investments will only intensify with China’s recent accession into the World Trade Organization (WTO). Unless external developments turn for the worse, regional economies should moderately rebound over the next two years. However, prospects for Southeast Asia in the mid to long term will largely depend on how successful regional policy-makers are in restructuring their economies and meeting the competitive challenges ahead.

Real GDP Growth in the ASEAN-5 Countries, 1996 to 2003F

15.0 10.0

% change

5.0 0.0

1996

1997

1998

1999

2000

2001

2002

2003F

-5.0 -10.0 -15.0 Indonesia

Malaysia

Singapore

Thailand

SOURCE: Asian Development Bank (ADB).

46 © 2003 Institute of Southeast Asian Studies, Singapore

Philippines

REGIONAL ECONOMIC THE ASEAN-10 TRENDS

Real GDP Growth in Cambodia, Laos, Myanmar, and Vietnam, 1996–2003F 12 10

% change

8 6 4 2 0 1996

1997

1998

1999

Cambodia

2000

Laos

2001F

2002F

2003F

Myanmar

Vietnam

SOURCE: ADB and Economist Intelligence Unit (EIU).

Relative Performance of ASEAN-5 Currencies to the U.S. Dollar, 1997–2002 120.0

100 = January 1997

100.0 80.0 60.0 40.0 20.0

Rupiah to US$

Ringgit to US$

S$ to US$

Bath to US$

May-02

Jan-02

Sep - 01

May - 01

Jan - 01

Sep - 00

May - 00

Jan - 00

Sep - 99

May - 99

Jan - 99

Sep - 98

May - 98

Jan - 98

Sep - 97

May - 97

Jan - 97

0.0

Peso to US$

SOURCE: CEIC Data.

47 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

Relative Performance of ASEAN-5 Main Stock Market Indices, 1997–2002

140.0

100 = January 1997

120.0 100.0 80.0 60.0 40.0

Jakarta Composite S’pore ST 55

KLSE Composite Bangkok SET

May-02

Jan-02

May - 01

Jan - 01

Sep - 00

May - 00

Jan - 00

Sep - 99

May - 99

Jan - 99

Sep - 98

May - 98

Jan - 98

Sep - 97

May - 97

Jan - 97

0.0

Sep - 01

20.0

Manila PSE Composite

SOURCE: CEIC Data.

ASEAN and CHINA FDI Inflows Compared, 1996–2001

50,000 45,000 40,000 US$ millions

35,000 30,000

ASEAN

25,000

CHINA

20,000 15,000 10,000 5,000 0 1996

1997

1998

1999

SOURCE: UNCTAD.

48 © 2003 Institute of Southeast Asian Studies, Singapore

2000

2001

REGIONAL ECONOMIC THE ASEAN-10 TRENDS

THE ECONOMICS OF INTERNATIONAL RESERVE HOLDINGS BY DEVELOPING COUNTRIES By Ramkishen S. Rajan

W

hile many developing countries persist with pegged regimes, they have generally allowed for a relatively greater, albeit modest, degree of variability of their currencies according to market conditions (China, Malaysia, and Hong Kong being obvious exceptions). Yet, the central banks in the Asian countries have appeared keen on bolstering reserves to historically high levels. Theory has offered policy-makers only limited guidance when it comes to managing international reserves. In the absence of strong analytic basis, a popular benchmark rule of thumb used by central bankers until the early 1990s has been to hold reserves that are sufficient for at least three months worth of import cover. However, the evidence clearly indicates that some countries accumulate reserves well beyond levels that would be deemed adequate by the simple import-based yardstick. The seeming insatiable appetite for reserves noted above does not necessarily imply irrational behaviour by the countries concerned. The currency crises of the 1990s and beyond that have afflicted many developing countries have predominantly been crises of the capital account.1 Accordingly, conventional current accountbased rules of thumb determining the adequacy of international reserve holdings (such as import cover) may severely downplay the actual quantity of reserves that are needed. In the aftermath of the East Asian crisis, the extent of short-term indebtedness has been found to be a key indicator of illiquidity and a robust predictor of financial

crises. Consequently, the reserves-to-short-term external debt (R/STED) ratio is viewed as a useful indicator of the threshold at which investors lose confidence, linking the measure to the theory of currency crises. Pablo Guidotti, former Deputy Minister of Finance of Argentina, is credited with being the first to propose that countries should manage their external assets and liabilities in such a way as to be capable of running without foreign borrowing for up to one year. This “external balance sheet rule” implies that usable foreign exchange reserves must at least exceed scheduled external amortization for one year. There are, however, two important limitations with this measure. Firstly, Alan Greenspan, Chairman of the Federal Reserve Board of the United States, has suggested that the “Guidotti-rule” be refined by having a “liquidity-atrisk” standard which is somewhat similar to the value-at-risk methodology used by financial institutions.2 Under this standard, a country’s external liability position would be computed across a wide range of possible outcomes, taking into account the full set of external assets and liabilities. An appropriate level of reserves would then be the one that provides a high probability that external liquidity will be sufficient to avoid new borrowing for at least one year. Secondly, the reserve to short-term debt measure only gives an indication of a country’s vulnerability to an “external drain” but fails to capture the threat of an “internal drain” associated with capital flight by residents. The latter may be best captured by measures of broad money supply (M2).

1

See R. Rajan, “Safeguarding Against Capital Account Crises: Unilateral, Regional and Multilateral Options for East Asia”, in Financial Arrangements in East Asia, edited by G. de Brouwer (London: Routledge, forthcoming). 2 A. Greenspan, “Currency Reserves and Debt” (Remarks made at the World Bank Conference on Trends in Reserve Management, Washington, DC, 29 April 1999).

49 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

THE ECONOMICS OF INTERNATIONAL RESERVE HOLDINGS BY DEVELOPING COUNTRIES (continued)

Taking on board the Guidotti-Greenspan suggestion as well as the need to consider capital flight, the table highlights recent computations of reserve adequacy for a subset of developing countries using two closely related measures.3 The first incorporates both shortterm external debt and a proxy for capital flight (part of M2), modified by a “probability factor” captured by a country risk index. This measure is more fully explained in the notes to the table. The second measure incorporates an additional cushion over and above short-term external debt so as to provide a time period for policy change before the reserves to short-term debt threshold is reached (as discussed above). Both measures, which account for the type of exchange rate regime of the country under consideration, suggest that Brazil, Russia, South Africa, Turkey, and Argentina held inadequate reserves in 1999, while a number of countries in Asia, including India, Korea, Thailand, and Malaysia, actually held reserves that were significantly in excess of adequate levels by end-1999. Considering the sharp appreciation in reserve levels in these countries relative to short-term external liabilities in the last few years, the size of “excess” reserves held by them ought to have grown substantially. While the Guidotti-Greenspan balance sheet rule is an important step forward in judging reserve adequacy in an era of international capital mobility, it does beg the question why short-term debt is useful in the first instance. According to the Economist (23–29 September 2000), “(i)t is rather as though a household with lots of cash sitting idle in a low-interest bank account was at the same time paying a much higher

3

interest rate on its debt. It would make more sense to repay some of that debt” (p.90). More generally, an important limitation of such a reserve-hoarding policy is that it involves high fiscal costs as the country effectively swaps high-yielding domestic assets for lower-yielding foreign ones. These “insurance premium” costs have been estimated to be of the order of 0.3 to 1 per cent of gross domestic product (GDP) for the five crisis-affected economies in East Asia in 1999.4 In view of these high costs, is there any way in which the liquidity yield from holding reserves may be generated without the need for individual countries to continue to accumulate them? Indeed, if capital outflows reflect a perception within private capital markets that a country is illiquid, reducing international reserves and therefore curbing liquidity further is hardly likely to be an effective strategy. Rapid reserve depletion has been one of the defining features of currency crises, and reserve levels ex ante have showed up as a significant variable in many studies examining the predictability of crises. The foregoing suggests that countries need to look beyond domestic reserves and debt management to buttress their international liquidity positions if they are to effectively protect themselves from the vagaries of international capital markets. One way might be for regional economies to develop a network of swap arrangements that would provide member countries with extra liquidity in the event of a crisis. This is in fact the direction in which East Asia appears to be moving.

See J.A.H. De Beaufort Wijnholds and A. Kapteyn, “Reserve Adequacy in Emerging Market Economies”, Working Paper No. 01/43 (Washington DC: IMF, 2001). 4 See the longer working paper by G. Bird and R. Rajan, “Too Good to be True?: The Adequacy of International Reserve Holdings in an Era of Capital Account Crises”, CIES Discussion Paper No. 0210 (University of Adelaide, Centre for International Economic Studies, 2002).

50 © 2003 Institute of Southeast Asian Studies, Singapore

REGIONAL ECONOMIC THE ASEAN-10 TRENDS

Estimated Adequate and Actual Reserves (end 1999, in US$ billions) Augmented STED Measureb

Actual reserves

Independent Float

BHK measurea

Brazil Chile Colombia India Indonesia Korea Mexico Peru Philippines Poland Russian Federation South Africa Thailand

47.4–53.0 7.7–8.2 6.3–6.8 14.9–19.8 24.2–27.4 51.0–56.2 29.9–33.1 7.1–7.5 10.0–11.0 8.9–10.0 13.5–15.0 16.6–18.6 19.2–21.9

43.2 7.4 5.9 10.3 21.6 47.1 27.5 6.8 9.4 8.0 12.5 15.3 17.1

34.8 14.4 7.6 32.7 26.4 74.0 31.8 8.7 13.2 24.5 8.5 6.4 34.1

86.9–149.8 6.9–8.2 8.0–8.9 12.1–15.1 29.1–33.3 6.2–7.2

24.8 5.9 7.3 9.4 25.9 5.4

157.7 12.8 11.0 30.6 23.3 12.3

45.0–47.5 99.7–105.5

43.7 96.1

26.3 96.2

Managed Float or Fixed China Czech Republic Hungary Malaysia Turkey Venezuela Currency Boards Argentina Hong Kong SAR

NOTES: a) This measure is provided by De Beaufort Wijnholds and Kapteyn (2001) where they amalgamate the reserves to short term external debt (R/STED) ratio with a reserves to broad money ratio adjusted to reflect the fraction presented as a range of M2, which may realistically be expected to be mobilized against reserves in a short time span. They also make an allowance for the fact that “not all emerging market economies are equally susceptible to the risk of capital flight”. To make the adjustment, they use the Economist’s country risk index, which takes into account 77 different indicators, ranging from monetary and fiscal policy to political stability. The fraction of broad money multiplied by the country risk index is then added to the amount of STED. b) This measure simply augments STED in the way described in the text by adding a “policy change” cushion of 3 per cent of short-term external debt. SOURCE: Modified from Table 3 in De Beaufort Wijnholds, J.A.H. and A. Kapteyn, “Reserve Adequacy in Emerging Market Economies,” Working Paper No 01/43 (IMF, 2001). All data are from International Financial Statistics for reserves; and from BIS/IMF/OEDC/World Bank Statistics for external debt. The exchange rate classification is based on the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (2000). Reserves have been calculated to exclude gold.

51 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK THE ASEAN-10 Lee Poh Onn • Mya Than • Muhammad Chatib Basri • Soedradjad Djiwandono • Nick J. Freeman • Denis Hew • Aladdin D. Rillo • Ngiam Kee Jin • Sakulrat Montreevat

Brunei

52

B

runei’s economy looks as if it will be treading on challenging economic grounds in 2003 and 2004. Since 1999, its economy has been improving, although unevenly, with real gross domestic product (GDP) averaging 2.3 per cent from 1999 to 2001. The downturn in the Bruneian economy, which occurred in the latter part of 2002, in which the private sector was affected by weak government support, and the possibility of a prolonged U.S.-Iraq conflict, must be considered when examining the country’s potential growth prospects in 2003 and 2004. In addition, the worrying unemployment prospects of Brunei’s fresh graduates have been particularly marked in the latter part of 2002; which may spill over into early 2003. Unemployment, which has been averaging around 4.6 per cent since 1999, does not look set to improve in the first half of 2003, neither is it likely to deteriorate markedly. Since the latter part of 2002, Brunei’s construction industry has also not been showing significant signs of improvement, which does not bode well for the first half of 2003. This may, however, improve if the global economic climate picks up in 2003 and 2004. A guardedly optimistic sentiment holds for the whole of 2003 and 2004. A hike in oil prices as a result of the worsening political environment in the Middle East may work to Brunei’s short-term advantage in the first half of 2003. Remember that the oil and gas sector contributes to more than 30 per cent of the country’s GDP, and comprises around 88 per cent of its total exports. However, should intense instability in the Middle East be dragged over an extended period, the longer term growth prospects for Brunei would be negatively impacted, as oil-importing countries in the region and around the world will be affected by the oil price hike. Brunei’s economic health is dependent on its exports to Japan (44 per cent), ASEAN (23 per cent), South Korea (11 per cent), and the United States (8 per cent), four of its major destination markets. To the extent that the economic outlook in these areas is negatively affected, the outlook in Brunei would tend to parallel such developments. One factor that should improve Brunei’s business climate regardless of shocks introduced by oil prices would be a reduction in the bank prime rate to spur investments in the private sector. If the bank prime rates are reduced in the coming months, this may have a significant impact on the short- and long-term growth prospects of the country. Another factor would be a further reduction in red tape that is currently choking the business investment climate in the country. Brunei’s continuing stance of not entering into international Muslim politics and radical Islam are also positives, making the country a haven of security in the region. Brunei’s growth prospects in 2003 and 2004 will be cushioned by a B$1 billion proposal of public spending in 2002 to stimulate the private sector, new investment incentives set by the government to further facilitate foreign direct investments (FDIs), and a reduction in

Reproduced from Regional Outlook: Southeast Asia 2003-2004, edited by Russell Heng Hiang Khng and Denis Hew (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

THE ASEAN-10

vehicle taxes to 20 per cent. The ongoing issue of the settlement of debts left behind by the Amadeo conglomerate is slightly worrying, but the updating of financial regulations and the proposal to create an offshore financial centre are positive moves that will enhance growth prospects in the coming years. In the outlook period, Brunei’s real growth rate is estimated to be between 3 and 4 per cent in 2003, and slightly higher in 2004. This is because of the gradually improving global economic climate, and also factors within Brunei such as the streamlining of regulations governing foreign direct investment processes, and also the stable business and political environment.

A

gainst all odds, Cambodia’s economy grew strongly in 2001. Many Cambodia watchers were not very optimistic about the country’s economic performance and not impressed with the government’s target of gross domestic product (GDP) growth rate of 6.4 per cent for 2001 because of problems in general economic management, severe flooding in the later part of the year, and drought in some parts of the country. The latest estimated GDP growth rate of 5.3 per cent is almost the same as the International Monetary Fund’s (IMF’s) estimate of 5.25 per cent in August 2001. Last year’s Regional Outlook 2002-2003 estimated a moderately strong growth for Cambodia’s economy and pointed out favourable factors for growth, such as a strong industrial sector (based on rapid expansion of the garment industry), improved infrastructure (as part of the Greater Mekong Sub-Region initiative), and a strong export sector registering double digit growth. The surge of tourism might be one of the supporting factors for the growth, as well as external financial assistance. In terms of per capita Overseas Development Assistance (ODA), Cambodia, with US$56, is way ahead of Laos and Myanmar. The Asian Development Bank’s (ADB) Asian Development Outlook 2000 also attributed the industrial sector — led by the garment sub-sector — to the strong economic growth. This was because the agriculture sector suffered from flooding, and growth in services was muted (ADB, Asian Development Outlook 2002, p. 43). Agricultural sector performance was moderately strong, with a growth rate of 5 per cent despite the bad weather, whereas the industry sector’s growth rate of 12.0 per cent was as impressive as the last four years. This was mainly a result of expansion in the garment industry. On the other hand, the services sector grew weakly at about 2 per cent despite strong tourist arrivals. The external sector also played an important role in the strong economic performance. Exports in 2001 grew more than 18 per cent, led by garments (mostly to the United States and Canada) while exports of agricultural commodities — the traditional leading export item — decreased because of bad weather. At the same time, imports increased by about 54 per cent. However, the average trade deficit during the last four years was manageable at about US$200 million. One discouraging factor in the external sector was the decreasing inflow of foreign direct investment (FDI) since the Asian financial crisis of 1997. Cambodia is struggling to attract new foreign investments — FDI inflows in 2001 was estimated at

Cambodia

53 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

US$120 million only. Nonetheless, Cambodia is the least indebted country in the region (with just over US$2 billion in foreign debt). Stability in prices and the exchange rate also encouraged economic expansion. Inflation rates (low during the last four years) are expected to grow moderately. The country’s foreign exchange rate had been appreciating at 1.2 to 13 per cent per annum. Improved political stability might also have contributed to better economic performance. On the other hand, savings to GDP ratios during 2001 and 2002 were disappointing. The ratios were less than 10 per cent, probably because of continued fiscal deficits, which were compensated by grants and loans. However, investment to GDP ratios during the four years were impressive, at about 40 per cent, which is comparable to East Asian standards. Although macroeconomic management problems and poverty issues still persist, Cambodia’s economic performance in 2001 appeared to be satisfactory. What is the prospect of the economy in the short-term? For the year 2002, the performance of Cambodia’s economy does not appear to be as bright as that of 2001 mainly because of continued severe flooding in the country. The economy will grow moderately at 4 per cent. This is because, unlike in Myanmar and Laos but similar to Vietnam, economic reforms are on track. The prospects for exports are encouraging as the export of garments by one of its rivals, Myanmar, was banned from United States (a major importer of garments and textile products). To some extent, international demand for garments have benefited Cambodia at Myanmar’s expense. Future growth prospects will depend not just on the United States but the entire world economy. If world demand for Cambodian products decline significantly, the country’s economic outlook could be adversely affected. As mentioned earlier, FDI inflows have declined since the 1997 financial crisis. It fell from US$ 293 million in 1996 to less than half, at US$120 million, in 2001. However, FDI approvals recovered in the first half of 2002 and may give the economy a boost in the short-term. Meanwhile, ODA commitments are encouraging — international agencies promised grants and loans of US$560 million in 2001, which is more than half of the government budget. Out of this budget, Japan, France, and Australia alone donated US$118 million, US$36 million, and US$25 million respectively. However, according to the government’s plan, the country needs about US$1.45 billion for the next three years from the international community for administrative and legal reforms, mainly to tackle corruption. There is a good chance that Cambodia may receive it, although international donors have criticized the government over the slow pace of reforms — there is a gap between commitment and disbursement. For example, the country introduced one reform measure to reduce the size of the army (just like Vietnam). Many ex-army men were promised compensation from ODA funds. However, they are still waiting for the compensation since nothing has materialized from the promise. Tourism in Cambodia has been increasing significantly and it is expected to grow further, provided there is improvement in roads and airports. One bit of good news regarding the improvement of infrastructure in Cambodia is the World Bank’s approval of a loan to repair provincial roads (Economist Intelligence Unit, August 2000). The increase in world demand for the country’s products, however, may aggravate inflation and cause the foreign exchange rate to appreciate (but it is likely to be modest).

54 © 2003 Institute of Southeast Asian Studies, Singapore

THE ASEAN-10

Cambodia: Selected Economic Indicators, 1998–2004F 1998

1999

2000

2001

2002

2003F

2004F

1.8 1.5 2.1 5.1 7.7 –0.6 2.5

5.0 6.9 6.9 5.0 12.0 5.8 4.8

4.5 5.4 7.7 5.8 29.0 3.1 –2.7

5.3 5.3 6.3 5.5 12.0 1.9 5.0

5.0 4.5 4.5–5.0 4.0 10.9 1.8 3.0

6.4 6.1 5.0–6.0 5.0 12.6 2.5 5.4

6.4 — — 6.2 8.4 7.3 4.1

Exports (US$ million) Imports (US$ million) Trade balance (US$ million)

913 1,073 –160

1,323 1,241 82

1,358 1,418 –60

1,603 2,183 –580

1,750 2,500 –210

1,900 2,750 –350

2,000 2,900 –900

Inflation CPI average (% change) External debt (US$ billion)

12.6 2,039

0 2,083

0.5 2,100

0 1,158

2.0 —

3.0 —

3.5 —

390

388

502

—

—

—

—

15.7 3,756

17.3 3,803

26.9 3,854

18.0 3,900

16.0 3,960

14.0 4,000

— 4,100

GDP growth (% change) (Official) (ADB) (EIU) Regional Outlook Industry sector growth (% change) Services sector growth (%change) Agriculture sector growth (% change)

Foreign exchange reserves (US$ million) M2 growth (% change) Exchange rate (Riel/US$1)

SOURCES: Country Presentation for Cambodia, Third United Nations Conference on the Least Developed Countries, 2001; ADB, Asian Development Outlook 2002; ADB, Key Indicators 2001; EIU, Country Report, August 2002.

If economic reforms continue on the right track, external assistance increases as promised, physical infrastructure improves, and human resource development advances, the GDP growth rates for 2003 and 2004 are estimated at 5.0 per cent and 6.2 per cent respectively. However, it seems that economic growth alone is not enough; poverty should be addressed urgently since 36 per cent of Cambodians live below the poverty line and, according to ADB estimates, 90 per cent of the poor live in the rural areas.

T

he performance of President Megawati Soekarnoputri’s administration in reviving the economy during the past year has been mixed at best. However, it has to be stressed that the current economic problems are very difficult indeed. Hence, too much was probably expected of Megawati’s administration initially. Nonetheless, there has been a positive trend in both economic and social development in 2002. The exchange rate has stabilized within a tolerable range of about Rp9,000 to the U.S. dollar. Macroeconomic developments have brought about a relatively stable social

Indonesia

55 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

environment by July 2002, which has made the government optimistic. Despite the present improved economic indicators, Indonesia’s weaknesses, namely, the lack of credibility of public institutions and the political uncertainty, have not disappeared. In the second quarter of 2002, the gross domestic product (GDP) grew by 3.51 per cent year-on-year (y-o-y), which was higher than the first quarter. This pulled up the y-o-y GDP growth rate in the first half of 2002 to 2.87 per cent. The main contributors to the stronger growth were the private sector and government consumption, which grew by 6.3 per cent and 9.4 per cent respectively. Although private consumption has been rising steadily, its growth is now slowing down. The strong growth of private consumption was driven by non-foods. Strong non-food consumption is consistent with some leading indicators that include motorcycle and motor vehicle sales. For example, motorcycle sales has been remarkable in the last few years. Similar trends have also occurred with respect to the sales of motor vehicles, cement, and electricity. Non-food consumption growth rates had accelerated since mid-2001 as a result of the increase in consumer credit, wages, and the decline in prices of some goods. In addition, a recovery in consumer confidence may have contributed to the acceleration, while inflation hedging activities by consumers may have prompted the increase in durable goods consumption. In contrast to the strong consumption growth, investment remained bleak. In the second quarter of 2002, the growth of gross fixed capital formation declined by 1.01 per cent, compared with the same period the previous year. While domestic investment growth has remained positive, the significant drop in foreign investments has caused total investments to contract. Recent export data released by the Central Bureau of Statistics (BPS) indicate a possible positive trend for export growth in the future. Total exports contracted by 5.2 per cent for the period of January–July 2002, compared with the same period last year. Nevertheless, the trend is positive. There is a similar pattern occurring for non-oil exports, which contracted by 1.25 per cent for January–July 2002, compared with the same period last year. In terms of production, the agricultural sector grew by 6.25 per cent, compared with the same period last year. However, the manufacturing sector showed a declining trend. In the second quarter of 2002, the manufacturing sector grew by 2.8 per cent (y-o-y), slower than the first quarter of 2002 (4.4 per cent). In the same quarter, four out of nine industries, including textile and wood products experienced negative growth. The slowdown of the textile industry is partly due to weakening demand in the U.S. market. The Extended Fund Facility (EFF) programme, which has been extended until end-2003, will still be needed for two reasons. Firstly, the main prerequisite for an economic recovery is to implement government policies consistently. Like it or not, pressure from the International Monetary Fund (IMF) is needed as a strong reminder to the government that economic recovery should be one of its policy objectives. Secondly, the IMF-supported programme is one of the requirements of the Paris Club III agreement that has to be met. The Paris Club is an ad hoc forum held in Paris, where Western creditor governments discuss the renegotiation of debts owed to official creditors or guaranteed by them. Despite the anti-IMF campaign by Indonesia’s Minister of Planning, the IMF Board meeting approved the programme review on 21 June 2002 and disbursed a loan of US$358 million.

56 © 2003 Institute of Southeast Asian Studies, Singapore

THE ASEAN-10

Since the beginning of 2002, there has been a trend of strong appreciation and less volatility of the rupiah. Based on such developments, the currency is expected to be stronger in 2002, compared with the previous year and forecast to range between Rp9,000–Rp9,300 to the U.S. dollar. However, the currency may under-perform if the government fails to accomplish its economic agenda, which includes implementing the financial restructuring programme consistently, improving business conditions, make steady progress in the Indonesia Bank Restructuring Agency (IBRA) sale of assets programme, and privatizing state enterprises. For the period January–August 2002, the inflation rate reached 5.61 per cent (5.31 per cent for January–July 2002). If such development persists, overall inflation in 2002 would be running at about 9 per cent. A stronger rupiah would provide more room for the Central Bank to continue to relax its monetary policy stance. Taking into account the inflation target, the Bank Indonesia’s Certificate (SBI) rate is expected to decline further to 13–14 per cent by end-2002. In general, the banking sector has improved, as reflected by the rising value of credit in rupiah, higher capital, positive operational profit, net interest margin (NIM), and marginal improvement of non-performing loans (NPL) in terms of absolute value as well as in terms of ratio to total credit. Total bank credit rose by 2.5 per cent, from Rp347 trillion in May 2002 to Rp355 trillion in October 2002. The rise in credit allowed the loan to deposit (LDR) ratio to move slightly higher, from 38.8 in May 2002 to 40.0 in October 2002. In mid-August 2002, the draft of the state budget for 2003 was unveiled. The 2003 budget expects to spend Rp354.1 trillion (compared to Rp344 trillion in 2002) and bring in revenues of Rp327.8 trillion (compared to Rp301.8 trillion in 2001), leaving a budget deficit of Rp26.3 trillion or 1.3 per cent of GDP, compared with 2.5 per cent of GDP targetted in 2002. To meet the 2003 deficit target, the government plans to further cut fuel, electricity, and food subsidies. Market sentiment in the Jakarta stock market was positive in early 2002. However, the improvement of market sentiment has stalled since May. At the end of July, Asian stock prices plunged as a result of the deterioration in the U.S. stock market. The Jakarta Stock Exchange Composite Index (JCI) moved in tandem with regional stock markets, with a sharp fall of 8 per cent to 463 in July 2002 and a smaller decline of 4 per cent to 443 in August 2002. The bearish sentiment in world stock markets seemed to have impacted on Indonesia since May 2002, when the JCI began to fall. The ability of the government to attract foreign investments to Indonesia is highly dependent on political stability and the ease of doing business in the country. Political instability, labour problems, and local taxes can increase the cost of doing business in Indonesia. As long as the political situation remains unstable and the cost of doing business remains expensive, there will be little interest in investing in Indonesia. In view of the obstacles President Megawati’s administration has to face in addressing the problem of good governance, it does not appear likely that the cost of doing business will decline in 2002. Much needed foreign investment will not return unless significant reforms are made to strengthen institutions in the political and legal systems.

57 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

Notwithstanding the acceleration of GDP growth in 2002, the level of Indonesia’s GDP remains below the pre-crisis level. However, encouraging progress has been made during the year. For 2003, the Indonesian economy will still be driven mainly by private consumption. On the external side, although exports continued to experience slow growth in the first quarter of 2002, it is likely that it will improve in the second half of 2002. Foreign investments will remain low, unless Indonesia creates a more competitive environment. On the domestic front, although bank recapitalization has been completed, the banking sector is still experiencing difficulties. The loan to deposit ratio remains low, indicating the limited ability of the banking sector to provide credit to the real sector. Under this situation, it is difficult to expect monetary policy to be effective. Coupled with political instability, labour problems and local taxes, these factors will influence Indonesia’s economic growth in 2002. However, consumption-led growth is not sustainable over the long term. Sustainable economic growth can only be achieved through strong investments and exports. Unfortunately, Indonesia still faces many problems in investments because of banking problems and the poor investment climate. Given these limitations, the Indonesian economy is expected to grow by 3.8 per cent in 2002, 4.4 per cent in 2003, and 5 per cent in 2004.

Indonesia: Selected Economic Indicators, 1998–2004F

GDP growth (% change) Industry sector growth (% change) Services sector growth (% change) Agriculture sector growth (% change) Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Inflation/CPI average (% change) Gross external debt (% of GDP) Foreign exchange reserves (US$ billion) One month SBI rate (% per annum) M2 growth (% change) Exchange rate average (Rupiah/US$1)

1998

1999

2000

2001

2002E

2003F

2004F

–14.2 –11.4 –10.7 –1.3

0.8 3.8 –0.7 2.7

4.8 6.2 5.5 1.7

3.3 4.3 3.5 0.6

3.8 4.4 4.5 2.1

4.4 5.2 4.7 2.3

5.0 5.9 4.9 2.6

50,371 31,942 18,429

51,241 30,600 20,641

65,408 40,366 25,042

57,363 34,669 22,694

60,231 35,016 25,215

65,050 37,817 27,233

72,205 41,220 30,985

77.8

20.8

3.8

12.6

9.8

8.5

7.6

112.2 23.8

104.1 24.4

91.5 29.4

95.0 28.1

75.0 29.3

65.0 30.1

60.0 31.8

38.4 28.2

23.1 11.9

12.6 15.6

17.2 11.8

14.5 12.4

13.3 14.0

13.0 14.0

9,829

7,804

8,330

10,200

9,500

9,200

9,200

SOURCES: Bank Indonesia; the Central Bureau of Statistics (BPS); and authors’ estimates.

58 © 2003 Institute of Southeast Asian Studies, Singapore

THE ASEAN-10

T

he Lao People’s Democratic Republic is a less developed country (LDC), with approximately 40 per cent of its population still living below the poverty line. The average per capita gross domestic product (GDP) is about US$400. Since the late 1980s, the country has been undergoing a gradual process of economic transition, away from the central planning methods adopted after 1975, and towards a more market-oriented economy. This process has been titled the “New Economic Mechanism”, and broadly parallels the doi moi economic reform process in neighbouring Vietnam. However, this transition process has been very gradual, with only limited impact on the rural parts of the country that lie beyond the handful of major towns. The government aims for Laos to graduate out of LDC status by 2020, but this will be an uphill task. Having largely recovered from the contagious effects of the Asian financial crisis, transmitted from neighbouring Thailand, Laos’ policy-makers have been able to regain some degree of economic and monetary stability in recent years. However, as a bout of currency depreciation in mid-2002 showed, the overall health of the economy remains quite fragile. In mid-2002, the kip begin to slide in value, against both foreign currencies widely used in Laos: the U.S. dollar and the Thai baht. Laos is a highly dollarized economy, with far more dollars and baht floating around the economy than Lao kip. Contributory factors behind this recent bout of depreciation are unclear, although the issuance of new 10,000 and 20,000 kip notes may have played a part in triggering a run on the local currency. Public confidence in the local currency is jittery, particularly since the late 1990s. Between 1997 and 1999, Laos’s local currency — the kip — went into a downward spiral, falling from less than 1,000 kip to the U.S. dollar in early 1997 to over 8,000 kip by 2000. The devaluation of the Thai baht initiated this decline in the kip, and an erroneous decision to spend a large proportion of the country’s reserves on water pumps — in a partly successful bid to radically increase the dry season paddy harvest, and thereby ensure food security — served to exacerbate the depreciation. Indeed, the depreciation of the kip even exceeded that of the Indonesian rupiah. This sharp depreciation sparked high inflation in the late 1990s (peaking at over 130 per cent in 1998), and consequently, the real incomes of government employees and other urban workers contracted markedly. The degree of distress felt by Laos’ urbanites galvanized the government into pushing forward with economic reforms in 2000, which came as welcome news to the resident community of bilateral and multilateral development agencies that had become increasingly frustrated with the lack of economic reform momentum in the latter part of the 1990s. In April 2001, the International Monetary Fund (IMF) resumed lending to Laos, with a US$40 million, three-year Poverty Reduction and Growth Facility (PRGF). This has become a critical platform on which other development assistance activities are being enacted, including World Bank credits to assist in financial management adjustment and capacity building, unveiled in mid-2002. The Asian Development Bank is also very active in Laos. The IMF’s assessment on progress made by Laos during the first year of its loan programme was “generally satisfactory”. This is hardly a ringing endorsement, but some advances have apparently been made, seen in upward revisions in the prices of various utilities and services, and scheduling a phased restructuring of the state-owned banks.

Laos

59 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

An important element of the economic reform process in the next few years will be the phased restructuring and recapitalization of the country’s three state-owned commercial banks (SOCBs), which together account for about 65 per cent of total banking assets in Laos (of about US$400 million). All three SOCBs have been consistently loss-making, have non-performing loan levels in excess of 70 per cent of total loans, have negative capital adequacy, and are effectively insolvent. With the assistance of the Asian Development Bank and the World Bank, two of these SOCBs — Lao May Bank and Lane Xang Bank — are destined to be merged into a single entity. The third, Banque pour le Commerce Exterieur Lao (BCEL), Laos’ single largest bank by far, will also undergo radical restructuring. It is expected that these banks will be recapitalized in stages over the next three years, as they meet specific targets, under a points-based — “carrot and stick” — performance measurement regime. About 80 per cent of the banks’ bad loans are to state-owned enterprises, and hence, any revival of the banks is dependent upon parallel moves to reform the state enterprise sector in the country. Laos was successful in divesting most of its 640 state enterprises in the first half of the 1990s. However, a rump of about thirty “strategic” state firms remain in the public sector, and policy lending to a handful of these has resulted in most of the high non-performing loan levels in the SOCBs. Some of these state enterprises are simply badly managed, and seemingly have a general disregard for the basic principles of lending. Other state enterprises are obliged to charge subsidized rates for the utilities and services — such as water, electricity, and domestic flights — that they provide. There is, therefore, a need to revise upwards the prices they charge, to levels at which they can perform as commercial entities. Where essential services and utilities are to remain subsidized by the government, such subsidies need be funded by the state budget, rather than by the banking sector. Another important issue to monitor in the coming years will be the government’s new decentralization drive, which is granting greater autonomy to Laos’ eighteen provinces and districts. The official slogan for this decentralization process is: “making the province the strategic unit, the district the budget planning unit, and the village the implementing unit”. Some provinces, particularly in the south, have reportedly seized on this initiative with considerable vigour. The logic behind an economic and administrative decentralization drive is far from clear, but the government’s decision may just be turning a de facto situation into de jure. Communications within the country remain rudimentary, rendering some provinces remote from the capital. All but two of the country’s provinces have a border with at least one of Laos’ five neighbouring countries: Cambodia, Thailand, Myanmar, China, or Vietnam. As a result, their local economies can be fairly independent from the centre. In this context, a degree of economic and administrative decentralization seems appropriate, although considerable doubt surrounds the ability of some provinces to adequately manage and balance their public finances. Tellingly, a previous attempt at decentralization, in the late 1980s, was extremely unsuccessful. Even the national government’s track record with public finances is fairly poor, consistently running a budget deficit — equivalent to about 8 per cent of GDP in 2001, on revenues of 15 per cent of GDP, and expenditures of 23 per cent of GDP — which is financed from grants and soft loans from external donors.

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However, political decentralization is not expected to follow in the wake of economic and administrative decentralization, as the ruling Lao People’s Revolutionary Party (LPRP) — the only permitted political party in Laos, under the 1992 constitution — retains a strong hold on power throughout the country, right down to the village level. Indeed, the LPRP’s willingness to consider some degree of economic and administrative decentralization, without much concern that its grip will be loosened, is a reflection of its confidence that it securely holds the reins of power. Whilst Laos’ economic problems are often perceived to be those of a transitional economy, this is only part of the picture. The leadership’s attempt to create a socialist economic system in the late 1970s was a relatively brief and half-hearted affair. Subsequent attempts at economic reform have also displayed a degree of ambivalence at times. Vientiane has become accustomed to receiving relatively large sums of grant aid, soft loans, and other forms of external assistance, and partly as a result of this economic safety-net, a general lack of urgency seems to permeate government policy-making. Laos’ most fundamental economic challenges are those of a less developed country, with a population of about 5.3 million

Laos: Selected Economic Indicators, 1998–2003F

GDP growth (% change) Industry sector growth (% change) Services sector growth (% change) Agriculture sector growth (% change)

1998

1999

2000

2001

2002E

2003F

4.0 9.2 5.5 3.1

7.3 7.9 6.9 8.2

5.9 7.5 6.2 5.1

5.6 8.5 6.0 3.9

5.8 — — —

6.1 — — —

Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Balance of payments on current account (% of GDP)

337 553 –216

363 554 –191

393 591 –198

425 653 –228

461 725 –264

501 805 –304

–10.1

–6.3

–5.8

–7.2

–8.0

–8.0

Inflation/CPI average (% change) M2 growth (% change) Three month interest rate (% per annum)

87.4 113.3 31–34

134.0 78.3 22–30

27.0 45.8 16–24

7.8 20.0 —

6.5 18.0 —

6.0 16.0 —

Gross external debt (US$ million) Debt service ratio Foreign exchange reserves (US$ million)

2,561 11.1

2,617 11.4

2,558 10.1

2,662 10.5

— 9.8

— 9.2

3.2

8.8

7.9

8.0

—

—

2,135

4,274

7,600

8,140

10,000

11,000

Budget deficit (% of GDP) Exchange rate at year-end (Kip/US$1)*

*Official rate. SOURCES: Asian Development Bank, and International Monetary Fund.

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people, spread sparsely across over 236,000 square kilometres (of which much is mountainous and almost half is forested), linked by an inadequate transport system that spans the country’s challenging terrain. As a result, transaction costs are high, domestic markets are difficult to develop, and subsistence agriculture remains the principal endeavour for many, operating in a non-monetized economy. An additional challenge that confronts the Lao economy is the legacy of U.S. bombing over large parts of the country before 1975. Unexploded ordnance (UXO) is still evident in thirteen of Laos’s seventeen provinces, and contaminates up to half of the total land area. In addition to its continued toll on civilians, the presence of UXO constrains agricultural activity in large parts of the country, and inhibits food security for many Lao. Whilst ridding Laos of UXO will seemingly take several decades, Vientiane aims to rid the country of all opium production and swidden agricultural methods (sometimes referred to as “slash-andburn”) by 2005.

Malaysia

A

lthough Malaysia’s economy registered near-flat growth in 2001, the country is expected to recover and grow by 4.2 per cent in 2002. Economic recovery will be attributable to an improvement in domestic demand and export performance. In the light of a more favourable external environment, exports have improved significantly since the second quarter of 2002. Private consumption spending has strengthened during the past year because of higher export earnings, an upward salary revision in the civil service and individual tax rebates. However, private investment growth will be modest in 2002. Nevertheless, capacity utilization in the manufacturing sector has edged-up during the year to meet the stronger global demand for Malaysian exports (especially electronic and electrical products). From the fiscal stimulus packages totalling RM7.3 billion that were announced in 2001, only 61.5 per cent was spent because of delays in project implementation as at end-February 2002. Hence, there still remains a sizeable portion of fiscal expenditure due in the year. Public sector expenditure is thus expected to contribute 1.3 percentage points to gross domestic product (GDP) in 2002. With an improving economic outlook, fiscal policy will be less expansionary over the next two years. The government has targetted a fiscal deficit of 4.7 per cent in 2002 (originally forecast at 5.1 per cent) and 3.9 per cent in 2003. Inflation has been kept in check and monetary policy is expected to remain accommodative to facilitate economic recovery. Foreign reserves are relatively robust at US$34 billion in November 2002, adequate to finance 5.4 months of imports and 5.1 times short-term external debt. Malaysia’s exchange rate peg to the U.S. dollar is unlikely to be scrapped in the next two years unless there is a severe exchange rate misalignment with regional currencies. The domestic banking system has proved to be resilient with risk-weighted capital adequacy ratio of 13.3 per cent (as of September 2002), well above the Bank of International Settlements (BIS) standard of 8 per cent. The extensive bank consolidation exercise in which

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all domestic financial institutions (that is, commercial banks, merchant banks, and finance companies) were merged into ten anchor banks was completed in 2002. To prepare the domestic banking sector for financial liberalization, a second wave of bank mergers seems inevitable. Pengurusan Danaharta Nasional Berhad (Danaharta) and the Corporate Debt Restructuring Committee (CDRC) have done a fairly good job in cleaning up most of the bad loans in the banking system. Danaharta has acquired about 40 per cent of non-performing loans (NPLs) from the banking system and has disposed of almost 90 per cent of them. Danaharta is currently winding up its operations and plans to complete its assets disposal and restructuring by 2005. Meanwhile, the CDRC ceased operations on 15 August 2002 after successfully resolving 98 per cent of cases accepted, with a total value of RM43.97 billion. The 2003 Budget, announced on 20 September 2002, was rather disappointing. The widely anticipated corporate tax cuts did not materialize but domestic small and mediumscale industries (SMIs) were given a significant 8 per cent tax reduction. This is in line with the government’s plans to revitalize the domestic SMI sector. The government did, however, outline various tax and special incentives. For example, tax incentives were given to foreign companies that use Malaysia as a regional distribution centre or operational headquarters in the services sector. Other tax incentives were given to reduce the cost of doing business in Malaysia as well as to enhance exports. Despite these incentives, there are growing concerns that the country’s current tax regime is not competitive enough. Foreign direct investment (FDI) inflows to Malaysia have been trending downwards over the past few years because of rising labour costs, shortage of technically-skilled labour, as well as increasing competition from China. According to UNCTAD, FDI inflows to Malaysia fell markedly from US$3.8 billion in 2000 to US$554 million in 2001. The Malaysian Industrial Development Authority (MIDA) reported that Malaysia had received just RM5.8 billion worth of approved foreign manufacturing investments from January to September 2002, compared with RM18.8 billion for the whole of 2001. Hence, the government’s economic strategy has notably shifted focus towards diversifying the domestic economy. In particular, the government is keen to develop domestic-based sources of growth, such as education and health-care services, tourism, and biotechnology. In the services sector, tourism has been identified as an industry with enormous potential for future growth. Although the 11 September terrorist attacks on the United States caused tourist arrivals to plunge in November 2001, intense promotional activities by the government led tourist arrivals to recover and stabilize to about 1.1 million arrivals for the first half of 2002. Moreover, arrivals have increasingly diversified to include tourists from China and the Middle East. The government plans to establish Malaysia as a regional transport and logistic hub, especially in shipping and aviation — which would compete head-on with Singapore. This seems evident with the rapid development of Port Tanjung Pelepas and its recent securing of port handling business from Maersk-Sealand (the world’s largest mainline operator) and Evergreen Marine Corporation. The Malaysia Airports Holding Berhad (MAHB), which operates the Kuala Lumpur International Airport (KLIA), has also introduced attractive incentives, such as a five-year full waiver on landing and parking fees for international

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airlines. However, it would be difficult in the short-term for KLIA to compete with Singapore’s Changi airport or even Bangkok’s Don Muang airport, both among the world’s busiest passenger and cargo airports. The government has launched the much talked about Knowledge-based Economy (KBE) Master Plan in September 2002. This KBE Master Plan, which will facilitate Malaysia’s transformation from a production-based economy to a knowledge-based one, was among the initiatives recommended in the Third Outline Perspective Plan, 2001–2010 (OPP3). The Master Plan outlines seven strategic thrusts that focus on areas such as human resource development, institutional framework, info-structure and infrastructure, science and technology capacity, role of the private sector, a knowledge-based civil service, and bridging the knowledge and digital divide. Other recent government initiatives to develop a KBE include a venture capital fund of RM500 million to provide equity financing for companies involved in information and communication technology (ICT), as well as a RM 1.6 billion ICT fund (in collaboration with Japan Bank of International Cooperation). The government also plans to develop a biotechnology cluster called Bio-Valley Malaysia within the Multimedia Super Corridor (MSC). This cluster will consist of biotechnology research institutions, universities, and bio-technology companies. The three new research institutions that will form the core of Bio-Valley Malaysia are the National Institute for

Malaysia: Selected Economic Indicators, 1998–2004F 1998

1999

2000

2001

2002F

2003F

2004F

–7.4 –10.7 –5.0 –2.8

6.1 11.7 4.5 0.5

8.3 19.1 5.7 2.0

0.4 –6.2 5.7 1.8

4.2 4.9 5.0 1.1

5.0 6.1 5.2 1.5

6.1 9.4 7.0 2.4

75,411 60,033 15,378

84,621 65,389 19,232

98,229 81,963 16,266

88,005 73,866 14,139

92,845 75,343 17,502

100,737 81,446 19,291

112,322 91,301 21,021

5.2

2.8

1.6

1.4

2.1

2.2

2.5

Gross external debt (% of GDP) Foreign exchange reserves (US$ billion)

58.8 26.2

52.9 30.9

46.4 29.9

50.7 30.8

51.7 35.0

48.0 40.0

45.5 45.0

Three month interest rate (% per annum) M2 growth (% change)

9.4 1.5

4.1 13.7

3.2 5.2

3.1 2.2

3.2 6.0

3.3 7.8

3.5 8.5

Exchange rate at year-end (Ringgit/US$1)

3.80

3.80

3.80

3.80

3.80

3.80

3.80

GDP growth (% change) Industry sector growth (% change) Services sector growth (% change) Agriculture sector growth (% change) Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Inflation/CPI average (% change)

SOURCES: Bank Negara Malaysia, Ministry of Finance Malaysia, Economic Intelligence Unit (EIU), and author’s estimates.

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Agro-Biotechnology, National Institute for Pharmaceutical and Neutraceutical Biotechnology, and the National Institute for Genomics and Molecular Biology. The project is targeted for completion within the time-frame of the Eighth Malaysian Plan, 2001–2005 (8MP). Despite these ambitious plans, Malaysia’s transition to a KBE will be long and bumpy. One major stumbling block is the acute shortage of highly skilled manpower, particularly engineers and scientists. Attracting foreign talent will not be easy as many developed countries are also aggressively looking for knowledge workers around the world. Furthermore, the government’s recent proposal to introduce English as a medium of instruction in national schools for mathematics and the sciences — as a means to catch up on the technological ladder — has been met with stiff resistance. Regardless of the generous tax cuts given to domestic SMIs, it seems a tall order to expect this largely underdeveloped sector to pick up some of the slack from falling FDI over the short to mid-term. The economic environment in Malaysia over the next two years should remain stable. Although there will be a change of leadership when Dr Mahathir Mohamad steps down in October 2003, the next Malaysian Prime Minister, Abdullah Ahmad Badawi, is unlikely to make any drastic economic policy changes. Moreover, Malaysia’s economic policies are unlikely to deviate from its economic strategies as specified in the Second Industrial Master Plan (1996–2005), the 8MP, and the OPP3. Benefiting from stronger domestic demand, real GDP is expected to grow by 5.0 per cent and 6.1 per cent in 2003 and 2004 respectively. However, Malaysia’s economic outlook over the next two years, like the rest of Southeast Asia, will be more dependent on external developments. In the light of the declining trend in FDI and rising competition from China, Malaysia’s economic prospects over the longer term appears uncertain.

T

he performance trend of the Myanmar economy for the years 2000/01 and 2001/02 seems to be more of the same as in previous years, with the economy growing at double-digit rates, according to official sources. To many international and regional institutions, however, the official figures appear to be overestimated, and their estimates differ from official sources. While the gross domestic product (GDP) growth rate for 2000/01 revealed by officials was 10.9 per cent, the International Monetary Fund’s (IMF’s) figure was 6.2 per cent. Even the government’s own Central Statistical Organization reported a GDP growth rate of 13.6 per cent, which appears to contradict the official figure. For 2001/02, officials announced that the economy grew at 10.5 per cent but others think the figure is over-inflated and the economy might have slowed down that year. The Economist Intelligence Unit (EIU) came out with a 5.4 per cent growth rate for the same year. Both figures (official and EIU) are not necessarily inaccurate because it would depend on how they were calculated. Nevertheless, between the two figures, the EIU’s estimate is likely to be more realistic. The inflated official estimates could be due to factors such as the inclusion of informal sector production, which have never been included in the national accounting system. An example is small-scale household production which, interestingly, has now been included. On the other hand, those who consider the government figure

Myanmar

65 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

over-inflated could also be right as growth in the agriculture sector, which is closely linked to GDP growth, did not perform outstandingly well during the year 2001/02. However, favourable weather conditions resulted in better than expected performance in the rice sub-sector in 2001, despite sluggish growth in the agriculture sector as a whole (because of shortage of inputs such as fertilizers and other inputs). Myanmar was able to export about one million tons of rice (0.94 million ton) that year. The mining and energy sector also performed well during the last two years, particularly gas production. In early 2002, there were reports that the country’s income from selling gas from the Yetagun offshore gasfield to Thailand amounted to about US$130 million. Meanwhile, for the first time in recent years, the balance of trade for 2001/02 was positive and central tax revenue rose by about 20 per cent. These factors might have boosted the overall growth of the economy during the year 2001/02. On the other hand, there was a long list of negative factors which withheld the growth potential of the economy. The industry sector did not perform well because of power cuts, shortages of imported inputs, and weak external and domestic demand. Output of cotton yarn and cotton fabrics dropped by 18.9 per cent and 18.4 per cent year-on-year respectively (EIU, Country Report, August 2002). This might be due to weakening demand for garments from Myanmar — about thirty U.S. garment retailers stopped importing garments from Myanmar because of a consumer boycott in the United States. The value of garment exports from Myanmar declined 35 per cent in the first quarter of 2002 on a year-on-year basis. In addition, there was a sharp fall in foreign direct investment and a decline in tourist earnings. There was also back-pedalling in economic reform measures by the government — for example, the export and import ban on several commodities and items and the imposing of export taxes. Foreign firms are prohibited from import activities, which affected private sector businesses. There were also more restrictions on foreign exchange and a withdrawal of licences from selected private money-changers. At the same time, the local currency was grossly overvalued. In the last month of the financial year 2001/02 (March), the market rate for one U.S. dollar was equivalent to 900 kyats, whereas the official exchange rate was about 6.7 kyats. Foreign exchange reserves improved significantly, increasing to US$418.6 million by the end of January 2002 (equivalent to less than two months of imports) from US$200.9 million ten months ago. However, there are some signs that the rise in reserves may have stalled. Moreover, prices of basic goods including rice, cooking oil, and fuels, had started to rise gradually from the beginning of the year and sharply by the end of the financial year. As a result, even the official inflation rate was given as 35.5 per cent. Many believe that the real inflation rate in the country is running at about 50 per cent. One of the main factors causing high and persistent inflation was the growth in money supply (M2), which was running at the rate of about 50 per cent. Meanwhile, the budget deficit was about 4 per cent as military expenditure took up about 30 per cent of public spending. In short, the overall economy grew moderately during the financial year 2001/02 mainly because of the slow progress in implementing economic reforms and back-tracking of some reform measures. However, social indicators, especially child malnutrition, were not reflected in the average growth rate of GDP from 1993 to 2002. This is because when

66

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a country’s economy grows at around 8 per cent for 8–10 years, then national income should have doubled (as in the cases of East Asia, the older ASEAN members countries, and China). In addition, if a country’s national income had doubled within a decade, its standard of living would have been raised significantly, resulting in the improvement of social indicators. According to United Nations (UN) sources, the share of the population living below the poverty line in Myanmar in 1997 was 22.9 per cent, which was considered by the Asian Development Bank (ADB), in Asian Development Outlook 2002, to be underestimated. More worrying, the regional headquarters of the United Nations Children’s Fund (UNICEF) stated that the society in Myanmar was on the “brink of a humanitarian crisis”, especially women and children, as they were in an extremely precarious situation. What are the prospects for the growth of the Myanmar economy in 2003 and 2004? Recent political, economic, and social indicators suggest that there is less prospect for strong economic growth compared with previous years mainly because the military junta does not seem to be willing to introduce much needed overall economic reforms. Meanwhile, economic woes, such as high and persistent inflation, unsustainable budget deficits, dwindling foreign reserves, the grossly depreciated local currency, energy shortages, widespread corruption (although to a lesser degree than the neighbouring countries), and red tape, remain much the same problems as in previous years (if not worse). At the same time, the government is trying to boost economic performance by introducing a very ambitious Ten-Year Plan (2001/02–2010/11), which is divided into two short-term Five-Year Plans. The aim of the Plan is to double the GDP growth in ten years, with an average annual growth rate of 7.2 per cent in order to raise the socio-economic conditions of the people. According to official data, the target for the first year was over-achieved. However, the Plan lacks the main ingredients to boost the economy — that is, the widespread economic reforms that are necessary to correct the macroeconomic imbalances and reduce deepening poverty (EIU, August 2002). On the positive side, infrastructure such as roads, bridges, and dams has improved in recent years. The industrial sector, particularly the mining and energy sector, will grow but not as high as official projections. Production in the Yetagun and Yadana offshore gasfields will increase, and more gas is likely to be sold to Thailand. According to some press reports, there is a prospect of finding huge gas reserves in the Bay of Bengal. However, performance in the agriculture sector will be constrained by the policy of a compulsory quota system, lack of transparency in land policy, and shortage of inputs. The construction sector will continue to be weak as domestic demand continues to decline. Meanwhile, inflation is rising as prices are skyrocketting. The price of rice, the country’s staple food, doubled in August 2002, compared with one year ago in Yangon, probably as a result of last year’s export drive. Cooking oil and fuel prices have also risen alarmingly to triple-digit rates. According to AFP news agency (16 September 2002), long queues have been seen at government stalls set up in Yangon as people wait for hours for a few tins of the staple. There were also unsubstantiated reports of lootings of rice depots in some townships. More worrisome is the news that recent floods around the country may affect the year’s paddy harvest.

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The prices of meat, vegetables, and eggs are also rising at shocking rates. Inflation is estimated at about 50 per cent. Meanwhile, the value of the local currency is in free fall as confidence in the currency has deteriorated. The growth of money supply (M2) of nearly 50 per cent has also fuelled the price hike, together with the perennial budget deficits. In September 2002, the value of the kyat hit an all-time low of 1,200 kyats to one U.S. dollar in the free market whereas the official rate is still around 6.9 kyats. The price of gold is increasing almost at the same rate as the declining kyats. One year ago, the price of gold was half of the present price of about 200,000 kyats. The value of the kyat will continue to fall in the near future and the price of gold will continue to rise. Although the salaries of one million civil servants were increased by five times the previous year, they still do not match the price hike of basic goods. Based on these facts, some critics argue that the current economic situation seems worse than in September 1988 when the present military junta took control of the country. To make things worse, the foreign exchange reserves situation is not encouraging. Foreign direct investment (FDI) has significantly decreased as 46 foreign firms from 14 countries and 30 out of 43 foreign bank offices have withdrawn from Myanmar. Moreover,

Myanmar: Selected Economic Indicators, 1998–2004F 1998

1999

2000

2001

2002

2003F

2004F

5.7 5.7 5.7 5.1 8.9 6.6 3.7

5.8 5.8 5.8 5.0 6.6 7.9 3.5

10.9 10.9 10.9 5.8 13.7 8.8 10.5

13.6 6.2 6.2 5.5 20.6 13.2 9.5

10.5 — 5.4 5.0 14.7 9.0 3.4

7.2 — 5.2 5.6 14.7 9.0 3.5

7.2 — 5.6 6.2 14.7 9.0 4.2

975 2,107 –1,132

1,199 2,375 –1,176

1,371 2,115 –744

1,884 2,473 –1,589

2,817 2,809 8

2,950 2,200 –750

3,100 2,500 –600

Inflation CPI average (% change)

33.9

30.1

15.7

–1.7

34.5

34.2

15.3

External debt (US$ billion) Foreign exchange reserves (US$ million)

5.1 250

5.6 315

6.0 266

6.0 223

5.5 411

5.7 —

5.4 —

M2 growth (% change)

29.6

28.5

27.2

42.4

43.9

—

—

Exchange rate (Kyat/US$1: Official) Exchange rate (Kyat/US$1: Market)

6.2 241

6.2 334

6.3 420

6.7 630

6.9 710

6.9 900

6.9 1,300

GDP growth (% change) (Official) (ADB) (EIU) Regional Outlook Industry sector growth (% change) (ADB) Services sector growth (%change) (ADB) Agriculture sector growth (% change) (ADB) Exports (US$ million) Imports (US$ million) Trade balance (US$ million)

SOURCES: Central Statistical Organization (CSO); Ministry of National Planning and Economic Development, May 2001; ADB, Asian Development Outlook 2002; IMF, Country Report (January 2001); EIU, Country Report (August 2001); Programme of Action for 2001–2010; and IMF, Direction of Trade Statistics.

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foreign trade will be affected by restrictions in exports and imports and the foreign exchange regime. The country will find it difficult to increase exports because the private sector’s activities remain restricted. Meanwhile, sanctions imposed by the West are intact. As negative factors outweigh positive ones, the short-term economic outlook for Myanmar is not encouraging and uncertain. This is mainly due to the government’s reluctance in implementing much-needed widespread reform measures to correct severe macroeconomic imbalances. To conclude, the ADB’s statement that “While growth remains constrained, the prospects for a headway in poverty reduction are minimal” (Asian Development Outlook 2002, p. 59) and the World Bank’s warning that “Continuing lackluster economic performance that fails to improve living standards of the majority of the population could have devastating consequences for poverty, human development and social cohesion in Myanmar” (1 September 1999, p. 1) should be seriously taken into consideration.

I

n 2002, the Philippine economy continued to face difficulties from a weak external environment. Although economic output has recovered from a downturn a year ago, the slower-than-expected recovery in the global economy constrained the country’s export-driven growth. Nonetheless, exports have turned around to underpin the strong improvement in external balances. Inflation rates have been well contained while interest rates, monetary growth, and exchange rates remain generally stable. Except for a disappointing outcome in the fiscal sector, the economy as a whole performed relatively better than in 2001. Economic conditions are expected to improve albeit moderately in 2003. Growth will continue to be export-driven, as the country’s electronics exports benefit from the acceleration in global demand and complete liquidation of inventory cycle in the U.S. information technology (IT) sector. As in previous years, private consumption will be robust and provides an important source of growth on the demand side, although the rising unemployment rate (13.9 per cent as of June 2002) can be a limiting factor. Government spending will slow down as efforts to consolidate the fiscal position gets under way. However, the moderation in public spending will be limited by election-induced spending towards the end of 2003 (as the campaign period starts to kick off for the presidential elections in 2004). On the supply side, industrial output, particularly manufacturing, is expected to rise by 4.7 per cent in tandem with greater activity in the electronics industries, as exports continue their recovery. However, capacity constraints in the manufacturing sector as well as a slow pick-up in construction will dampen the ability of industry to pace a much higher growth in output. Although growth in services will be steady at 6 per cent (mainly because of increases in output of telecommunications, trade, and financial services), the weakness in agriculture until the first half of the year as a result of El Nino further undermines the overall momentum of gross domestic product (GDP) growth to reach its potential. Given the dependence of the Philippines on external demand, the downside risks to this outlook hinge critically on the strength of the U.S. recovery. Assuming economic growth in the United States turns more decisively sluggish as the crisis in corporate governance

Philippines

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re-emerges and the geopolitical risks of the war in Iraq intensify, then the export-driven growth in the Philippines will be at risk again, unless domestic demand picks up strongly. This is unlikely, however, given the structural weaknesses in the domestic economy, particularly the fragility of the banking system and slow progress in power reforms. At the same time, political economy considerations may also figure prominently in the near-term outcome of the economy, as politicians get ready for the 2004 elections at the expense of economic priorities that need immediate attention. External balances will be generally stable amid a moderate growth in the external environment. As the global economy accelerates to 3.7 per cent (IMF, World Economic Outlook, September 2002) the country is well positioned to benefit, given its high dependence on trade. Export growth is likely to rise to 6.7 per cent from an estimated growth rate of 4.1 per cent in 2002 owing partly to increased intra-regional trade, particularly in ASEAN. However, merchandise imports are also expected to rise by almost 10 per cent to reflect the increased activity in the manufacturing sector and the large imported components of the country’s electronics exports. This should lead to a smaller trade surplus of US$2.1 billion, compared with its level of US$2.9 billion a year ago. While the income account balance will remain positive with the improving global economy, the deficit in the services account and a smaller trade surplus will cause the current account surplus to narrow steadily to US$1.3 billion by end-2003. Given investors’ concerns over the outcome of the elections in 2004, portfolio investments will continue to be weak. Reflecting this, the official reserves will see a slight improvement at US$16.9 billion by year-end as the peso edges lower to P53 against the U.S. dollar. Over the next two years, the country’s central bank (Bangko Sentral ng Pilipinas) will continue to accommodate the growth in money stock, consistent with its inflation targets. The average inflation rate is expected to go up to 5.6 per cent in 2003 from 3.8 per cent in 2002, caused mainly by higher food prices (as a result of poor harvests). Rising energy prices (as tensions in Middle East escalate) can also lead to further inflationary pressure. Nonetheless, the inflation environment will be generally subdued. As a result, it is likely that key policy rates (overnight lending and borrowing rates) will be reduced early in 2003, following a global monetary easing by the Federal Reserve. However, any upward adjustment in interest rates later will be made quickly as soon as indications of the strengthening of final demand in the United States becomes clearer, such that by end-2003 the three-month rates (91-day T-bills) are likely to average higher at 8.1 per cent. Adjustment in rates will also be influenced by rising inflation rates as the country remains committed to its inflation targetting policy. On the fiscal front, the government seeks to limit fiscal expansion at 3.3 per cent of GDP. However, owing to structural problems of weak tax collection and low tax-effort ratio, fiscal difficulties will continue to prevail despite efforts to consolidate. Moving forward, the Philippines needs to confront three policy issues critical to sustaining the recovery. The first is the need to strengthen the financial system by getting rid of bad loans in the banking sector and cleaning up the balance sheets of the corporations. As of end-July 2002, the non-performing loans (17.7 per cent) and non-performing assets (14.6 per cent) of commercial banks were still high and rising, prompting the authorities to

70 © 2003 Institute of Southeast Asian Studies, Singapore

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pursue corrective measures to ensure financial stability. In 2003, the Special Purpose Asset Vehicle (SPAV) or asset management companies will be operational to effectively manage non-performing loans and assets and to provide incentives (such as tax breaks to buyers of bad loans and foreclosed assets) to facilitate corporate and financial restructuring. This is a positive development for the country especially if implemented properly. Restoring the health of the banking sector will allow the resumption of lending activities that are critical to much needed growth in investment and manufacturing. Indeed, the absence of aggressive bank lending had been one of the factors that undermined the strong revival in domestic demand in the past. Although fiscal sustainability is not yet a problem in the near-term, the risks are gradually increasing, as evident in the country’s high public sector debt to GDP ratio (estimated at 74.4 per cent in 2002). For 2003, the key fiscal challenge is how to meet the deficit target and remove the structural impediments that prevent efficient tax collection. Since 1997, the country’s revenue slippage has been substantial, and despite restructuring efforts in the past, problems such as low enforcement of tax regulations, inadequate tax settlement procedures, and narrow revenue base have persisted. Recently, the government has drawn up plans to restructure the Bureau of Internal Revenue (the main agency that collects 80 per cent of taxes), in addition to some modest tax proposals that include increase

Philippines: Selected Economic Indicators, 1998–2004F 1998

1999

2000

2001

2002E

2003F

2004F

–0.6 –6.4 –2.1 3.5

3.4 6.6 0.9 4.0

4.4 3.4 4.9 4.4

3.2 3.7 1.3 4.5

4.1 3.9 2.9 5.7

4.3 4.0 4.7 6.0

5.0 4.9 4.8 6.5

28,726 28,082 644

34,210 29,252 4,958

37,295 30,380 6,915

31,243 28,496 2,747

32,520 29,618 2,902

34,694 32,560 2,134

38,611 33,232 5,379

8.9

6.3

3.8

5.9

3.8

5.6

6.5

External debt (% GDP) Reserves (US$ billion)

69.7 10.8

70.7 15.0

78.7 15.0

73.9 15.6

74.4 16.5

75.0 16.9

74.5 17.0

Interest rate (%)* M3 growth (%)

15.3 7.4

10.2 19.3

9.9 4.6

9.7 6.8

6.4 6.9

8.1 7.1

8.0 6.5

39.06

40.31

50.00

51.40

52.80

53.0

52.0

GDP growth (%) Agriculture Industry Services Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Inflation (average)

Exchange rate (year-end)

* 91-day T-bill rate SOURCES: Country websites; Economist Intelligence Unit (EIU); and author’s estimates.

71 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

in excise tax, and a switch from a net to a modified gross income system of taxation. Plans to further pursue power reforms are also on the main fiscal agenda. It is expected that the transmission assets of the National Power Corporation will be disposed as early as 2003, while the major part of the facilities are projected to be sold off completely by end-2004. While these restructuring measures are encouraging, they represent at best a small step on a long road towards overhauling the entire tax system — a key to near-term improvement in revenue collection. Finally, there is a need to address the structural deterioration of investment in the country, as the continued under-investment in infrastructure and investment easily puts at risk the medium-term growth of the economy. From 1998, growth in fixed investment has been contracting at an average rate of 3.2 per cent annually, while the country’s investmentto-GDP ratio has been on a decline since 1996.

Singapore

T

he Singapore economy showed positive growth in 2002 after recovering from the worst recession since independence, when it shrank by 2 per cent in 2001. The economy in 2002 was driven largely by external demand for Singapore exports, most notably in specialty chemicals, pharmaceuticals, and petrochemicals. Electronic exports, which accounted for about two-thirds of Singapore’s exports, improved moderately after registering a sharp decline of about 20 per cent in 2001. With a small domestic market, Singapore has little choice but to continue relying on the external economy for growth. What the government can do, and has been doing, is to try to improve the overall competitiveness of business in Singapore. This is crucial as Singapore, which ranked the second most competitive economy in the world for the past five years by the International Institute of Management Development (IMD), slipped to the fifth position in 2002. To improve Singapore’s competitiveness, the Economic Review Committee, chaired by Deputy Prime Minister Lee Hsien Loong, recommended a lowering of tax rates in its initial report in April 2001. The government announced its acceptance of the main recommendation of the committee — that there should be a phased reduction in corporate and personal income tax rates — in its 2002/03 budget in May 2002. Accordingly, corporate tax rate will be cut by 2.5 percentage points from the year of assessment 2003, and the personal tax rate by 4 points, bringing both down to 22 per cent. They will be cut further to 20 per cent within three years. These will bring the tax rates closer to levels prevailing in Hong Kong. To make up for the loss in revenue, the Goods and Services Tax (GST) will be raised by 2 points, to 4 per cent from 1 January 2003 and to 5 per cent a year later. Despite the moderate rebound of the Singapore economy in 2002, its economic outlook remains highly uncertain for various reasons. First, global growth is becoming increasingly unpredictable. Economic growth in both the United States and Europe is decelerating, while Japan remains mired in a decade-long malaise. Secondly, the huge wealth destruction in the U.S. stock market had knock-on effects on stock markets worldwide and could be exacerbated by a bursting of the U.S. housing bubble. If that were to happen, it could halt the U.S. recovery and cause another recession in Asia. Thirdly, the

72

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U.S. West Coast port shutdown in October 2002 caused a slowdown of Singapore’s exports to the United States. Fourthly, a war in Iraq could push up the price of oil, causing a worldwide recession. Being a small and open economy, Singapore is extremely vulnerable to changes in external circumstances. In the midst of these uncertainties, there are some benign developments which should have a positive impact on Singapore. On the global scene, there are signs that the world is moving towards greater trade liberalization with the passing of a wide-ranging tradepromotion act in the United States, the signing of bilateral Free Trade Agreements (FTAs), and the launching of the World Trade Organization Doha Round. Amid the slowdown of its exports to the United States, Europe and Japan, Singapore, together with most Southeast Asian countries, is currently enjoying a roaring trade with China. In the second quarter of 2002 alone, Singapore’s non-oil domestic exports to China surged by a phenomenal 50 per cent. On the local front, Singapore has already concluded FTAs with New Zealand and Japan, and is currently seeking FTAs with the United States, Australia, Canada, and Mexico, and is lobbying for support for a similar trade deal with the European Union. By enacting such agreements, the government hopes to revive the economy by accelerating the exchange of goods and services, funds, and human resources with countries with which Singapore has strong ties. This is also expected to allow more exchanges of highly trained specialists and heavier investment between partner countries. As a result, Singapore continues to be an attractive place for foreign investors despite the fact that China is siphoning off the lion’s share of the foreign direct investment (FDI) flowing into East Asia. According to the ASEAN Secretariat, Singapore took 65 per cent of the US$13 billion of FDI invested in Southeast Asia in 2001. Fixed asset investments in Singapore’s key manufacturing sector totalled S$9.2 billion in 2001, with a further S$1.8 billion in the service sector. For 2002, the government is targetting S$9.2 billion in investments to the manufacturing sector and S$2 billion in services. In the long run, the Singapore economy is expected to become more diversified, reducing its dependence on the manufacture of electronic products. The manufacturing sector is expected to see a larger share of output from biomedical sciences (covering pharmaceuticals and medical technology), chemicals, and engineering. These three clusters could cushion the blow of the global electronic downturn but will need time to build their share of manufacturing capacity. While continuing to stress Singapore’s importance as a regional transportation and financial services hub for Southeast Asia, the government is expected to actively promote the development of other high value-added services, such as biomedical services, health-care, education, and telecommunications. Being a small islandstate, Singapore’s comparative advantage lies with services rather than manufacturing. Manufacturing is generally more land-intensive than services which tend to be more knowledge-based. With active encouragement from the government and the economic recovery in Southeast Asia, the services sector in Singapore should be able to grow much faster than the manufacturing sector, and its share of the gross domestic product (GDP) could jump from the current 67 per cent to 75 per cent within a decade. As services begin to account for a bigger share of its GDP, economic cycles in Singapore should become less bumpy, with shallower downswings. This is because the demand for services is less sensitive

73 © 2003 Institute of Southeast Asian Studies, Singapore

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to changes in income than for manufactured goods. They are, in a way, more recessionproof. Returning to the near term, Singapore’s economic growth is anticipated to pick up moderately to about 4.0 per cent in 2003, although much depends on developments both within and beyond Southeast Asia. Private consumption growth is expected to increase marginally in 2003, as the economy recovers and household incomes are boosted by the government’s tax reductions. However, the continuing high unemployment rate (expected to improve only slightly to 3.7 per cent in 2003), the increase in GST, and the prolonged slump in property and stock prices are all expected to dampen the growth of private consumption. However, Singapore’s non-oil domestic exports are expected to grow more strongly in 2003 after performing sluggishly for the previous two years. A recovery in external demand for electronics, chemicals, and pharmaceuticals should see a higher growth in both manufacturing and non-oil domestic exports in 2003. Singapore’s services are expected to show moderate growth, as the Bali bombings will slow down tourist arrivals and foreign direct investment flows to the region. This will adversely affect Singapore’s financial, transport, retail, and trade sectors.

Singapore: Selected Economic Indicators, 1998–2003F Economic Variable (% Change)

1998

1999

2000

2001

2002E

2003F

Gross Domestic Product Private Consumption Non-oil Domestic Exports Manufacturing Financial Services Construction Wholesale & Retail Trade

–0.1 –3.8 0.9 –0.6 –7.4 2.8 –4.1

6.9 6.4 9.5 13.6 5.1 –8.8 7.1

10.3 9.9 11.8 15.3 4.6 –1.7 15.2

–2.0 0.5 –14.5 –11.5 2.2 –2.1 –2.6

2.2 1.1 2.0 7.4 –1.8 –5.5 2.3

4.0 4.1 4.0 9.5 1.9 2.2 3.0

110.8 96.0 17.9

115.6 104.4 20.4

138.9 127.5 21.8

122.5 109.6 23.4

128.3 118.1 20.7

140.1 131.0 18.0

Consumer Price Index Unemployment Rate

–0.3 3.2

0 3.5

1.3 3.1

1.0 3.3

0 4.5

1.5 3.7

Official reserves (US billion) Official reserves (as months of goods imports)

74.9 9.4

76.8 8.8

80.1 7.5

75.4 8.26

80.9 8.22

82.3 6.86

Prime lending rate (% per annum) M2 growth (% change)

5.9 30.2

5.8 8.5

5.8 –2.0

5.4 5.9

5.4 6.0

5.1 7.0

Exchange rate (average) (S$1/ US$1)

1.67

1.70

1.72

1.79

1.79

1.82

Export (US$ billion) Import (US$ billion) Current account balance (US$bn)

E – Estimates; F – Forecasts SOURCES: MAS, Survey of Professional Forecasters, September 2002; and author’s estimates.

74 © 2003 Institute of Southeast Asian Studies, Singapore

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SINGAPORE’S FREE TRADE AGREEMENTS: IMPLICATIONS FOR ASEAN AND FUTURE CHALLENGES By Rahul Sen

I

n the aftermath of the East Asian crisis of 1997–98 and its adverse impact on trade and liberalization efforts within ASEAN and the Asia–Pacific Economic Co-operation (APEC), bilateralism has emerged as an alternative option to advance freer trade in East Asia. The option was initiated by Singapore, which has been pursuing bilateralism as a major instrument of its commercial trade strategy through its moves to engage in Free Trade Agreements (FTAs) with its trading partners. In this context, it has targetted its major trading partners, namely, the United States and Japan, as well as other trading partners, such as Australia, New Zealand, the European Free Trade Association (EFTA), Mexico, and Canada, to enter into bilateral FTAs. This strategy has been pursued with twin goals: first, to strengthen its economic linkages and gain a “first-mover” advantage vis-à-vis its major trading partners; second, to concomitantly look to enhance its market access in new, emerging market economies, that are equally committed to trade and investment liberalization across both goods and service sectors. This strategy is expected to help the Singapore economy to reduce its erstwhile dependence on other regional economies for its growth in trade prior to the crisis. This is especially in the light of changing post-crisis investor perceptions that the dynamism in trade and investment liberalization in Southeast Asia has been lost. The perception is largely due to the slow pace of economic recovery of some of the major economies from the crisis, as well as the increasing competition faced by the region from rapidly growing large emerging markets such as China. Singapore has already signed and implemented its FTA with New Zealand, is also close to implementing its FTA with Japan that was signed in early 2002, and

recently concluded its FTA with EFTA, which should be implemented by 2003.1 Negotiations are ongoing with the United States, Canada, Mexico, and Australia, with the possibility that the negotiations for a Singapore–U.S. FTA and a Singapore–Australia FTA would be completed by the end of 2002. In so far as the reasons for Singapore’s attraction to this “new regionalism” are already well known,2 this article provides a futuristic view of the possible implications for ASEAN from Singapore’s moves towards this new regionalism, and some of the recent initiatives taken by ASEAN itself to move towards this trend, and the challenges that lie ahead. Implications for ASEAN Singapore is an international trading, manufacturing and logistics hub and continues to serve as a major regional entrepôt for ASEAN, besides being a member of the regional trading bloc, namely, the ASEAN Free Trade Area (AFTA). Thus, the above moves towards bilateralism by Singapore have naturally been greeted with concern among the other member countries within the grouping. Although Singapore has assured other ASEAN members that its FTAs are “WTO-plus” in nature and would be trade-creating, not only for Singapore but also for the region, concerns have been raised about possible discriminatory effects for member countries. Besides this, some ASEAN members are also concerned that increasing attention towards bilateralism by a key partner, Singapore, would undermine its own efforts to enhance trade and investment liberalization among the region through the AFTA, which reached full implementation in 2002 for all except the four new members comprising the CLMV (Cambodia, Laos, Myanmar, and Vietnam).

1

Ministry of Trade and Industry, Singapore, http://www.mti.gov.sg. See R. Rajan, and R. Sen, “Singapore’s New Commercial Trade Strategy: Examining the Pros and Cons of Bilateralism”, in Singapore Perspectives 2002, edited by L.L. Chang (Singapore: Times Academic Press, 2002), pp. 99–130.

2

75 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

SINGAPORE’S FREE TRADE AGREEMENTS: IMPLICATIONS FOR ASEAN AND FUTURE CHALLENGES (continued)

In the light of the above, the pursuance of Singapore’s FTA strategy is likely to have important implications for future trading arrangements involving ASEAN as a grouping or any of its member countries. First, the increasing attraction towards FTAs by Singapore, which has been designed with a view to enhance trade and investment liberalization among like-minded trading partners, is likely to provide an inclination for some of the other ASEAN members that are in a position to enter into similar bilateral FTA arrangements, in order to avoid discriminatory treatment by some of the trading partners with whom Singapore has also signed or is contemplating an FTA. Thus, in July 2001, Thailand made its moves to explore possibilities of an FTA with Australia, which is also expected to be comprehensive, covering trade in both goods and services, as well as investment, and to be consistent with the World Trade Organization (WTO) in nature, on similar lines as the Singapore model. A joint study group has already submitted its report highlighting that such an FTA would be highly mutually beneficial to both trading partners.3 Very recently, Thailand has also proposed an FTA with Japan on similar lines, and is contemplating to further enter into such FTAs with many other trading partners whose exports do not compete directly with those of Thailand, namely, Mexico, India, New Zealand, Russia, and the Czech Republic.4 As other countries in ASEAN develop and aim to expand their market access, the bilateral route shown by Singapore is likely to influence them to enter into similar agreements, wherever it would be deemed beneficial, especially if ASEAN as a collective regional grouping fails to enhance its own efforts in stepping up regional trade and investment integration among the member countries.

3 4

Secondly, apart from Singapore, the merchandise trade of many of the ASEAN member countries, such as Thailand, the Philippines and most of the CLMV countries still constitute a significant proportion of agricultural commodities. Thus, unlike the Singapore model of FTAs, which has excluded the agricultural sector in the case of the Japan–Singapore FTA, other ASEAN members would find it extremely difficult to negotiate an FTA on similar lines with their trading partners without including agricultural exports. Since the agricultural sector is highly protected and also face non-tariff barriers through stringent environmental standards in the developed economies, namely, Japan and the European Union (EU), any possible FTA of ASEAN (both as a grouping and as individual member countries) involving such economies would be a problem to negotiate through. If such agreements exclude agriculture in order to avoid a deadlock in negotiations, then the resultant FTA would no longer be hailed as WTO-consistent. Thirdly, Singapore being a member of ASEAN is also likely to influence the overall regional grouping to explore possibilities for negotiating such FTAs with major trading partners within the Asia–Pacific region, thus creating a precursor towards an East Asia, and further, towards an APEC-wide FTA. Thus, Singapore’s moves towards bilateralism have led ASEAN as a grouping to engage in bilateral economic partnerships, or explore FTA possibilities with its important trading partners. Hence, the idea of forming an East Asian Free Trade Area involving ASEAN +3 (that is, China, Japan, and Korea) has evolved and its scope is being studied. Another very important development in this context has been the proposal by ASEAN and China to form an ASEAN–China FTA within a decade. Recognizing the increasing influence of China in the region and in

“Australia–Thailand FTA Joint Scoping Study”, at http://www.dfat.gov.au/trade/negotiations/thai_fta/index.html. “Thailand Seeks Free Trade Deal with Australia, Others”, at http://www.woolmark.com/index.shtml, 23 March 2001.

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the world economy after its entry into the WTO in 2001, Japan is also considering to propose an FTA with ASEAN in 2003, with negotiations to be decided upon once a basic framework outlining the various areas of bilateral co-operation are decided.5 Among other recent developments, ASEAN has also signed a trade pact with Australia and New Zealand to reduce trade barriers and enhance trade and investment linkages through a Closer Economic Partnership (CEP), with plans to introduce a possible FTA by 2010.6 There has also been a proposal by India to engage in a regional trading arrangement with ASEAN, details of which would be worked out through an ASEAN–India Economic Linkage Task Force.7 Notwithstanding the long-term benefits for ASEAN from these developments, the issue that is of concern is whether these proposals have the potential for realization within the suggested time-frame, and what major challenges ASEAN would face in order to make these FTAs a reality. This is pertinent in the light of the fact that the motivations behind most of these proposals appear to be largely political rather than economic in nature. Future Challenges The sheer political and economic diversity among the ten members in ASEAN poses a significant challenge for enhancing regional integration among the grouping itself. The financial crisis of 1997–98, which led many ASEAN economies to undertake comprehensive structural reforms, and caused political turmoil in one of the largest members, Indonesia, has already made this task quite difficult, with the resultant slow progress

in liberalization of their economies in both goods and services through AFTA and the ASEAN Framework Agreement on Services (AFAS) respectively. Although the AFTA has been implemented for the ASEAN-6, tariff barriers on all goods are still not dismantled, while AFAS has not been able to increase significantly the pace of service sector liberalization.8 Thus, the principal challenge before ASEAN to be successful in its FTA efforts is to increase the pace of liberalization and undertake necessary structural and institutional reforms in the member countries, wherever required, in order to enhance and sustain competitiveness in the global market, before it enters into the proposed FTAs with its trading partners to obtain substantial benefits from trade co-operation. This would be particularly important to ensure that its FTAs with large and rapidly growing economies (such as China) and economically developed countries (such as Japan, Australia) do not undermine its importance as a grouping. This would further require the older ASEAN members to encourage the new CLMV member countries to integrate their economies at a faster pace so that the overall economic progress of ASEAN is not constrained by the slower progress of the new members. These members have a larger time-frame under AFTA to open up their markets, which should help them to catch up with the older members. Finally, although the suggested FTA proposals are expected to be WTO-consistent and comprehensive in nature, covering all sectors, ASEAN member countries must ensure that they do facilitate, rather than impede the move towards the larger goal of liberalization in a multilateral forum through the WTO.

5

“Japan may discuss FTA with ASEAN next year”, Straits Times, Singapore, 9 September 2002. “ASEAN signs Trade Pact with NZ and Australia”, Straits Times, Singapore, 15 September 2002. 7 “India wants to join AFTA, task force set up”, Straits Times, Singapore, 16 September 2002. 8 See R. Rajan and R. Sen, “International Trade in Services in selected ASEAN countries: Telecommunications and Finance, ISEAS Working Papers in Economics and Finance no. 3 (Singapore: Institute of Southeast Asian Studies, 2002), 45p. 6

77 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

THE SINGAPORE–MALAYSIA WATER ISSUE: TRADE-OFF AND ALTERNATIVES By Lee Poh Onn

S

ingapore has been depending on Malaysia for nearly 40 per cent or more of its water supply. The importance of water to the Republic, economically and otherwise, cannot be questioned, and the historical and present role of Malaysia in assuaging this aspect of Singapore’s dependence has been nothing less than crucial. A delicate balance is needed for Singapore to manage its water requirements. For strategic reasons and its national interests, Singapore must ensure that it has the capacity to be self-sufficient in meeting its water needs. For economic reasons, however, it also has to consider the least-cost option of meeting such requirements. There is, therefore, this trade-off between the strategic need to be self-sufficient, and the economic need to produce or acquire water supplies at its lowest cost. Currently, it is cheaper for Singapore to purchase water from Malaysia rather than sourcing for its entire supplies domestically. However, one important issue remains: that of coming to an agreed price for the purchase of raw water. Malaysia wants to revise the price of raw water upward from the current RM0.03/4.546 m3. Singapore accepts the Malaysian view that this price should be revised but feels that the proposal for a higher price should be undertaken in compliance with what had been set in the water agreements, although it is willing to make concessions on its part. Malaysia would like to charge water at the rate that Hong Kong pays Guangdong plus inflation, whereas Singapore would like the rate to be pegged to the cost of producing recycled or NEWater (Straits Times, 24 July 2002). The Malaysian authorities have suggested RM6.80/4.546 m3 as the price after 2011. Both countries are still in the process of negotiating the final price as at end-September 2002.

78

© 2003 Institute of Southeast Asian Studies, Singapore

How formidable is Singapore’s water dependence on Malaysia? Can Singapore wean itself away from this dependent relationship in the near future? Should the “self-sufficiency” alternative be considered by Singapore? If so, what are the costs of obtaining water from domestic sources compared with the present arrangement of drawing water from Johor in Malaysia? Two water agreements signed between Malaysia and Singapore in 1961 and 1962 are in force up to 2011 and 2061 respectively. The first is known as the Gunong Pulai/Pontian Tebrau River and Scudai River Water Agreement, while the second is known as the Johor River Water Agreement. The 1961 agreement allows Singapore to draw up to 86 million gallons of water per day (mgd) from the Tebrau and Scudai Rivers, while the 1962 agreement allows up to 250 mgd of water to be drawn from the Johor River. In total, these agreements allow Singapore to draw up to 336 mgd (1.55 million m3 per day). Each day, around 680,000 m3 of Singapore’s water consumption is sourced domestically from catchment areas around the city-state. The remaining 520,000 m3 of raw water is imported from Johor. In July 2002, Singapore stated that it had decided to allow the 1961 agreement to lapse when it expires in 2011. It will be producing that amount by domestic means rather than importing it from Johor. This, however, begs the question: would Singapore’s population increase by 2011 create undue pressures on future production capacity? Presently, water consumption has been estimated to be in the vicinity of 1.3 million m3 per day (Kog 2002, p. 36; Long 2002, p. 131). By 2011, Singapore’s rate of water consumption is likely to range between 1.2 to 1.4 million m3. That water consumption will not increase dramatically can be supported by data from the Public Utilities

THE ASEAN-10

Board which indicate that water consumption per head has, in fact, fallen in recent years: from 135 m3 in 1995 to 110 m3 in 2001 (Public Utilities Board, Annual Report 2001). Drastic population increases are also unlikely to occur. Total fertility rates have decreased from 1.7 in 1996 to 1.4 in 2001, with Singapore’s population (citizens and permanent residents) projected to hover around 3.3 million in 2010 (Saw 1999, p. 229). The total population will not climb above 4.3 million by 2010, assuming that the number of foreigners remain between 800,000 to 1,000,000. Compared to the present population of around 4.1 million, this projected figure suggests that any additional pressures created on water production should be manageable in 2011. The capacity to be self-sufficient does not imply that Singapore wants to dissolve its entire water partnership with Malaysia. Even in the eventuality that the Republic becomes self-sufficient, the Singapore Government has expressed the view that it would like to continue to purchase water, under fair terms, from Malaysia (Business Times, 24 July 2002). This not only has economic benefits but, as Prime Minister Goh Chok Tong has stated, creates an interlocking relationship where both countries have to find a way to co-exist happily (Straits Times, 26 January 2001, cited in Long 2002, p. 107). Self-sufficiency in the near future, or the capacity to be self-sufficient, is to be achieved through increasing present water catchments, recycling (NEWater), and desalination. By 2011, together with water from its reservoirs, desalination, and recycling plants, Singapore will no longer be in the waterstressed condition that has plagued the country since historical times. The two desalination plants at Tuas are scheduled to produce 140,000 m3 by 2005. By 2011, desalination would produce 400,000 m3 of

water per day. The production of NEWater, on the other hand, is scheduled to be up and running by 2003. A prototype plant in Bedok was already producing around 10,000 m3 of NEWater by 2002. By 2003, plants in Bedok and Kranji will produce around 50,000 m3 per day (10.8 mgd) of NEWater. By 2011, 250,000 m3 of NEWater will be produced from the Bedok, Kranji, Seletar, and, possibly, Ulu Pandan plants (Straits Times, 26 September 2002). (See the first table.) The remaining tables provide estimates of the expenditure figures that Singapore will incur under the different scenarios. One note of caution needs to be upheld as these calculations merely involve utilizing data culled mainly from published sources such as monographs, journal articles, and newspaper clippings, and are not officially verified. The second table shows the current expenditure that Singapore possibly incurs from purchasing water at RM0.03/4.546 m3 together with a treatment cost of RM2.40. The third table calculates expenditure based on the scenario that Singapore continues to import water from Malaysia (at the new price of RM6.80/4.546 m3 in 2011), supplemented by its own reservoir and catchment supplies. It is assumed here that the capacity to produce water from NEWater and desalination plants will only be acting as back-up, and, as such, will not be included as part of the expenditure. The fourth table shows expenditure based on Singapore sourcing its entire water supplies domestically. The calculations in the last two tables suggest that the trade-off between self-sufficiency and economic viability will be skewed towards that of self-sufficiency when raw water is priced at RM6.80/4.546 m3 or more.

79 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

Major Sources of Water in 2011 (Projected) Total Water Requirements for Singapore

1.2 to 1.3 million m3

Domestic Reservoirs and Catchments (a) Desalination (b) NEWater (c) Total: a+b+c

0.68 million m3 0.40 million m3 0.25 million m3 1.33 million m3

SOURCE: Long (2002); and Straits Times, various issues.

Current Expenditure based on the Price of Raw Water at RM0.03 per 4.546 m3 (1000 gallons) (at 2002 Prices) Sources of Water Water from Malaysia Domestic Supplies (Water from Reservoirs and Catchments) Total Costs

Volume (million m3)

Cost (RM million)

0.52

1,264 [0.52*(2.4+0.03)]

0.68

1,632 (0.68*2.4) 2,896

NOTE: The price of raw water plus treatment cost in the case of water from Malaysia adds up to RM2.43. For domestic supplies, it is assumed that water is free; hence only the treatment cost of RM2.40/4.546 m3 is included.

Year 2011 Expenditure based on the Price of Raw Water at RM6.80 per 4.546 m3 (1000 gallons) (at 2002 Prices) Sources of Water Water from Malaysia Domestic Supplies (Water from Reservoirs and Catchments) Total Costs

Volume (million m3)

Cost (RM million)

0.52

4,784 [0.52*(2.4+6.8)]

0.68

1,632 (0.68*2.4) 6,416

NOTE: The price of raw water plus treatment cost in the case of water from Malaysia is RM9.20. Again, for 3 is included. domestic supplies, it is assumed that water is free; hence only the treatment cost of RM2.40/4.546 m

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Year 2011 Expenditure, with Water Sourced Domestically (at 2002 Prices) Sources of Water Water from Reservoirs and Catchments Desalination Plants NEWater Plants Total Costs

Volume (million m3) 0.68 0.40 0.25

Cost (RM million) 1,632 (0.68*2.4) 2,968 (0.4*7.42) 927.5 (0.25*3.71) 5,547.5

NOTE: The cost of desalination (RM7.42/4.546 m3) is based on the price of the lowest tender submitted to the PUB. This was obtained from the Straits Times, 1 June 2002. The cost of producing NEWater approximates 50 per cent of the cost of desalination (Straits Times, 30 July 2002). Based on the lowest cost of desalination, NEWater would cost RM 3.71/4.546 m3. Costs may decrease further when newer technologies come into play.

References Kog, Y.C. “Natural Resource Management and Environmental Security in Southeast Asia: A Case Study of Clean Water Supplies to Singapore”. In Beyond Vulnerability: Water in Singapore–Malaysia Relations, edited by C.G. Kwa. IDSS Monograph No. 3. Singapore: Institute of Defence and Strategic Studies, 2002. Lim, I.F.J. “Water Spike! Hydropolitik and Conflict in Singapore-Malaysia Relations”. In Beyond Vulnerability: Water in Singapore–Malaysia Relations, edited by C.G. Kwa. IDSS Monograph No. 3. Singapore: Institute of Defence and Strategic Studies, 2002. Long, J. “On the Threshold of Self-Sufficiency: Toward the Desecuritisation of the Water Issue in Singapore-Malaysia Relations”. In Beyond Vulnerability: Water in Singapore–Malaysia Relations, edited by C.G. Kwa. IDSS Monograph No. 3. Singapore: Institute of Defence and Strategic Studies, 2002. Public Utilities Board. Annual Report 2001. Saw, S.H. The Population of Singapore. Singapore: Institute of Southeast Asian Studies, 1999. Business Times, Singapore. Straits Times, Singapore.

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Thailand

D

omestic consumption was the main contributor to the faster growth in the Thai economy in 2002, owing to an expansionary fiscal policy and accommodative monetary policy. The government started to cut back the budget deficit of FY 2002/03 because of the high level of public debt. The focus of macroeconomic policy is therefore shifting away from fiscal stimulus towards an easing of monetary policy. With the existing external risks, enhancing domestic demand is still the main policy target in boosting the economy. Private consumption has become the main factor contributing to the country’s growth, owing to expansionary policies. To sustain consumption growth, the government maintains low interest rates and a 7 per cent value-added tax rate (instead of the promised return of 10 per cent). Inflation has increased slightly as a result of higher oil and agricultural prices. Private consumption, however, is expected to continue to grow in 2003 and 2004. Private investment expanded rapidly at 5.5 per cent in the first half of 2002, compared with 0.5 per cent in the same period of 2001. This was attributed to a strong demand for construction and equipment investment, especially in the second quarter of 2002. Public investment has tended to decline since the last quarter of 2002 as a result of a 5.5 per cent cut-back in government investment for FY 2002/03. To boost new private investment, the government has kept lending rates low. In addition, it has encouraged state-owned banks to release more credit to small and medium-sized enterprises (SMEs), especially in the rural sector. Total investment is expected to grow only slightly in 2003 and 2004 owing to excess industrial capacity and a contraction in public investment. On the production side, the agricultural sector experienced strong growth in 2002 from crops and livestock, while fisheries shrank as a result of a drastic drop in exports of frozen shrimp to the European Union. Agricultural output is expected to be lower in 2003 because of serious flooding in the third quarter of 2002. In the non-agricultural sector, recovery encompassed a broader base of industries in 2002. To enhance the country’s competitiveness, the government plans to promote five industries with good prospects: food, fashion, automotive, software, and tourism. The non-agricultural sector is expected to grow moderately in 2003 and 2004. In the external sector, exports started to recover in the second quarter of 2002 owing to a strong external demand for electronic products and higher export prices of rice, rubber, cassava, and pineapple. Meanwhile, imports rose in line with the increase in domestic demand, especially for durable goods and industrial machinery. Exports have increased along with the strong growth in the region while imports have expanded with the continued increase in oil prices and strong consumption demand. Consequently, the trade balance in 2003 is expected to be about the same level as in 2002. International oil prices have become a key factor to watch as energy and oil imports account for a 10 per cent share of total imports. To improve the country’s trade balance, Thailand is negotiating free trade agreements with the United States, Mexico, Australia, China, and India as well as taking steps to establish an account trade system with Bangladesh, Indonesia, Malaysia, and the Philippines. On the services side, tourism has grown steadily as Thailand has an advantage over some of its neighbours, particularly those countries that are experiencing domestic conflict and terrorist acts. The deficit in the income account has tended to decline because of lower

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levels of external debt and international interest rates. Overall, the current account balance is forecast to expand slightly in 2003. Net foreign direct investment (FDI) inflows were found to be very low during the first eight months of 2002. To promote FDI, the government has granted tax privileges to foreign investors that establish regional operating headquarters in Thailand. To encourage portfolio investment, the Stock Exchange of Thailand (SET) launched a Code of Best Practices as a guideline for good governance for listed companies. In addition, a Thai Capital Market Master Plan was set up to provide strategies for long-term development. The Plan aims at strengthening the efficiency of organizations, internationalization of standards, transparency, and good corporate governance. According to Credit Lyonnais Securities (CLS), Thailand was ranked below the other ASEAN-5 countries in 2000 in terms of corporate governance. According to the International Institute of Management Development (IMD), Thailand lost two ranks in corporate governance rating, that is, from 47th rank in 1999 to 49th rank in 2001. To tap portfolio inflows in the long term, the Thai corporate sector will need significant improvements in its governance system. International reserves remain comfortable at US$37.6 billion in September 2002. Large external debt repayments, particularly short-term debt, has also reduced the country’s external vulnerability. In August 2002, the ratio of international reserves to short-term external debt was reported at 282.3 per cent, which increased from 81.1 per cent at the end of 1996. In addition, Thailand signed bilateral swap agreements with Japan (US$3 billion), China (US$2 billion), and South Korea (US$1 billion) for the availability of foreign currencies in case of a financial crisis. The baht strengthened against the U.S. dollar in the first half of 2002, owing to strong portfolio inflows. The Bank of Thailand (BOT) managed to buy U.S. dollars in August to prevent further baht appreciation and loss of the country’s export competitiveness. The baht is expected to stabilize at about 42 baht per U.S. dollar in 2003 and 2004. On macroeconomic policy, both fiscal and monetary policies have continued to support the economic recovery. The budget deficit for FY 2002/03 is expected to decrease to 3.1 per cent of gross domestic product (GDP), with a 2.3 per cent reduction in total expenditures to 999.9 billion baht. The government plans to utilize only 36.6 billion baht out of the 58 billion baht fiscal stimulus fund. However, the amount may increase if the country’s exports begin to decline. On monetary polices, the BOT reduced the benchmark fourteen-day repurchase rate to 1.75 per cent in November 2002 to safeguard against external uncertainties and support economic growth in 2003. Inflation has increased slightly but remains low because of excess capacity in the industrial sector and lack of demand pressure. A stable baht and moderate growth in domestic demand should keep inflation within the target range of 2 to 2.5 per cent for 2003 and 2004. On the banking front, bank lending remained sluggish in the first eight months of 2002 while deposits continued to rise. As a result, local banks were burdened with 600 billion baht of excess liquidity, partly because of their reluctance to lend for fear of increasing their non-performing loans (NPLs). Therefore, deposit and lending rates will decline if U.S. interest rates remain low. To spur domestic consumption, the BOT eased the requirements on issuing credit cards in early 2002. This resulted in a dramatic increase in credit card

83 © 2003 Institute of Southeast Asian Studies, Singapore

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spending to 13.2 billion baht in mid-2002, or an increase of 24 per cent from the previous year. Reported NPLs of all financial institutions stood at 479.6 billion baht, or 10.29 per cent of total loans in October 2002. Meanwhile, NPLs transferred to asset management companies (AMCs) accounted for 634.6 billion baht, or 13.6 per cent of total loans. High NPL levels still remain a burden to Thai financial institutions. In terms of debt restructuring, foreign banks show a better capability in tackling bad loans — their ratio of restructured debt to total NPLs was 27 per cent in the first seven months of 2002, followed by finance companies (21 per cent), private banks (20 per cent), and state-owned banks (18 per cent). The Thai Asset Management Corporation (TAMC) has made progress in debt restructuring. Out of a total of 717.6 billion baht of the TAMC’s NPLs, 200.8 billion baht were restructured in the first half of 2002. To speed up debt restructuring, the TAMC has prioritized the restructuring of debts of thirteen potential industries — food, textiles, automobiles and parts, electronics and electrical products, ceramic and glass, rubber and tools, leather and clothes, medicine and chemicals, jewelry and ornaments, wood and furniture, plastic and petrochemical products, and iron and steel. In addition, the TAMC is

Thailand: Selected Economic Indicators, 1998–2004F 1998

1999

2000

2001

2002E

2003F

2004F

GDP growth (% change) Industry sector growth (% change) Services sector growth (% change) Agriculture sector growth (% change)

–10.5 –13.3 –10.0 –1.5

4.4 9.9 0.4 2.0

4.6 5.2 4.0 4.9

1.8 1.3 2.3 1.6

4.1 4.8 3.6 3.4

3.8 4.7 3.3 3.0

3.9 4.6 3.4 3.2

Exports (US$ million) Imports (US$ million) Trade balance (US$ million)

52878 40643 12235

56801 47529 9272

67889 62423 5466

63190 60665 2525

64391 61878 2512

66322 63735 2588

69837 67240 2597

8.1

0.3

1.6

1.6

0.5

0.9

1.2

105.1

95.1

79.7

67.5

65.1

63.1

58.0

29.5

34.8

32.7

33.0

37.8

37.6

37.0

Headline Inflation (% change) Gross external debt (% of GDP) Foreign exchange reserves (US$ billion) Prime lending rate (% per annum) M2 growth (% change) Exchange rate, average (Baht/US$1)

11.50–12.00 8.25–8.5 7.50–8.25 7.00–7.50 7.00–7.25 6.75–7.25 7.00–7.25 9.5 2.1 3.7 4.2 5.5 4.5 3.8 41.37

37.84

40.16

44.48

SOURCES: Bank of Thailand; CEIC Database; Economist Intelligence Unit; and author.

84 © 2003 Institute of Southeast Asian Studies, Singapore

42.60

41.50

41.50

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considering proposals for matching funds to buy some of the TAMC’s NPLs. Nonetheless, there still seems to be concern in some quarters that the TAMC is not progressing as well as hoped. Corporate sector performance improved significantly in 2002 but leverage ratios were still high in some sectors, such as banking, transportation, finance and securities, and communication. Large firms have increasingly shifted their funding from banks to debentures because of sluggish bank lending and low domestic interest rates. Therefore, accelerating the pace of corporate restructuring and improving corporate governance will be necessary to support corporate finance and to prevent an economic slowdown. In conclusion, consumption-led growth has put the Thai economy on a recovery path. However, it comes with a price — fiscal vulnerability. With a softer fiscal boost and a low interest rate policy, the country is forecast to grow moderately in 2003 and 2004. High corporate and public debts may impede the country’s economic recovery. If there is no clear sign of faster debt restructuring and a strong fiscal stance, bank lending as well as private investment will remain sluggish and not be able to fuel economic growth.

PUBLIC DEBT MANAGEMENT IN THAILAND By Sakulrat Montreevat

T

he Asian financial crisis of 1997–98 has led the Thai economy to fiscal vulnerability. The budget surpluses of the pre-1997 years turned to deficits in order to rejuvenate the economy. In doing so, the government has had to borrow from both domestic and external sources to finance the deficit gaps. A cumulative build-up of fiscal stimuli, the fiscal cost of financial sector restructuring, and the creation of safety nets in coping with the crisis have contributed to the mounting public debt outstanding and a high level of debt service payment. As a result, the government plans to reduce the budget deficits from FY 2002/03. As recorded, total public debt rose dramatically to 2.94 trillion baht, or 54.8 per cent of

gross domestic product (GDP) in May 2002, from only 0.56 trillion baht, or 14.5 per cent of GDP in September 1996. By definition, public debt includes direct government borrowings, governmentguaranteed and non-guaranteed state-enterprise debt (excluding debt of government financial institutions) and debt of the Financial Institutions Development Fund (FIDF).1 Two-thirds of public debt outstanding is currently financed domestically, with the remaining one-third externally — of which, about half is in U.S. dollars and the other half in yen. Domestic public debt dramatically increased from 302.8 billion baht in September 1996 to 2100.4 billion baht in May 2002.

1 According to the IMF’s Government Finance Statistics, public debt excludes FIDF liabilities since they are considered to be part of the public financial sector.

85 © 2003 Institute of Southeast Asian Studies, Singapore

ECONOMIC OUTLOOK

PUBLIC DEBT MANAGEMENT IN THAILAND (continued)

Even though external public debt is a minor component, it rose significantly in baht terms, from 349.8 billion baht in 1996 to 839.6 billion baht in 2002. Management of public debt is, therefore, a matter of concern. Public debt management generally refers to the process of establishing and executing a strategy for managing public debt in order to raise the required amount of funding and achieve its risk and cost objectives. In principle, debt managers should work closely with fiscal and monetary policy-makers to ensure that public sector indebtedness remains on a sustainable path and their strategy is in place to reduce excessive levels of public debt.2 In Thailand, post-crisis public debt management started with the merger of two divisions in the Ministry of Finance (MOF) — one in the Fiscal Policy Office responsible for foreign borrowing of the government and state enterprises, and another in the Controller General’s Department responsible for domestic borrowing of public debt and government debt service payments. The new office, namely, the Public Debt Management Office (PDMO), was set up in the MOF in September 1999. Its mandate is to be the single office in the Thai Government with full responsibility for monitoring and managing Thailand’s public debt. It also monitors and analyses the fiscal risks associated with the government’s contingent liabilities. The PDMO, in close collaboration with the Bank of Thailand (BOT), assists policy-makers in developing

2

a comprehensive, medium-term financial and debt management strategy. Besides the establishment of the PDMO, efforts have been made to improve the legal framework with respect to public debt. Various related laws were consolidated into one Act. In August 2001, the Cabinet approved the Public Debt Management Act. The Act aims at promoting efficient management of the public debt and the supervision and monitoring of new borrowings, as well as providing greater flexibility in management by allowing the refinancing of deficit financing bonds. In addition, the government has developed a domestic bond market as government bonds are the most actively traded securities in the bond market, accounting for approximately 80–90 per cent of total trade.3 The BOT continues to perform the agency function for domestic borrowing by registering and issuing government debt instruments to individual holders and making debt service payments. Meanwhile, the issuance and auction of state-owned enterprise (SOE) bonds are managed by the PDMO. The government is also implementing institutional and policy reforms to improve the fiscal position, as well as lower public debt. These initiatives include improving tax revenue collection and expenditure management, privatization of SOEs, decentralization, and increased transparency and accountability.4 Fiscal consolidation began to be implemented in FY 2002/03, with a 2.3 per cent cut in expenditures. The budget deficit was targetted to decline to 3.1 per cent of GDP, from 3.8 per cent

See details in the International Monetary Fund and the World Bank, “Guidelines for Public Debt Management”, March 2001. Available at http://www.imf.org/external/np/mae/pdebt/2000/eng/. 3 See details on bond market development at http://www.thaibdc.or.th/. 4 See details in the World Bank, “Thailand Economic Monitor: Positioning for a Sustainable Recovery”, May 2002. Available at http://www.worldbank.or.th/economic/index.html.

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in FY 2001/02. On privatization, the government initially plans to privatize eighteen SOEs within the 2001–03 period. For the time being, only two SOEs have made any progress. Internet Thailand was privatized through an equity offering of more than 50 per cent of the government’s holding. Meanwhile, the Petroleum Authority of Thailand was corporatized with an initial public offering of 30 per cent of the government’s holding. The other sixteen SOEs are still in the pipeline of the privatization process. Because of the current unfavourable market condition, the privatization programme is expected to be completed by 2006. If it proceeds as planned,

this in turn could cut SOE debts by half and lower the ratio of public debt to GDP by 7–8 percentage points. Even though Thailand’s public debt trended upwards, it is favourably comparable to some emerging countries. A cross-country comparison by the International Monetary Fund (IMF) indicates that Thailand’s public indebtedness is of the same order of magnitude, in terms of the share of GDP, as that of Korea, Mexico, Turkey, Indonesia, the Philippines, Argentina, and Bulgaria. Meanwhile, Thailand’s share of external indebtedness is smaller than that of the other emerging market economies.5

Resolution to the FIDF’s Losses (million baht) Bond

Principal

FIDF 1: Gov’t Bonds

500,000

Principal Burden

Interest Burden

90% of BOT profits (paid-off in 30 years without privatization revenues)

Budget

FIDF 2: FIDF Bonds

112,000

Annual net profits from BOT Currency Reserves (paid-off in 19 years)

Budget

FIDF 3: Gov’t Bonds

780,000

Annual net profits from BOT Currency Reserves (paid-off in 19 years)

Budget

Interest Costs

689,917 (NPV=401,097)

352,763 (NPV=240,946)

SOURCE: Ministry of Finance, Thailand

5 International Monetary Fund (IMF), “Thailand: Selected Issues and Statistical Appendix”, IMF Country Report No. 02/ 195, September 2002. Available at http://www.imf.org/external/pubs/cat/. 6 Ibid., p. 47.

87 © 2003 Institute of Southeast Asian Studies, Singapore

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PUBLIC DEBT MANAGEMENT IN THAILAND (continued)

Despite this, there are some concerns about the future path of Thailand’s public debt management. One major concern is about fiscalizing the FIDF’s losses, accounting for 1.4 trillion baht. The table shows that the government first fiscalized 500 billion baht (FIDF1) by issuing government bonds in May 1998, followed by giving full guarantee on FIDF bonds amounting 112 billion baht (FIDF2) in October 2000. To settle the rest, the government plans to issue government bonds amounting to 780 billion baht. The first phase of the plan entailed 305 billion baht worth of savings bonds issued to retail investors in the second half of 2002. It is unlikely that the initial bond issuance would have a disruptive impact on financial markets or the banking system, since some of the FIDF liabilities to be refinanced with the savings bonds are held by retail investors. In addition, ample bank liquidity should facilitate a switch from deposits to bonds.6 The remaining bonds worth 475 billion baht will be issued according to the FIDF’s cash requirements. The tentative schedule is to issue bonds in the amount of 200 billion baht and 275 billion baht in FY 2003/04 and FY 2005/06 respectively. If the market conditions are not suitable, the FIDF may opt to borrow from the repurchase market instead.

7

Under the fiscalization plan, the MOF projects that the ratio of public debt to GDP will remain below 60 per cent in the next seven fiscal years — the peak was at 59.2 per cent in FY 2001/02, and the ratio of debt service to the budget will not exceed 16 per cent (see table on Public Debt Projections). Meanwhile, the IMF’s baseline projection shows that the peak of the public debt ratio will be at 65 per cent in FY 2004/05, and will be brought down to its current level, 56.3 per cent, by FY 2009/10. The two projections are based on different assumptions of GDP growth and borrowing requirements. With higher GDP growth and lower borrowing requirements, the MOF’s fiscal framework will cause a faster reduction in the public debt ratio. According to the IMF’s standard level of sustainable public debt, the ratio of net public debt to GDP should not exceed the limit of 30 per cent of GDP. However, this number is arbitrary and varies from country to country.7 In Thailand, the MOF has set the limit of 65 per cent of GDP for gross public debt as the benchmark. To keep to the path of public debt as planned, fiscal consolidation is necessary. Improving the tax collection system and accelerating SOE privatization are necessary to lower future government borrowings and public debt outstanding.

The benchmark for the appropriate level of government gross debt to GDP of each European Union member is 60 per cent. New Zealand’s benchmark is 15–20 per cent of GDP for net public debt.

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Public Debt Projections (million baht) Fiscal Year

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Ministry of Finance, Thailand (as of 20 June 2002) Public Debt (tril.baht)

2.804 2.932 3.122

3.264 3.371

3.641 3.658

3.692 3.686 3.705

Public Debt/ GDP

58.04 57.83 59.18

58.97 57.22

57.50 53.45

49.58 45.43 41.69

Debt Service/ GDP

1.61

1.70

2.19

Debt Service/ Budget

9.04

9.47

11.29

Assumptions: GDP growth

3.7

3.2

3.1

3.4

3.9

4.9

5.5

6.2

6.4

Inflation

1.6

1.7

1.0

1.5

2.6

2.6

2.6

2.6

2.6

–1.20 –0.69

–0.06

0.45

Cash Balance/ GDP

–2.50 –2.00 –3.81

2.55

2.72

14.00 15.22

–2.65 –1.41

2.75

2.67

15.62 15.56

2.56

2.59

1.90

15.38 15.89 12.54

Bond Issue: 2002=305 billion baht, 2004=200 billion baht, and 2006=275 billion baht International Monetary Fund (as of September 2002) Public Debt/GDP

57.8

65

56.3

Assumptions: GDP Growth

2.2

-------------------------------- 4.5 -------------------------------------

Inflation

2.6

-------------------------------- 2.5 -------------------------------------

Real Interest Rate

3.7

-------------------------------- 3.9 -------------------------------------

Government Deficits: Steady fiscal adjustment which closes the central government deficit gap by FY 2008 Value-added Tax: 7 per cent, not raised to 10 per cent NOTE: Fiscal year 2000 = 1999/2000 (October 1999–September 2000); 2010 = 2009/2010. SOURCES: Ministry of Finance, Thailand; and IMF (2002).

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Vietnam

E

conomic reform momentum has gained ground in Vietnam in the last two years, as evidenced by a number of important developments. These include the introduction of an epochal Enterprise Law in early 2000, which has done much to improve the business environment in Vietnam for private sector companies; the opening of a small stock market in Ho Chi Minh City in mid-2000; the signing and ratification of a bilateral trade agreement with the United States; improvements to the foreign investment law; and the resumption of IMF (International Monetary Fund) lending, after a five-year hiatus. Not surprisingly, business sentiment towards the country has picked up, sensing these events to be leading indicators that Vietnam’s leadership wishes to move the economic reform programme — initiated in the late 1980s — into a higher gear, having free-wheeled during much of the late 1990s. Potential political distractions have also been removed, following the Ninth Vietnam Communist Party Congress in April 2001, and the National Assembly elections in May 2002. At the Ninth Party Congress, Vietnam’s leadership set itself some fairly ambitious economic targets for the 2001–10 period, including a doubling of Vietnam’s gross domestic product (GDP) over the next ten years (Vietnam’s GDP doubled during the 1990s). The agricultural sector is being asked to record an average annual growth of 4–4.5 per cent, the industrial sector is expected to grow by 10–15 per cent per year on average, and the service sector is to register 7–8 per cent annual growth. Such targets necessitate that additional economic reforms and business liberalization measures are forthcoming in the domestic arena, and that Vietnam’s efforts to further integrate with the global economy bear fruit in the external arena. Indeed, detailed negotiations have already begun for Vietnam’s accession to the World Trade Organization (WTO), perhaps by 2005 — arguably the last major challenge left for Hanoi in what has been an extremely successful campaign, during the last fifteen years or so, to rejoin the global business community as an active participant. As one of the world’s major exporters of various commodities (notably coffee and rice), seafoods, garments and footwear, Vietnam’s presence in the international trading community has become quite robust. Perhaps the greatest potential brake on Vietnam’s current economic growth trajectory is the fragile state of the global economic backdrop and relatively anaemic cross-border capital flows. Should the global economy continue to display its current fragility, this could constrain Vietnam’s export potential, and make it harder for the country to attract much-needed foreign direct investment (FDI) inflows. This is already evident in the fairly disappointing FDI inflow pledges recorded in 2001 and 2002, despite the upturn in foreign investor sentiment towards the country. There seems to be some difficulty in translating this revival in sentiment into tangible capital inflows. Whilst Vietnam is certainly not wholly dependent on foreign investment inflows and foreign exchange earnings from exports for its economic well-being, there is little doubt that its ambitious economic growth targets for the 2001–10 period — and its aim of being an industrialized economy by 2020 — will be harder to achieve through the use of domestic resources alone. Back on the domestic front, Vietnam’s current macroeconomic profile is fairly enviable. The exchange rate has continued to be stable, the country has sufficient foreign exchange

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reserves (around US$4 billion) and relatively low aggregate foreign debt levels (below 40 per cent of GDP), the current account deficit is not unduly high, the inflation rate is low, and GDP growth is above 5 per cent. The September 2000 agreement with Russia to restructure Vietnam’s US$10.5 billion non-convertible debt, effectively reducing it by 85 per cent to just US$1.7 billion, and thereby also effectively halving the country’s total external debt obligations, was a particularly welcome achievement. The major ratings agencies seem to agree. In anticipation of a maiden sovereign bond issue, expected some time soon, both Standard & Poors (S&P) and Fitch joined Moody’s in providing broadly positive ratings for Vietnam during 2002: BB- (stable outlook) by S&P; BB- (positive outlook) by Fitch, and B1 (positive outlook) by Moody’s. Such ratings put Vietnam on par with countries like Bolivia, Bulgaria, and Turkey. The economic reform agenda that now confronts Vietnam spans a range of issues, including further state enterprise reform, private sector development, banking reform, as well as trade and business liberalization. With more than one million new workers joining the ranks of the labour force each year, increased emphasis is being placed on developing the country’s private sector, as both a source of employment and economic activity. Indeed, the private sector is likely to become an increasingly significant engine of growth for Vietnam’s economy, as the obstacles that previously kept it at a disadvantage with the state enterprise sector are gradually removed. Tens of thousands of new companies have been registered under the relatively new Enterprise Law, which offers corporate income tax incentives for start-up businesses, and the green light has also now been given for members of the Vietnam Communist Party to operate their own firms. Private companies are also finding it easier to gain access to bank credit to help fund their development, and new forms of equity financing are following in the shadow of the new stock market in Ho Chi Minh City, which now hosts about twenty listed companies. One area in which the pace of economic reform has been less impressive is in the field of state enterprise reform, where tangible progress continues to be somewhat sluggish. In particular, the pace of “equitisation” (the partial divestment of state-owned firms) apparently slowed down in 2001 and 2002, despite the opening of the stock market to act as a trading platform for the trading of shares in select equitized companies. All but one of the companies currently listed on the stock market are equitized former state enterprises. More than 800 state firms have now been equitized since 1993. A lack of progress on state sector reform also has the potential to constrain banking sector reforms, as a result of high non-performing loan (NPL) levels incurred by the banks in lending to state firms. As of March 2002, the 200 largest debtor state firms owed Vietnam’s banks more than 40 trillion dong, an increase from about 30 trillion in December 2000, and 31 trillion in March 2001. Recapitalization bonds for the four state-owned commercial banks — which still dominate the banking sector in Vietnam, and hold about 75 per cent of total bank NPLs — are expected to be issued in 2003–04, after having completed external audits; made some moves to resolve existing NPLs; and improved their internal mechanisms for assessing credit risk. An ongoing process to consolidate the private banking community also plods along, with the State Bank aiming to roughly halve the number of joint stock banks to about 25 by end-2003, primarily through mergers.

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Finally, will economic reform momentum be maintained in Vietnam in the near to medium term ? If Vietnam is to meet the “conditionalities” attached to the existing IMF loan programme, as well as its various commitments as an ASEAN member (such as the ASEAN Free Trade Area, and the ASEAN Investment Area), the bilateral trade agreement with the United States, and succeed in gaining entry to the WTO, then the answer would appear to be yes. Together, these commitments — and the knock-on effects that arise from them — combine to map out a fairly comprehensive “road map” of economic reform and business liberalization measures. If Vietnam is able to turn these commitments into reality, the country’s economic and business environment should change markedly for the better over the next decade, in a new tranche of reform measures.

Vietnam: Selected Economic Indicators, 1998–2004F 1998

1999

2000

2001

2002E

2003F

2004F

4.4 7.3 3.0 2.8

4.7 7.6 2.1 5.2

6.8 9.7 4.4 3.6

5.8 9.7 4.4 2.3

6.2 10.0 5.0 2.1

6.8 10.2 6.0 2.4

6.5 9.8 5.5 2.5

9,360 11,500 –2,140

11,540 11,622 –82

14,455 15,639 –1,184

15,027 16,162 –1,135

16,440 18,350 –1,910

18,400 21,100 –2,700

21,400 24,240 –2,840

Inflation/CPI average (% change) M2 growth (% change)

9.2 25.6

4.1 39.3

–0.6 39.0

0.9 25.5

4.5 25.0

4.0 27.0

5.0 28.0

Gross external debt (% of GDP)* Foreign exchange reserves (US$ billion)

75.6 —

71.6 —

39.1 3,512

38.6 3,755

38.7 4,144

38.1 4,173

36.0 4,409

2.6 —

2.8 —

4.2 36.7

4.9 38.8

4.9 40.8

5.2 43.2

6.2 45.4

13,344

13,922

14,505

15,071

15,350

15,750

15,950

GDP growth (% change) Industry sector growth (% change) Services sector growth (% change) Agriculture sector growth (% change) Exports (US$ million) Imports (US$ million) Trade balance (US$ million)

Budget deficit (% of GDP) Government debt (% of GDP) Exchange rate at year-end (Dong/US$1)

* In late 2000, US$10.5 billion of Russian debt was written down to US$1.7 billion. SOURCES: Credit Suisse First Boston; Asian Development Bank; and author estimates.

92 © 2003 Institute of Southeast Asian Studies, Singapore

SELECTED SOURCES OF DATA Asian Development Outlook (Asian Development Bank) Asian Wall Street Journal Bangkok Post (Thailand) Borneo Bulletin (Brunei) Brunei Darussalam Statistical Yearbook (Brunei) Business Times (Singapore) Business Day (Thailand) Cambodian Daily, Weekly Review (Cambodia) Economist Intelligence Unit, Country Reports The Edge (Malaysia) Far Eastern Economic Review Jakarta Post (Indonesia) Manila Bulletin (Philippines) Nation (Thailand) New Light of Myanmar (Myanmar) New Straits Times (Malaysia) News Express (Brunei) Newsbreak Magazine (Philippines) Nhan Dan (Vietnam) Philippine Daily Enquirer (Philippines) Philippine Star (Philippines) Phnom Penh Post (Cambodia) The Economist The Star (Malaysia) Straits Times (Singapore) Tempo (Indonesia) Utusan Malaysia (Malaysia) Vientiane Times (Laos) Vietnam News (Vietnam) Vietnam Investment Review (Vietnam)

Reproduced from Regional Outlook: Southeast Asia 2003-2004, edited by Russell Heng Hiang Khng and Denis Hew (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

93

THE CONTRIBUTORS Political Outlook 2003–2004 Mely Caballero-Anthony is Associate Professor at the Institute of Defence and Strategic Studies, Singapore. She contributed the country section on the Philippines. Derek da Cunha is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Singapore. John Funston is Associate Director, National Thai Studies Centre, Australian National University. He contributed the country section on Thailand. Russell Heng Hiang Khng is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Laos. David Koh is a Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Vietnam. Lee Hock Guan is a Fellow at the Institute of Southeast Asian Studies. He contributed the section on Malay rights in Malaysia. Mohamad Yusop bin Awang Damit is Dean of Postgraduate Studies and Research, Universiti Brunei Darussalam. He contributed the country section on Brunei. K.S. Nathan is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Malaysia. Sharon Siddique is a partner in a regional research consulting firm. She contributed the section on Islam in Southeast Asia. Daljit Singh is a Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the overview section on geopolitical trends in the Asia-Pacific, and the section on the terrorist threat in Southeast Asia. Anthony L. Smith is a Senior Research Fellow at the Asia Pacific Center for Security Studies, Hawai’i, and Associate Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Indonesia. Tin Maung Maung Than is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country sections on Cambodia and Myanmar.

Economic Outlook 2003–2004 Muhammad Chatib Basri is Lecturer and Researcher at the Institute for Economic and Social Research, Faculty of Economics, University of Indonesia (LPEM-FEUI), Jakarta, Indonesia. He co-contributed the country section on Indonesia. Soedradjad Djiwandono is Professor of Economics, University of Indonesia, Jakarta, Indonesia, and a Senior Visiting Fellow at the Institute of Defence and Strategic Studies, Singapore. He co-contributed the country section on Indonesia. Nick J. Freeman is an Associate Senior Fellow at the Institute of Southeast Asian Studies, and Senior Advisor to Mekong Capital Ltd, Ho Chi Minh City, Vietnam. He contributed the country sections on Laos and Vietnam. Denis Hew is a Fellow at the Institute of Southeast Asian Studies. He contributed the section on Regional Economic Trends, and the country section on Malaysia. Lee Poh Onn is a Fellow at the Institute of Southeast Asian Studies. He contributed the section on the Singapore-Malaysia Water Issue: Trade-Off and Alternatives, and the country section on Brunei.

94 © 2003 Institute of Southeast Asian Studies, Singapore

Sakulrat Montreevat is a Fellow at the Institute of Southeast Asian Studies. She contributed the section on Public Debt Management in Thailand, and the country section on Thailand. Mya Than is an Associate Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country sections on Cambodia and Myanmar. Ngiam Kee Jin is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Singapore. Ramkishen Rajan is a Senior Lecturer at the School of Economics, University of Adelaide, Australia. He contributed the section on the Economics of International Reserve Holdings of Developing Countries. Aladdin D. Rillo is a Senior Officer (Bureau of Finance & Surveillance) at the ASEAN Secretariat, Jakarta, Indonesia. He contributed the country section on the Philippines. Rahul Sen is a Research Associate at the Institute of Southeast Asian Studies. He contributed the section on Singapore’s Free Trade Agreements: Implications for ASEAN and Future Challenges.

95 © 2003 Institute of Southeast Asian Studies, Singapore