Regional Outlook: Southeast Asia 2007-2008 9789812307248

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REGIONAL OUTLOOK

Southeast Asia 2007–2008

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The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publishing, an established academic press, has issued almost 2,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publishing works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world.

REGIONAL OUTLOOK Southeast Asia 2007–2008 Editorial Committee Chairperson K. Kesavapany Editors Asad-ul Iqbal Latif Lee Poh Onn Production Editor Rahilah Yusuf

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Southeast Asia 2007–2008

INSTITUTE OF SOUTHEAST ASIAN STUDIES

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First published in Singapore in 2007 by ISEAS Publishing 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.

© 2007 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 sls91-209988 ISSN 0218-3056 ISBN-13: 978-981-230-428-5 (soft cover—13 digit) ISBN-10: 981-230-428-2 (soft cover—10 digit) Typeset by International Typesetters Pte Ltd Printed in Singapore by Utopia Press Pte Ltd

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CONTENTS

Preface K. Kesavapany

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Introduction Asad-ul Iqbal Latif and Lee Poh Onn

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POLITICAL OUTLOOK The Asian Security Environment

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The United States and Southeast Asia

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China’s Relations with Southeast Asia

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India’s Strategic Engagement with Southeast Asia, 2007–2008

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The ASEAN-10

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Brunei Darussalam

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Cambodia

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Indonesia

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Laos

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Malaysia

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Myanmar

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Philippines

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Singapore

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Thailand

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Vietnam

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CONTENTS

ECONOMIC OUTLOOK Regional Economic Trends

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The Crude Oil Move: Implication for Asia?

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East Asian Regionalism

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Asian Currencies and Globalization

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The ASEAN-10

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Brunei Darussalam

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Cambodia

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Indonesia

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Laos

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Malaysia

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Myanmar

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Philippines

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Singapore

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Thailand

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Thailand’s Financial and Corporate Sector Reforms and Consequences

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Vietnam

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Selected Sources of Data

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The Contributors

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PREFACE

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ince 1992, the Institute of Southeast Asian Studies has been offering a concise analysis of the political and economic trends in ASEAN and the wider region through its annual Regional Outlook. Written in an accessible and easily understood scholarly style, this publication is suited for a modern audience of busy executives, professionals, diplomats, journalists, and interested observers. Regional Outlook, over the years, has managed to build up a loyal readership within Southeast Asia and beyond. In 2005, Regional Outlook alerted readers that security threats remained a constant. The outbreaks of terrorism and violence in Indonesia, southern Thailand, and southern Philippines demonstrated that such threats remained a preoccupation, besides non-traditional security problems such as the bird flu, piracy, the haze caused by the burning of forests, and environmental and natural disasters. The haze has motivated regional cooperation, in order to prevent a worse outbreak in 2007, when the predicted El Niño effects might worsen the impacts on health, tourism, and investments. On the positive achievements list are the major steps taken to strengthen Asian regional cooperation, such as the holding of the East Asia Summit (EAS) in Kuala Lumpur in December 2005. The major significance of the EAS was the expansion of the geographic footprint to include India, Australia, and New Zealand. The inclusion of all the major Asian powers shows that the EAS is both inclusive as well as serious. Already the list of interested external powers wanting admission is growing. The challenge is now to articulate the vision and the roadmap, the instruments, and the norms needed to transform the EAS beyond a talk-shop towards an Asian community.

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PREFACE On the negative side, the challenges to the Asian region posed by the North Korean nuclear test are numerous and daunting. Beyond getting Pyongyang back to the negotiating table at the Six Party Talks lies the challenge of starting serious negotiations between the United States and North Korea. With the Democratic Party congressional victories and the willingness to talk to Iran and Syria about helping to stop the violence in Iraq, there might also be demonstrated a similar U.S. willingness to talk directly with Pyongyang. On the economic front, growth will moderate for the Southeast Asian region over the next two years because of a clear sign of a modest global economic slowdown, particularly emanating from the economy of the United States, one of the largest engines of global economic growth, and Southeast Asia’s main trading partner. OECD (Organization for Economic Cooperation and Development) indicators also show that almost all other major developed economies (Europe and Japan) will slow down at least in early 2007. Their economies will continue to expand but at a moderately slower pace than that of 2005 and 2006. Tighter monetary policies and high oil prices, though expected to level off and fall in July 2006, are worrying. Higher interest rates in the U.S. economy and other major developed economies will dampen their domestic demand and also reduce liquidity. Corrections in Southeast Asian financial markets could occur as capital flows from Asian equity markets flow into the developed countries’ economies. The possibility of a bust in the U.S. property market is also cause for worry. The impending slowdown of the overheated Chinese economy is another worrying factor, especially with the Chinese policy-makers intent on restraining the growth of fixed investments in the country. Any misdirected or inappropriate tools used to achieve this may result in a painful economic slowdown that will affect Southeast Asian exports to China. ASEAN’s challenge is to also remain ahead of China in terms of the value-added chain of production and not be reduced to the subsidiary role of supplying raw materials to the Chinese manufacturing sectors. In this respect,

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PREFACE

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the process of integration and economic restructuring within the impending ASEAN Economic Community will be crucial. So far, though challenges remain, ASEAN appears to be getting its house in order to face this future. Whilst ASEAN continues to face up to the challenges of integration, in order to cope with the increased competition from India and China, it took important steps forward by drafting the ASEAN Charter. This will be discussed at the Cebu ASEAN Summit in December 2006. Another important progress was the advancement by five years to 2015 of the 2020 ASEAN Economic Community. A milestone was the Asia-Pacific Economic Cooperation (APEC) Summit held in Hanoi in November 2006, together with the announcement of Vietnam’s entry into the World Trade Organization (WTO). The Second EAS will also be held in Cebu in December 2006. All these major meetings demonstrate that ASEAN is achieving major milestones and is in the centre of regional developments. Though there will be a general economic slowdown, global demand will continue to fuel Southeast Asian growth albeit at a more moderate pace. Japan’s slower growth from 2007 onwards will still very much be in positive territory. This is a positive factor given the close links between the Japanese and ASEAN economies in the region. China and India will continue to drive global growth and demand for ASEAN exports. India’s economy is healthy and is expected to perform well over the next few years. Domestic factors are also important. Central banks in Southeast Asia have been more attentive in addressing inflation, enhancing the credibility of their financial markets. Governments have also been exercising more caution in their fiscal spending, and there is now fiscal space to carry out public sector spending to cushion a weaker external demand. Southeast Asian corporate balance sheets have also improved in recent years and rates of return to capital have been increasing across the region. All these factors will lead to greater resilience in the region towards external shocks that a moderate global slowdown may impose on the region over the next two years.

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PREFACE Regional Outlook 2007–2008 will cover the ground on both domestic and regional trends and issues. The editors, Asad-ul Iqbal Latif and Lee Poh Onn, have sought new perspectives from writers. I wish to thank both editors as well as the contributors for their hard work and for their fine contributions. K. Kesavapany Director Institute of Southeast Asian Studies 15 November 2006

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INTRODUCTION

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t has long been noted that politics is most unpredictable, and it has been shown within ASEAN members’ politics. The truism that politics is most unpredictable has been demonstrated by the happenings in some of the member states of ASEAN. Whilst some countries demonstrated commendable continuity and stability in 2006, the military coup in Bangkok on 19 September 2006 took many observers by surprise even though it brought a measure of stability to Thailand, which had been roiled for months by demonstrations against Prime Minister Thaksin Shinawatra. A return to political normalcy however is still awaited. Over in Malaysia, the controversy caused by the attacks of former Prime Minister Dr Mahathir Mohamad against his successor, Prime Minister Abdullah Ahmad Badawi, continued to agitate domestic politics. Other ASEAN members such as Vietnam and Laos installed new leaders, whilst in Singapore, elections in May 2006 returned Prime Minister Lee Hsien Loong to office. The Philippines, Cambodia, and Brunei made quiet and steady progress. Myanmar slowly rolled along with its constitutional conference process, whilst Indonesia, under President Dr Susilo Bambang Yudhoyono enjoyed stability and social concord. However, the country had to grapple with the haze problem which was affecting neighbouring countries. In 2006, Vietnam was the star in the region, with its rapid and high economic growth, its accession as 150th member of the World Trade Organization (WTO) and as host of the Asia-Pacific Economic Cooperation (APEC) Summit. On the broader regional front, major milestones included the holding of the ASEAN and the East Asia Summits in Cebu, and the

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INTRODUCTION progress on drafting the ASEAN Charter and the advancement of the target year to 2015 of the establishment of the ASEAN economic community. Relations with all ASEAN dialogue partners progressed well. For instance, the United States signed a Trade and Investment Framework Agreement with ASEAN in mid-2006. Talks with India on a free trade agreement (FTA) are progressing albeit slowly. With China, relations hit a new high, with the hosting of the China-ASEAN Summit in Nanning in late 2006. Increasingly, several ASEAN members looked towards China for increased trade, aid, and investments. The advent of a new Japanese Prime Minister, Shinzo Abe, with his first overseas visit to China rather than the United States, brought cautious hope to ASEAN members and the rest of Asia that Sino-Japanese and Japanese-South Korean relations would progress. This is of course a set of vital relations, important not only for the ASEAN+3 process, but for the East Asia Summit and for regional security as well. This issue of Regional Outlook examines the set of relations between ASEAN on one hand, and the United States, India, and China on the other. It is clear that regional relations are being reset, with the U.S. Democratic Party’s congressional/senate electoral victories affecting policies on Iraq, Afghanistan, Iran, and North Korea. A stronger shift towards diplomacy and engagement can be expected, and this will affect Asian regional dynamics. For instance, how will China, India, and Japan react towards such expected changes in U.S. policies? External macroeconomic shocks that were present in 2005, some continuing into 2006 and 2007, nevertheless continue to be worrisome. Higher oil prices, though moderating in 2007, the overheating Chinese economy, the massive U.S. deficit and slower moderate growth in the U.S. economy, and also the bird flu pandemic are some of the concerns. High oil prices have certainly put a dampener on ASEAN countries’ growth in 2006, with the exception of Brunei Darussalam. However, the huge current account surplus and foreign reserves in some Southeast Asian countries will provide a comfortable buffer to oil prices in the short to medium term. China’s economic expansion has continued to fuel Southeast Asian growth. Policy-makers in China will need to deftly engineer a soft landing for the overheated economy that will not cause

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INTRODUCTION

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widespread disruption to capital markets and hard investments, that will in turn put a massive dampener on domestic Chinese demand. A new strain of bird flu emerging from China, which is resistant to vaccines and spreading fast through Southeast Asia, has been reported in early November 2006. This could trigger a pandemic and cause economic upheaval in the region. Besides a moderate slowdown, looming on the horizon and which cannot be entirely discounted is the possibility of a U.S. recession as the country continues to save very little and has been relying on foreign capital to finance its current account deficits. Any unanticipated sharp rise in interest rates because of rising oil prices could also cause a deflation in the housing market, and also impact on U.S. consumer demand. Should a massive property market bust occur, this could trigger a recession in the economy with negative spillovers on ASEAN economies as the United States is one of ASEAN’s largest trading partners. Nevertheless there are many upsides in the various Southeast Asian economies that will help to weather these challenges. ASEAN now has been developing closer trade links with economies in Europe, India, and China. Presently, demand from Japan, China, and India are positives for ASEAN’s economic growth prospects. Economies in Southeast Asia are also now more resilient through better macroeconomic management. The Indonesian economy has recovered from the “mini crisis” which occurred in late 2005 when fuel subsidies were cut. Despite the crisis, the Indonesian economy has also been growing in positive territory since 2001. Inflation in the country was very well controlled in 2006. Increased agricultural production, garment exports, and tourism will be factors supporting Cambodia’s growth during the outlook period of 2007 and 2008 though corruption still threatens growth prospects. Brunei Darussalam is making strong strides in its diversification efforts through port and industrial park projects though the full fruit of this exercise will only be realized in the years ahead. The Ninth Malaysian Plan which aims to improve competitiveness in Malaysia’s high-end activities and to continue with the promotion of developing Malaysia’s knowledge-based economy will bode well for Malaysia’s economic growth prospects during the outlook period.

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INTRODUCTION Growth in the Philippines has been underpinned by a rebound in the agricultural, manufacturing, and financial sectors and is likely to continue in 2007 and 2008 leading some analysts to speculate on the emergence of a firewall separating the economy from the less stable political system. Fundamentals are also looking good with easing inflation and a stable monetary policy in the country. Singapore will continue to enjoy vibrant growth as its domestic fundamentals are in much better shape than they were a decade ago. The economy now is more diversified, the property market is now recovering, and the labour market has now strengthened considerably. Vietnam’s sustained economic growth trajectory is set to remain strong with no apparent signs of slowdown in 2007 and 2008. This has been largely helped by the new leadership line-up, economic reforms, and business liberalization efforts. The domestic private sector is now more robust due to regulatory reform and the provision of a more conducive environment for entrepreneurs. The Thai economy continues to grow moderately supported by government spending. Despite the recent bloodless coup, the country’s economic fundamentals remain strong because of ebbing inflation rates, manageable public debt levels, and ample international reserves. The Lao economy appears poised for growth in 2007 and 2008, given the large scale investment projects in the mining and energy sectors. Hydropower projects are in the offing allowing for its aspirations to become the “battery of Asia”. Economic reform momentum in the country is also likely to be maintained in the years ahead. Moderate growth rates are expected for Myanmar during the outlook period with economic growth boosted by the oil and gas industry. Nevertheless, without significant economic reforms, growth prospects are not expected to be particularly spectacular. The thematic boxes in the Economic Outlook section take a serious look at rising oil prices and their implication for Asia, the features of East Asian regionalism and their impact on medium- and long-term economic growth, and the need for currency rate cooperation in an era of greater economic globalization. Such pertinent issues need to be taken into account when considering the short- and medium-term trends

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in regional development and growth. In this year’s issue, Thailand’s financial and corporate sector reforms and consequences since the 1997 financial crisis are also examined with the implications for growth and economic stability in the region. Asad-ul Iqbal Latif Lee Poh Onn Editors 15 November 2006

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POLITICAL OUTLOOK

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THE ASIAN SECURITY ENVIRONMENT By Rodolfo C. Severino

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ince the departure of Vietnamese forces from Cambodia in 1989, no Southeast Asian country has been subject to the threat of crossborder armed attack. Thus, the Association of Southeast Asian Nations (ASEAN) has maintained its proud record of having no member in violent conflict with another. The ASEAN norm of settling inter-state disputes peacefully has continued to be upheld. In the larger East Asia region, however, there remain potential causes of inter-state conflict, or at least of regional instability, which thus concern Southeast Asia. As frequently noted, there are three specific potential flashpoints — the South China Sea, the Korean Peninsula, and the Taiwan Straits. The disputes over conflicting claims to all or parts of the South China Sea have become quiescent partly because of ASEAN’s success in getting China to negotiate on the issue with the member-states as a group. This process culminated in the adoption in 2002 of an informal code of conduct that commits the parties to settle disputes peacefully, guarantee freedom of navigation and over-flight in the area, and exercise “self-restraint”. The parties are also to undertake certain confidence-building measures and cooperate in a number of areas. However, although such measures and cooperation have been carried out, the fact that the conflicting sovereignty claims have not been resolved can still cause trouble and instability in the future. Another issue that has region-wide and even global repercussions involves North Korea’s possession of nuclear weapons and its capacity to make, test and deliver them. North Korea carried out a

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POLITICAL OUTLOOK nuclear test explosion in October 2006, and although Pyongyang has agreed to return to the Six-Party Talks there is no guarantee that the forum will succeed in bringing about a nuclear-free Korean peninsula. Apart from its general destabilizing and threatening effect, a nucleararmed North Korea might compel — or give an excuse to — Japan to arm itself with offensive, even nuclear, weapons, a development that would inevitably provoke a strong backlash from China and others. A third potential destabilizing situation is the issue of Taiwan. China has asserted its right to use all necessary means, including force, to counter a declaration of Taiwan’s independence. The Democratic Progressive Party of President Chen Shui-bian has advocated measures that could move the island towards independence, including the possible revision of the Constitution of the “Republic of China” and a referendum on independence. Although formally adhering to a one-China policy and strongly advising Chen against moving towards independence, the United States is compelled by its Taiwan Relations Act to support Taiwanese resistance against Chinese military action. For its part, Japan, which also has a one-China policy, has lately been expressing its intention to be involved more actively in the security of the Taiwan Straits. In October 2005, for example, a paper issued by the Foreign and Defence Ministers of Japan and the United States applied Japan’s security responsibilities and its defence cooperation with the United States to “situations in areas surrounding Japan”, a term regarded as encompassing Taiwan. For Southeast Asia, the status quo is clearly the best possible option in terms of its security interests. On a broader and fundamental scale, the uneasy political relationship between China and Japan, East Asia’s most powerful states, is deeply unsettling for the region’s prospects of long-term stability. The volatile nature of that relationship is manifested in China’s unhappiness over former Japanese Prime Minister Koizumi’s regular visits to the Yasukuni Shrine, which honours convicted war criminals among other war dead, and over Japanese history textbooks that purportedly whitewash Japan’s Second World War atrocities

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in China. It is also expressed in China’s opposition to Japan’s bid for permanent membership in the United Nations Security Council. China’s concerns have been raised by the debate in Japan over its reversion to a “normal” country, that is, a country entitled to bear offensive arms, to project a military presence beyond its immediate area, and even to acquire nuclear weapons. The Sino-Japanese friction, however, is mitigated by the rapidly growing economic interdependence between the two countries. There are also the disputes over islets and waters between Japan and its two neighbours, China and South Korea, as well as over the legacy of the Second World War. The October 2006 visit to China and South Korea of Shinzo Abe, on his first foreign trip as Japan’s Prime Minister, seems to promise some improvement in relations. ASEAN is helping to ease tensions in Northeast Asia by providing venues for the three powers to interact informally with one another — in the ASEAN Regional Forum, the ASEAN dialogue system, the ASEAN+3 process, and, now, the East Asia Summit. There are limits to ASEAN’s efforts, however. These tensions and frictions can have a profound impact on the long-term stability of East Asia, including Southeast Asia. More immediately, the security of Southeast Asia’s peoples is threatened by problems internal to their nations or transcending national boundaries on a regional scale. Foremost among these are the ethnic and/or social conflicts that sometimes lead the desperate or fanatical to resort to terrorism or rebellion. The political, ethnic, and religious fissures that threatened Indonesia’s unity in the 1950s have resurfaced in the current tensions between militant and tolerant Islam, the religious and the secular, shari’a and Pancasila, separatism and territorial integrity, and local autonomy and the unitary state. President Susilo Bambang Yudhoyono’s astute and sensitive leadership — together with the military’s unifying, albeit diminished and less visible, presence — has kept Indonesia from descending into internecine conflict. National divisions have emerged in Thailand, too, most notably between the Muslim south and the rest of Buddhist Thailand and

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POLITICAL OUTLOOK between the urban elite and the rural electorate. Whether the September 2006 coup and the naming of a retired general of good repute as the new Prime Minister will heal these divisions, exacerbate them, or paper them over remains to be seen. The Philippines has always been a society divided basically between the powerful rich and the powerless poor and between clans in provincial fiefdoms. The composition of Myanmar, as a country with a large number of ethnic groups occupying their own territories, poses severe challenges to national unity. The current ceasefires between the government and the “nationalities” have been made possible only by the grant of a significant measure of autonomy to the latter. As a transnational problem, international terrorism could strike at shipping at the vulnerable choke points in the region’s vital sea lanes. Operational cooperation between states, sanctioned by top-level political mandates from ASEAN and its partners, has been largely effective in fighting international terrorist conspiracies. Another transnational threat comes from communicable diseases that can spread rapidly because of large-scale travel and migration. Avian influenza has so far been contained, but the region remains alert for possible outbreaks. Many threats to the environment, such as the haze from man-made forest fires, pollution of the sea, and interference in the flow of international rivers like the Mekong, are transnational in nature and, therefore, demand regional action. Having managed to avert conflict between members, ASEAN, by itself and with its partners, now has to devote full attention to the threats posed by transnational crime and terrorism, communicable diseases, and environmental degradation — threats to the security of people that are less dramatic than wars but are just as lethal. Just as seriously, national divisions threaten peoples’ and nations’ security.

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THE UNITED STATES AND SOUTHEAST ASIA By Daljit Singh

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outheast Asia is strategically important to the United States for its location astride vital sea and air routes linking the Pacific and Indian oceans. With a population of over 500 million and a growing middle class, its commercial importance is also significant: two-way trade in 2005 was US$149 billion, while U.S. direct investments in ASEAN in 2004 amounted to US$80 billion. For Southeast Asia, the United States remains a key market for exports, a vital source of investments and technology, and a crucial factor for regional security and stability. Yet, Southeast Asia has traditionally received much less attention in Washington than Northeast Asia, where the strategic interests of the major powers intersect, and where the United States can be involved in a major conflict on the Korean peninsula or in the Taiwan Straits. Southeast Asia, after the U.S. withdrawal from Vietnam in the early 1970s, was a relatively peripheral theatre, its importance declining further after the end of the Cold War. America’s perceived inadequate initial response to the start of the Asian financial crisis in Thailand in 1997 reinforced the feeling in parts of Southeast Asia of U.S. neglect and indifference. However, changes in the global and Asian security landscape since 9/11 have forced the United States to pay more attention to Southeast Asia. The uncovering in 2001 and 2002 of Islamic terrorist networks in the region that were linked to Al-Qaeda or that shared its ideology, the continuing threat from them, and a significant increase in China’s influence in the region will continue to ensure a higher level of U.S. interest in Southeast Asia. The policies of the present Bush administration in the Muslim world, especially in relation to Iraq and the Israel-Palestine conflict, have, as elsewhere, increased anti-U.S. sentiment among Muslims in Southeast Asia. The governments of the two Muslim-majority countries, Indonesia and Malaysia, have to be sensitive to this reality but, generally, U.S. relations with both can be expected to remain cordial. Relations with Indonesia have advanced. The United States has recognized that Indonesia under President Susilo Bambang Yudhoyono deserves more support because of its importance in the war on terror, its large Muslim population — the biggest in the world — and its status as a new democracy. US military aid to Indonesia, which had been suspended for more than a decade because of human rights abuses by the Indonesian army, has been restored. In the case of Malaysia, cooperation in the military and security arena has continued and a bilateral free trade agreement (FTA) is under negotiation.

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THE UNITED STATES AND SOUTHEAST ASIA (continued)

Relations with the Philippines, one of America’s treaty allies in Southeast Asia, had been in a state of neglect after the closure of the U.S. military bases in 1992, but have improved considerably since 9/11. Washington has been providing economic aid of about US$100 million a year as well as security assistance to strengthen Manila’s counter-terrorism efforts. U.S. military-civilian affairs teams have been active in the southern Philippines, where the United States has also assisted the Philippines military in its operations against the terrorist Abu Sayyaf Group. A joint U.S.-Philippines Security Engagement Board (SEB), announced in May 2006, functions as a defence panel to cover non-traditional security issues, such as terrorism, drug trafficking, pandemics like avian flu, and natural disasters. America’s good relations with its other formal Southeast Asian ally, Thailand, are unlikely to be significantly affected by the military coup in Bangkok in September 2006. Access to Thailand’s airfields and ports remains important in U.S. global military strategy. Thailand contributed troops in support of U.S. operations in Iraq and was designated a major non-NATO ally. There has been close intelligence cooperation in the war against terrorism. The removal of the Thaksin Shinawatra government could result in a review of Thailand’s position in the difficult negotiations over an FTA. However, the appointment as Foreign Minister of Nitaya Pibulsongram, a former Ambassdaor to Washington and until recently chief Thai negotiator for the FTA, suggests that the negotiations will probably be resumed, despite opposition from non-government organizations (NGOs) and grassroots organizations. America’s already close relations with Singapore have been further strengthened with the signing of an FTA in 2004 and a strategic framework agreement in 2005 to advance cooperation in defence and security. Bilateral relations with Vietnam have expanded, with the United States cultivating Vietnam for both commercial and strategic reasons. This trend will continue, but in the near term at least there are limits on how close Vietnam can get to the United States, given Hanoi’s reluctance to offend China and concerns about possible interference of the United States or U.S.-based groups in Vietnam’s domestic affairs. Little significant change of U.S. policy towards Myanmar is expected. Indeed, the rhetoric against Myanmar has increased. As long as there is no pressing U.S. strategic concern in relation to Myanmar, U.S. policy will likely to continue to be dictated by human rights and democratization considerations. The successful attempt by the United States in September 2006 to put the Myanmar issue on the UN Security Council agenda is likely to make Myanmar more intransigent than compliant. At the regional level, the United States is an ASEAN dialogue partner and it participates in ASEAN Post-Ministerial Conferences as well as in the ASEAN Regional Forum and the Asia-Pacific Economic Cooperation (APEC) forum. These are the key institutions for managing U.S. relations with the region. A plethora of forums has sprung up around ASEAN in which China is a visible, active, and skilful player that

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thinks strategically and long-term. ASEAN considers it essential to engage China in this web of cooperative arrangements but it also wants active U.S. participation. The fact that the United States is not a member of the East Asia Summit (EAS) process — despite deep and extensive American involvement in Asian economic and security dynamics which affects all the EAS members — makes it all the more necessary for it to engage ASEAN more actively and deeply. The United States has made certain responses to such concerns. In 2006, it created the post of an Ambassador for ASEAN Affairs, signed a U.S.-ASEAN Trade and Investment Framework Agreement to strengthen trade and investment relations, and also signed a Framework Document for the Plan of Action to implement ASEANU.S. Enhanced Partnership. The Plan of Action itself is a comprehensive document covering U.S.-ASEAN cooperation in many areas. ASEAN would have liked the United States to sign the ASEAN Treaty of Amity and Cooperation (TAC), which could pave the way for U.S. participation in the EAS, but this looks unlikely, at least during the Bush presidency. ASEAN would also like to see a regular U.S.-ASEAN summit. Further, ASEAN feels that the United States and Japan should also energize APEC, which binds the two sides of the Pacific. APEC already has a built-in annual summit meeting of leaders, and it has been discussing political and security issues, a role that could be strengthened and enlarged. Southeast Asia has changed much since the end of the Cold War. China’s political clout has increased substantially, for instance, in Cambodia, Laos, and Myanmar. Even Malaysia, the Philippines, and Thailand are seen to be bending towards it. On the other hand, Japan’s influence has declined. The United States is often viewed as a hedge against China, but interestingly, some also view China as a hedge against the United States. Such is the changed view of the United States, in part because of its foreign policy in the Muslim world and its perceived recent unilateralism. Apart from the implications of these trends for ASEAN’s desire to maintain an equilibrium of major power interests in the region, deteriorating Sino-Japanese relations and growing nationalism among the younger generation in both countries do not augur well for regional peace and stability. In such circumstances, active U.S. involvement in key regional forums may be just as essential as maintaining its security presence and alliance system. The strategic game is entwined with the political one. In strategic terms, the U.S. approach to Southeast Asia cannot be considered in strict isolation from U.S. posture and policies towards East Asia and towards South Asia as well. After all, the U.S. forward military presence and the critical U.S.-Japan alliance that have provided the framework for security and stability in the whole East Asian littoral, including Southeast Asia, are mostly anchored outside Southeast Asia. Despite some uncertainties about political stability, governance, and democratization in Southeast Asia, it will be difficult for the United States to ignore this region between the rising powers of China and India and possibly a resurgent Japan.

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CHINA’S RELATIONS WITH SOUTHEAST ASIA By Sheng Lijun

C

hina-ASEAN relations have undergone various stages. From 1949 to the early 1970s, this relationship was generally marred by suspicion and hostility. After ending the diplomatic isolation following its admission into the United Nations and its rapprochement with the United States in the early 1970s, China recognized the ASEAN grouping in 1975 and gradually established diplomatic relations with ASEAN members. This relationship was initially bilateral and lukewarm. Beijing was then looking for a platform where it could engage all ASEAN member states closely and multilaterally. Vietnam’s occupation of Cambodia in the late 1970s to 1980s offered Beijing an opportunity. China made good use of this opening to start its initial, though informal, irregular and low working level, multilateral cooperation with ASEAN. However, formal China-ASEAN relations was not possible until after China had established formal diplomatic relations with Indonesia in August 1990 and with Singapore in October 1990. Next, China made its first official contact with ASEAN in July 1991. However, this multilateral relationship then was still tentative at its best. China had to focus on its bilateral relations with individual ASEAN member states while waiting for opportunities to boost this multilateral relationship to a higher level. The opportunity came with the 1997 Asian economic crisis. China quickly responded to ASEAN’s acute need for its political and economic backing, and finally used the ASEAN-China Summit as its top-level platform for multilateral cooperation. When this momentum began to recede after ASEAN countries had overcome the initial crisis shockwaves, China made a renewed diplomatic effort. In 2001, it proposed a free trade agreement (FTA) with ASEAN to promote multilateral cooperation. The momentum was thus well maintained and is building up. By 2005, a total of forty-six mechanisms, ranging from political consultations to economic and other forms of cooperation, had been set up.

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THE ASIAN SECURITY ENVIRONMENT

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Milestones included the announcement at the first ASEAN-China Summit in 1997 of establishing “a partnership of good neighborliness and mutual trust”, which was later transformed into a “strategic partnership for peace and prosperity” at their Summit in October 2003, following China’s accession to a key ASEAN security protocol, the Treaty of Amity and Cooperation. The territorial disputes in the South China Sea, which had long troubled relations between China and ASEAN, have been placed on a backburner, with their signing of the Declaration on the Conduct of Parties in the South China Sea at the Summit in 2002. China-ASEAN trade has expanded fast, with an average growth rate of 21 per cent from 1991 to 2005, with ASEAN becoming China’s fourth biggest trade partner, and China the fifth biggest trade partner of ASEAN. In November 2002, both sides signed the Framework Agreement on Comprehensive Economic Cooperation, which provides for an FTA. In 2004, they signed the Agreements on Trade in Goods and Dispute Settlement Mechanism. Both sides are now working to conclude an agreement on trade in services and another on investments. These developments should be reviewed in proper perspective. Indeed, the two sides have a convergence of interest in avoiding the Cold War mistakes of hostility and moving towards a win-win cooperation. ASEAN needs China’s political backing to play its role as the primary driving force in regional interactions. It also wants to tap the booming Chinese market. However, ASEAN is not bandwagoning with, but “hedging” against China — engaging China while developing ties with other extra-regional powers for a “constructive regional balance” — instead of being China-centric. While China has gained influence in Southeast Asia in recent years, ASEAN’s relations with other extra-regional powers remain robust. China’s initiatives have been painstakingly balanced by ASEAN with similar arrangements with the other extra-regional powers.

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CHINA’S RELATIONS WITH SOUTHEAST ASIA (continued)

So far, China’s accumulated investments and official development aid (ODA) in Southeast Asia are still far below those from the United States, Japan, and the EU. Chinese investments in ASEAN countries will increase in future, but modestly, because Chinese companies continue to prefer to invest and produce domestically and trade overseas. The result is a massive increase in their trade with ASEAN, but a far more modest increase in their investment there. The high growth in China-ASEAN trade should be viewed in proper perspective. China’s total foreign trade also grew rapidly during the same period. Thus, its trade growth with ASEAN, though slightly higher than average, was not really spectacular. This trade comprised 8.3 per cent of China’s total foreign trade in 2000, rising to 10.5 per cent in 2004, before dropping to 9.14 per cent in 2005, still behind the United States and Japan in their trade with ASEAN. Even if it catches up, it will be more symbolic than substantive. This is because foreign companies in China (referring to foreign-owned and/or foreign-invested companies, which engage overwhelmingly in exports processing, from which China only retains a fraction of the value of the finished products) account for, taking 2005 for example, 60.6 per cent of China’s trade with ASEAN. The foreign component of ASEAN exports to China is also very high. Therefore, the increase in China-ASEAN trade was mainly intra-industrial trade within and between foreign companies in China and Southeast Asia as well as entrepôt trade. Double counting is estimated to be as high as 30 per cent of the total China-ASEAN trade. In the China-Singapore trade, which tops the China-ASEAN trade, entrepôt trade accounts for 46 per cent of China’s export to Singapore, and 40 per cent of Singapore’s export to China. A large part of China’s trade with ASEAN thus ends up in Western consumer markets. A sound China-ASEAN economic relationship in future will depend on how fast China or ASEAN can upgrade its economic structure to match their respective competitiveness and how much more the Chinese market can absorb ASEAN’s

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products. China is now attempting to move from an export-and-investment-led growth strategy to one balanced by healthy domestic consumer spending. If successful, this move will greatly but not abruptly improve its economic relations with ASEAN countries. China’s attractiveness to ASEAN still lies in its booming market, with a huge demand for Southeast Asian imports and rapidly increasing foreign reserves (approaching US$1 trillion now) and trade surplus, which China is likely to use as government investments and ODA overseas. Besides, China is willing to make more economic concessions, especially in agricultural products, than other major trading powers, and let ASEAN accumulate a trade surplus of nearly US$20 billion a year for the recent past years in its trade with China. With more government investments and ODA funds to spend overseas in future, China’s soft power may increase, but it is more likely to result in “low soft power” than in “high soft power” (appealing political and social systems and ideologies/belief). It is the high part of soft power, together with strategic interest, that is essential to form strong and lasting alliances between countries. Without strong soft power, China’s relationship with ASEAN counties cannot but remain socially narrowly based. So far, its relationship with many ASEAN counties rests mainly on high governmental levels and has not penetrated deeply and substantively to the middle and lower levels of the societies. China’s next step, apparently, is going to greatly but steadily broaden its social bases in Southeast Asia through building many more mechanisms and channels from the top to grass-root levels. However, this is very difficult as this effort will encounter not only higher strategic hurdles from both inside and outside the region, but also the deep-rooted ethnic and religious “obstacles”, which neither China nor the other powers has been able to overcome in the past. For the foreseeable future, China will lack the economic, political, social and strategic bases to tip the regional strategic balance. Should China’s goals remain modest, its relations with ASEAN are likely to remain vigorous. If it seeks to press too hard beyond the tipping point, it risks a strong backlash from not only from the ASEAN countries but also from the extra-regional powers.

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INDIA’S STRATEGIC ENGAGEMENT WITH SOUTHEAST ASIA, 2007–2008 By Sudhir Devare

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he year 2006 started on a high note for India with the latter’s participation in the first ever East Asia Summit (EAS) in Kuala Lumpur in December 2005. That India was accepted and invited to be a member of a primarily East Asian grouping of ASEAN and Northeast Asian states marked the recognition of India’s growing strategic importance in the region. It also reflected an increasing interest among the East Asian states to engage India across the board. India itself feels that its “Look East” policy approach has paid a good dividend in upgrading its relationship with Southeast Asia in a short span of a decade. It therefore feels encouraged to further consolidate and strengthen its ties in the Asia-Pacific region. Indeed, the passing year saw India’s steady efforts towards enlarging its relations with Southeast Asia, regionally as well as bilaterally and widening its understanding with China, Japan, and Korea. Clearly, the basic approach seemed to minimize differences, wherever they exist, while developing ties in strategic and especially in the economic field with all regional countries. This was evident in the bilateral visits of high-level leaders between India and Japan, China, Indonesia, Singapore, Myanmar, and the Philippines during 2006. The rapid expansion of trade between India and ASEAN and also India and China points to a new trend in their relationship. India-ASEAN negotiations during the year on a free trade agreement (FTA) (as a part of a Comprehensive Economic Cooperation Agreement, or CECA) were evidently not smooth due to ASEAN’s objection to the size of a negative list of items (for tariff reduction) as proposed by India. However, the talks have resumed and mutual differences are expected to narrow before the leaders meet at Cebu in the Philippines for the second EAS in December 2006. India’s engagement with Southeast Asia since the end of the Cold War has expanded manifold and takes place against the backdrop of several factors, international, regional, and bilateral. However, three are most prominent and are expected to play a major part in 2007. Firstly, direct contacts and better communication between India and Southeast Asia at all levels have vastly improved. Today, there is a greater degree of understanding between India and Southeast Asia across a wide range of political, defence, and economic issues. This includes areas such as maritime security, human security, energy security, economic interdependence, and integration. With regard to maritime security, both seek peace and stability in the maritime space extending from the Persian Gulf through the Arabian Sea, the Bay of Bengal, the Malacca Strait to the South China Sea. Their common concerns regarding piracy, transnational crime, and safety of the sea lanes of communication (SLOCs) in the northern Indian Ocean, especially with regard to transportation of oil and liquefied natural gas (LNG), have led to greater cooperation between their naval forces and coast guard organizations, increasing number of joint

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exercises, informal meetings as well as other confidence-building measures. These are expected to continue and grow further in the coming years. The same should hold good with respect to energy security. India and most of the Southeast Asian countries are short of indigenous energy supply and are looking intensively to augment their energy sources. Prospects of cooperation either bilaterally, as in the case of India-Vietnam joint venture on natural gas or India-Myanmar gas exploration project off the Rakhine coast, or the proposed Myanmar-Bangladesh-India gas pipeline utilizing the concept of multilateral cooperation under the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), or greater energy trading between Singapore, Malaysia, Indonesia and India offer examples in the field of energy. Today, in strategic engagement, economic cooperation holds the key where expectations of the Indian assistance are high among the Southeast Asian states. The target of a two-way trade between India and ASEAN of US$30 billion by 2010 seems attainable. However, that figure is miniscule when compared with the volume of trade of US$200 billion expected between China and ASEAN by 2010. There is no doubt that the need for economic integration with Southeast and East Asia is acutely felt in India today. The CECA with Singapore and an FTA with Thailand are already operational. Trade with the East Asian region already accounts for more than 50 per cent of India’s global trade. In the less developed CLMV states (Cambodia, Laos, Myanmar, and Vietnam), India has seen (from China’s experience) that trade expansion can best take place through investments and soft-term loans and credits. India’s economic performance in these countries will largely depend on this factor. With respect to human security, there is a closer interaction between India and Southeast Asian countries today. Traditional cultural linkages are being revived. Civil society groups, educational institutions, health-care bodies, and tourists interact with each other in larger numbers and more frequently. Indian experience and expertise in the services sector is increasingly welcomed in Southeast Asia. Indian democratic institutions and practices are also closely observed. The large Indian diaspora present in several Southeast Asian countries is getting poised to play a more active and catalytic role between the two. These expressions of the Indian soft power are going to be important ingredients in India’s engagement with Southeast Asia in the future. The second factor in India’s strategic engagement with Southeast Asia pertains to the U.S. policy on Southeast Asia and also the U.S.-India relationship itself. The United States is clearly working towards allaying the apprehension that the U.S. interest in Southeast Asia in the post-9/11 period had waned or remained focused only on the issue of terrorism. At the same time, a strategic partnership is evolving between the United

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POLITICAL OUTLOOK

INDIA’S STRATEGIC ENGAGEMENT WITH SOUTHEAST ASIA, 2007–2008 (continued)

States and India, especially with a Civilian Nuclear Energy Agreement having been signed. Given the fact that several Southeast Asian countries are closely linked to the United States with regard to their defence needs, the growing India-U.S. equation should augur well for India’s engagement with Southeast Asia. Japan’s increasing profile, including in the Indian Ocean, also fits well in this picture. The new Japanese leadership has shown keen interest in developing closer relations with India. The third important factor is China-ASEAN engagement and India’s rapidly progressing relationship with China. At the November 2006 Nanning Summit between China and Southeast Asian nations, which commemorated the fifteenth anniversary of their Dialogue Partnership, the remarkable development of their close and strong political and economic relations was reaffirmed. This significant event marks a new development. As stated by the Philippines President Arroyo, the current Chairperson of ASEAN, “China is not a threat, but an opportunity.” The visit of Chinese President Hu Jintao in November 2006 to India is expected to further solidify the overall ties between the two countries. China is expected to emerge as the largest trading partner for India in the coming five to six years. There are already growing exchanges in the defence field between the two. Although differences between them are likely to persist and intense competition would continue in many fields, China, India, and the countries of Southeast Asia are also keen to find room for common stability, peace, and prosperity. This finds expression at their meetings, be it the ASEAN Regional Forum (ARF) or EAS. Japan is also expected to join this endeavour in the Asia-Pacific, even as its new leadership tries to find a way out of serious differences with China and South Korea. In conclusion, the India–Southeast Asia engagement is on course. It will need to be more substantive with the passage of each year. This relationship is a vital component of the larger pan-Asianism which India has traditionally espoused. If the objective of an Asian Economic Community that India has proposed is to materialize, India would need to constantly take steps to strengthen the basic building block, namely, the India–Southeast Asia relationship.

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THE ASEAN-10 A. Mani • Verghese Mathews • Azhar Ghani • Martin Stuart-Fox • Ooi Kee Beng • Robert H. Taylor • Rodolfo C. Severino • Terence Chong • Nirmal Ghosh • David W.H. Koh

Brunei Darussalam Prosperity based on the buoyant oil prices has helped Brunei overcome the fear that had plagued it in the late 1990s, when lower oil prices and recession had reduced national expenditure. Another cause for rejoicing was the occasion of Sultan Hassanal Bolkiah’s sixtieth birthday in mid-July 2006. The increased oil revenue allowed the Sultan to announce a pay rise for all civil servants. Some had not seen any salary increases for twenty years. Civil servants enjoy benefits such as heavily subsidized housing, free medical care, and no income tax and consumption tax. Being an Islamic state, the government charges no interests on loans extended to the people. As the third-longest reigning monarch in the world after the Thai and British monarchs, the sixtieth birthday celebrations were organized elaborately from 1 July to 18 August 2006. The celebrations included all Bruneians as well as international heads of state and governments. Brunei Darussalam has also been active in forging regional political ties. Foreign Minister Prince Mohammed visited China, while the Sultan himself visited Malaysia to attend the tenth annual consultation meeting with Prime Minister Abdullah Ahmad Badawi. Brunei increased its international profile by announcing that it will send a hundred soldiers with the Malaysian contingent to participate in the United Nations

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POLITICAL OUTLOOK

BRUNEI DARUSSALAM Land area:

5,770 sq. km.

Population:

380,000

Capital:

Bandar Seri Begawan

Type of government:

Monarchy

Head of State and Prime Minister:

Sultan Haji Hassanal Bolkiah Muizzaddin Waddaulah

Currency used:

Brunei dollar (on par with the Singapore dollar)

US$ exchange rate on 1 December 2006:

US$1 = B$1.69

Interim Force in Lebanon (UNIFIL). This shows Brunei Darussalam’s increasing confidence in engaging in international affairs. Brunei also held discussions with ASEAN leaders during the year. The government focused vigorously on sustaining the local economy as well as slowly preparing Brunei to evolve its own representative form of government. The historical revival of the Legislative Council in 2004 and the reorganization of the Cabinet in May 2005 ushered in a new generation of leaders. From 2005, Brunei had followed an economic strategy to add value to local products and services of small and medium enterprises (SMEs). A standard and accreditation centre has been planned to ensure high-quality products and services. Brunei is also steadily creating a full-fledged Brunei Tourism Board, marketing Brunei as a unique tourism destination. A business-friendly environment is being created with efforts to increase the competitiveness of local SMEs. The role of SMEs is viewed as crucial to the future as about 97 per cent of the 6,817 companies (2002 estimates) are SMEs engaged in wholesale, retail, mining, and manufacturing. In April 2006, the Brunei Darussalam Economic Development Board (BEDB) established an SME innovation centre to support and develop the local SMEs, in particular,

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THE ASEAN-10 the growing number of technoprenuers. In order to attract both local and external investors, the BEDB has secured major partnerships for its projects. It has an aggressive strategy to attract US$6.7 billion worth of foreign investment and create 7,200 direct jobs locally within four years through major economic diversification. The US$1.5 billion Pulau Muara Besar Industrial Park will enable Brunei to attract maritime-related investments. It will help create a deepwater harbour to accommodate the next generation supertanker. The multi-million dollar Sungai Liang Project has attracted Alcoa to invest $1.5 billion. Another rubber plant is expected to attract $1.8 billion in foreign capital. The industrial park will also tap into Brunei’s gas reserves to establish downstream industries. There is a plan to establish power and water treatment plants that will invest US$1.3 billion, of which 70 per cent will be foreign capital and create more than 1,300 direct and indirect jobs. Mitsubishi Gas Chemical Company, Inc. (MGC), the Brunei National Petroleum Company, and the Itochu Corporation jointly operate as the Brunei Darussalam Methanol Consortium in the Sungai Liang Industrial Park; it will start methanol production in the second quarter of 2009, with an investment of US$350 million. It will produce approximately 850,000 tonnes of methanol annually, with most of it exported to Asian markets. It will spur local SMEs as the Consortium plans to procure 80 per cent of its basic supplies and services from local SMEs. Brunei is also planning to be an aviation hub, a haven for ecotourism, and a financial services centre. A 40-hectare “eco-cyber hub” is being planned, and investors will be welcomed with a twenty-year corporate tax holiday to develop the latest technology for offices and homes. The Islamic Bank of Brunei Darussalam (IBBD) was created in February by merging two banks in order to strengthen the Islamic financial institutions, in particular the banking sector and insurance, and make it more sustainable and competitive. Despite Brunei’s efforts at economic diversification for a sustainable economy, oil still remains the “black gold” of the economy. Escalating oil prices has made the oil and gas sectors dominant with 93 per cent of Brunei’s total exports. In 2005, Brunei exported 192,700 barrels per

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POLITICAL OUTLOOK day. India became the number one customer for Brunei’s oil, replacing China in 2005. Exports to India had increased significantly by 212.7 per cent followed by Australia (55.9 per cent) and Korea (27.0 per cent). Despite the prosperity, happiness, and confidence that were visible in Brunei Darussalam, there was concern about some subtle challenges. There is a visible population shift away from Bandar Seri Begawan into the Brunei-Muara District. This has resulted in less business for the once popular shopping complexes as businesses moved to newer shopping areas. There is also the lack of tourists. The cheaper airfares out of Bandar Seri Begawan to regional destinations as well as the weekend migration of shoppers to Labuan and Miri (in Sarawak) lure away the local buyers to neighouring countries. Despite the clean and well-maintained tourist attractions and hotels in Bandar Seri Begawan, the number of visitors has dropped from 1,306,764 persons in 2000 to 337,258 persons in 2002. Hoteliers and service operators hope that the government will help spur tourism as a high priority industry. The construction sector has gloomy prospects since the Amedeo Corporation collapse. Demand for national housing scheme, for instance, has exceeded supply with thousands in the waiting list for years. Only 2,500 houses have been built since 1991, with 14,000 families still waiting. While the budget limitations are offered as a reason, the call for the private sector to jointly develop the housing scheme has failed. Even though official reports indicated a 28.9 per cent growth in the second quarter for 2005 as compared to 2004, most constructions were fuelled by the private sector rather than public spending on buildings and infrastructure. Lack of coordination between the two ministries of finance and development does not allow all the objectives of the national development plan to be implemented. Other problems include the unnecessary imposition of controls with consequent increases in costs of building materials. One crucial issue is the costs and the grade of cement used in Brunei. Costs also increased when tender approvals were delayed. Brunei Darussalam has begun to pay careful attention to its human resource development. Until now 80 per cent of the University of Brunei Darussalam (UBD) graduates had been employed as teachers,

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THE ASEAN-10 with the rest going into the public and private sector jobs. This trend is alarming as higher education hardly produces the talents for Brunei’s economic diversification. With UBD preparing itself to enrol up to 4,000 students per academic session soon, the government is under intense pressure to diversify and cultivate its human resource. With this in mind, Sultan Hassanal Bolkiah announced in September 2006 the establishment of a National Committee at the Cabinet level to review tertiary institutions. The government appears to be determined in planning for a sustainable economy and to diversify the economy for the near future. Politically, three opposition parties and an election process for village councils have been set up. Overall, Brunei Darussalam’s outlook for the year is highly optimistic and promises more prosperity and progress.

Cambodia From an uncertain and unsettling start with its first elections in 1993 following the 1991 Paris Peace Agreement, a once fragile Cambodia has come a long way. The Cambodia that enters 2007 is a far more stable country with strengthened institutions, greatly reduced political violence and generally enhanced social conditions. Civil society continues to be active and vocal. While the country remains dependent on donor assistance, its macroeconomic policies and their implementation have improved and are recognized as such by relevant international organizations like the World Bank and the Asian Development Bank (ADB). Meanwhile, arrangements for the long-awaited Khmer Rouge Tribunal are finally on track. Overall, Cambodia has done well in the circumstances and has emerged as a responsible member of the international community and a concerned regional player. Notwithstanding these tangible and visible changes, the country continues to have a bad press, and detractors both at home and abroad, especially among human rights groups, have been no less strident. Prime Minister Hun Sen, the longest-serving head of government in Southeast Asia, and his ruling coalition have increasingly come under severe criticism, even from among their friends, in particular for not

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POLITICAL OUTLOOK

CAMBODIA Land area:

181,040 sq. km.

Population:

13.88 million

Capital:

Phnom Penh

Type of government:

Parliamentary democracy with constitutional monarchy

Head of States:

King Norodom Sihamoni

Prime Minister:

Hun Sen

Next election:

2007 (local elections) 2008 (National Assembly)

Currency used:

Riel

US$ exchange rate on 1 December 2006:

US$1 = 4,290 riel

meaningfully tackling the endemic corruption in the country and for the obstinate reluctance to table the long-delayed Anti-Corruption Bill. In addition, there has been criticism from the donor countries for the lack of progress in some earlier agreed areas of reform, especially in the judiciary. It needs to be noted here that several of these well-meaning critics have played fairly significant roles in Cambodia’s present well-being. In 2007, Cambodia can be expected to see continued growth and progress in those areas and sectors that are already moving. It will, nevertheless, be increasingly judged by how seriously it addresses and implements good governance issues and policies. Major challenges have hitherto been in the political area, largely resulting from the internal dynamics within the three major parties — Hun Sen’s Cambodian People’s Party (CPP), the opposition Sam Rainsy Party (SRP), and the royalist FUNCINPEC Party (FCP) — and the interaction among them. Although there is a discernable maturing of the political process, the forthcoming Commune Council elections

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THE ASEAN-10 in 2007 and the general election the following year will present challenges. The most significant change among the political parties has been in the FCP which, by mid-2006, was almost a non-party under Prince Ranariddh, whose long periods of absence from the country, whose falling out with Hun Sen, and whose preoccupation with personal problems were seen as serious impediments to the party’s growth. In October, a rival faction, reportedly with strategic advice from friends in the CPP, removed Ranariddh from the presidency and replaced him with his mild-mannered brother-in-law, Ambassador Keo Puth Rasmey. The Ranariddh faction, taken completely by surprise, threatened legal action while planning to form a new party. The new faction in FCP responded by accusing Ranariddh of misappropriating US$3.6 million he had obtained by unilaterally disposing off party assets. Meanwhile, Prince Thomico Sisowath, a close relative of former King Sihanouk, sensing that the royals would be further sidelined in Cambodian politics, earlier called on the FCP to disband and for its members to join his newly formed Sangkum Jatiniyum Front (Alliance of the National Community). Thomico went further and called on the government to be dissolved and for power to be given to ex-King Sihanouk, a position Ranariddh also subsequently supported. Hun Sen’s angry retort, in true vintage Hun Sen style, was that those planning such a constitutional coup had better prepare their coffins first. Norodom Sihanouk who, like Hun Sen, understands power play, not only distanced himself promptly from his relative’s lofty hopes but also cut off his monthly stipend from the royal purse, supposedly a serious admonition. This has not prevented calls, admittedly few, for the royals to either move out of politics or to move out of royalty. There is no doubt in the mind of most observers that, with the FCP weakened and Thomico’s party still an unknown quantity, the royalists will have a difficult time in 2007. A landmark constitutional amendment in 2006 which allowed a political party gaining more than 50 per cent of the votes in an election to form government, instead of the previous requirement of

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POLITICAL OUTLOOK two-thirds of the votes, has changed the face of Cambodian politics. What that means in real terms is that if Hun Sen had been well in control of the government and the party before, he goes into 2007 even more so in control. He remains unchallenged. If any challenge should emerge in 2007 it can only be from his own party and there is no such likelihood in sight. Likewise, for the first time since 1993, a confident CPP no longer needs the FCP or the SRP to form the government. There was a time, not too long ago, when the CPP needed the FCP in government to give it a gentler face and to reassure the international community and liberal groups. The CPP no longer needs this prop and neither the FCP nor the SRP can now claim to be anywhere near the CPP’s stature or its track record. Just as importantly, the CPP can now table its own political and economic vision and plan its own policies for over longer periods of time without having to compromise with any other party. A weakened SRP, which had been comparatively quiet for several months, can be expected to become active again in 2007 in preparation for the Commune Council elections in April and for the all-important general election in 2008. Although the party has lost some of its lustre and appeal, it is the only credible opposition at the moment and can be expected to renew its strident support of populist causes. The FCP has been considerably weakened, too, and will have an uphill task to regain lost ground and to rebuild its rural network. It has limited time to prepare the ground for a decent showing in the April Commune Elections and would probably set its sights for the 2008 general election. It will, however, have the support of the CPP, which recognizes the advantages of the FCP remaining viable. At this stage it is difficult to access Thomico’s new royalist party, which most observers have dismissed as a non-starter. It is too early for such pessimism. This fledgling party will either make it or break it in 2007. Fortunately for the monarchy, King Norodom Sihamoni, a reluctant monarch, has fitted in with dignity and has quickly earned the devotion

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THE ASEAN-10 of his subjects, especially the rural masses. Sihamoni has studiously remained above the political fray and did not interfere during the Hun Sen–Ranariddh spat. Sihamoni can be expected to similarly remain above politics. At the international level, Cambodia’s relations with the other ASEAN member countries are very strong. There is especially growing cooperation with immediate neighbours Vietnam and Laos and also with Thailand. There will be increased instances of cooperation among the neighbours in 2007. Relations with the United States have improved, and the U.S. ban on providing military assistance has been lifted. Eyes are, however, on China, which has become an important trading partner, investor, and donor. In particular, the administration is pleased with the Chinese attitude of not preaching to them when giving aid. Hun Sen can be expected to further consolidate his power in 2007 and to move up more competent second echelon leaders, many of whom are reform-minded. In the coming months, his main preoccupation will be the Commune Council elections, the 2008 general election, and the Khmer Rouge Tribunal. However, the albatross will remain the pervasive corruption in the country and the challenge to usher in good governance. At a personal level, Hun Sen has achieved most of the things he had set out to do. Those close to him suggest that he will want to concentrate now on improving his personal image. One sure way of achieving this is for a strong leader like him to personally accept responsibility and to oversee the fight against corruption and ensure good governance.

Indonesia President Susilo Bambang Yudhoyono’s five-year term in office will reach its halfway point in 2007. More than a mere chronological milestone, 2007 could prove to be a crucial year for his presidency. With Indonesia’s political clock set firmly to the election-cycle rhythm, time is quickly running out for Dr Yudhoyono on two counts:

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POLITICAL OUTLOOK

INDONESIA Land area:

1,919,443 sq. km.

Population:

245.45 million (July 2006 estimate)

Capital:

Jakarta

Type of government:

Presidential; based on amended 1945 Constitution

Head of State:

President Susilo Bambang Yudhoyono

Next election:

2009

Currency used:

Rupiah

US$ exchange rate on 1 December 2006:

US$1 = 10,040 rupiah

one, to implement the more long-term and strategic aspects of his agenda; and two, to position himself for re-election in the 2009 polls. While there will still be two years before 2009, many observers believe that starting in the middle of 2008, both the people and the politicians would be too distracted by election campaigning to focus on long-term issues. Also, during that period, tough and unpopular measures that may need to be passed would in all probability have almost no chance of getting through the country’s legislative House of Representatives (DPR), as political calculations become a bigger factor than usual. With many politicians keeping one eye on the elections in 2009, the pull of populist sentiments may just prove too strong then. In 2007, with the polls still some time away, political parties would try not to be too overtly partisan in their behaviour lest they earn public disdain. It would be unlikely that there would be a sudden switch in loyalties, or diminished support for the government, by any of the parties that had pledged their support. In short, it would generally be business as usual. Hence, 2007 would be the best time for Dr Yudhoyono to make an impact.

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THE ASEAN-10 In Indonesia today, despite the democratic reforms of the postSoeharto era, all roads still lead to the presidential palace. While the public knows that policies can be held hostage by the DPR if legislation is needed, it still deems the President ultimately accountable. Unlike his critics and political opponents — including those in the DPR — who snipe from the sides, Dr Yudhoyono cannot afford to separate the business of 2009 from the job at hand. As his VicePresident Jusuf Kalla said in an interview with Singapore’s Straits Times in April, those currently in power will be judged mainly by their record in office, and not by their election campaigning promises. Although he swept into office with an impressive 62 per cent of the votes in Indonesia’s first-ever direct presidential election in 2004, Dr Yudhoyono probably realizes that his popularity alone will not be enough to get him re-elected. He knows that he needs to show the people concrete results in matters of core public interest. In that respect, while 2007 is expected to be similar to 2006, there could be a sharper government focus on some areas. Indonesia’s anti-graft drive, which has netted a number of officials, will continue — as will accusations from detractors that not much is being done, or that the government cherry-picks the people it prosecutes. The anti-terrorism drive, too, will be maintained, with the hunt for Jemaah Islamiyah’s (JI) Malaysian militant Noordin Mohammad Top remaining a priority. An added challenge would be to thwart Noordin’s instructions for his followers to conduct at least one bombing every year. If this challenge can be met, it would signal a crucial turning point in Indonesia’s war against terror. On foreign policy, 2007 could further consolidate Indonesia’s, and Dr Yudhoyono’s, contributions to regional and global developments. Having signalled its readiness to play a more active international role in 2006 — it offered to mediate in the Iran nuclear crisis, in the tension in the Korean Peninsula, and in the Arab-Israeli conflict — Indonesia will very likely follow up the offers with more concrete steps. Ongoing efforts to help natural disasters victims — stretching back to the December 2004 tsunami — are also expected to continue apace, even as the government tries to cope with other high-profile problems

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POLITICAL OUTLOOK such as the bird flu outbreak as well as periodic (notably around the disasters’ anniversaries) public criticism over the slow pace of progress. However, it would be concrete results in matters that improve the people’s sense of well-being that are likely to dominate Indonesia’s agenda for 2007. Indeed, in his annual state of the nation address on 16 August 2006, the President had already indicated that job creation and poverty alleviation would be key priorities in 2007. Although the unemployment rate decreased for the first time in several years at the beginning of 2006 — down to 10.4 per cent from 11.2 per cent at end 2005 — the number of jobless people is still high. Officially, more than 10 million of Indonesia's 106 million-strong workforce are unemployed, but an estimated additional 30 million are underemployed, working less than 40 hours a week. As for the poor, their ranks officially swelled by some four million in 2006 to 39 million — or 18 per cent of Indonesia’s 220 million population. According to the government’s statistics bureau, the number of poor Indonesians would have soared even more, to 51 million, if the government had not given cash handouts to some 76 million people to cushion the knock-on inflationary effects of the 126 per cent fuel price hike in October 2005. In a direct presidential election, these numbers could translate into votes that could swing the result. Moreover, other voters not directly affected by either issue could also be swayed by how the current administration handles the plight of the poor. The two issues are not unrelated. Government officials have admitted that their target of reducing the poverty level to 8.2 per cent by 2009 is unattainable if the unemployment problem persists as expected. The year 2007 would therefore be a time for Dr Yudhoyono to make a meaningful impact on these issues and leave a positive impression to last till 2009. To tackle these problems, the economic reforms that were to have begun in earnest in 2006 are expected to feature strongly at the top of the President’s to-do list. In 2006, expectations had risen after the government’s highlyregarded new economic team — installed after a minor Cabinet reshuffle

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THE ASEAN-10 in December 2005 — rolled out a raft of well-received business-friendly policies in early 2006. Despite the fact that many of the core policies were tied to either new laws or amendments to current laws that need to be passed by the DPR, many people wanted to believe that things would be in place before the end of the year, or even earlier. But as the year wound down, the legislative changes — proposed new investment and taxation laws, and revisions to the current labour laws — were either still pending or had been dropped. The new investment and taxation laws were in various stages of legislative deliberation despite having been submitted sometime in mid-2006, while the proposed changes to the labour laws suffered a more decisive blow: the government decided not to submit the amendments to the DPR after fierce opposition from trade unions. The government has since shrewdly decided on a less contentious tactic. Instead of changing the law, Jakarta is drawing up statutory regulations aimed at alleviating some of the concerns of businessmen that were to have been addressed by the revisions. Statutory regulations do not have to be approved by the DPR and, hence, are less likely to be affected by where the political wind blows. Eliminating the prickly labour law amendments would also free up the DPR’s resources into deliberating the new taxation and investment laws. In 2007, the government may finally make meaningful inroads in the war for economic reforms despite having capitulated in its battle to reform Indonesia’s labour practices. If this were to translate into higher economic growths and more jobs by 2009, Dr Yudhoyono would look back on 2007 as a key turning point in shoring up his chances for re-election.

Laos There were hopes in the lead-up to the March 2006 Eighth Congress of the ruling Lao People’s Revolutionary Party (LPRP) that a change in Central Committee membership and policy decisions would signal new directions for the Lao People’s Democratic Republic. These hopes

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POLITICAL OUTLOOK

LAOS Land area:

236,800 sq. km.

Population:

6.368 million (July 2006 estimate)

Capital:

Vientiane

Type of government:

Socialist republic

Head of State (President):

Lt Gen. Choummali Sayason

Prime Minister:

Mr Bouason Bouphavan

Next election:

Early 2007 (for the National Assembly)

Currency used:

Kip

US$ exchange rate on 1 December 2006:

US$1 = 10,880 kip

were not entirely dashed, but indications are that any reforms that are introduced during the next five years, until the Ninth Congress in 2011, will be cautious and limited. The LPRP is a highly secret organization, which conducts its affairs with minimal transparency. The Eighth Congress was announced at the last minute. The 498 delegates met behind closed doors to rubber-stamp decisions on who would gain what position on the fifty-five-member Central Committee that had been thrashed out in previous horse-trading. The top eleven members “elected” constitute the Political Bureau of the Party. Of the senior members of the previous Politburo, the only one to retire was Party President General Khamtay Siphandone. His place as both Party and State President was taken by his close comrade-in-arms, Lt.-Gen. Choummali Sayason. Of the two new faces, Somsavat Lengsavat was the former long-serving Minister for Foreign Affairs, long tipped to make it into the Politburo. The other was the only surprise. Mrs Pany Yathothu is the first woman and first Hmong to be appointed to the Politburo. Whether her appointment is anything more than a nod to two minority political constituencies remains to be seen. Other figures to watch are the next three in the

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THE ASEAN-10 Central Committee rankings, all of whom gained rapid promotions. One is the powerful Minister for Security (formerly the Interior Ministry); another is the Hmong governor of Sayaboury province. However, the turnover in the rest of the Central Committee was considerable. Of the forty-four remaining members, nineteen are new faces. Overall they are younger and better educated (six have doctorates). The majority are either new ministers in the government or governors of provinces recently appointed to replace corrupt and inefficient predecessors. Only two are military officers. The Army retains its influence, however, through the Politburo, six of whom have military backgrounds. These men are the last of the revolutionary generation who fought in the “thirty-year struggle” to gain power. They are conservative in their views, suspicious of outside influence (except for the advice of their old friends in Vietnam, and newer ones in China), and determined to preserve the power of the Party. There is no possibility, therefore, that Laos will move even glacially towards multi-party democracy. In this, Laos has the support of both Vietnam and China, which the new Party and government leadership visited, in that order, immediately upon taking power. Once the Eighth Congress was over, the Party moved to install a new government. Early elections for the National Assembly were held in May. A total of 175 candidates stood for the 115 seats, which meant that almost half the seats were uncontested. All candidates had first to be vetted by the Lao Front for National Construction; in other words, by the Party. Of those elected two are independents, which in Laos means they are not Party members. All the rest are. Since sixty-nine deputies were elected for the first time, the Party was keen for renewal. The former Assembly, though it rubber-stamped all government decisions, did act as a forum for debate, and even questioned some policies. It was also critical of corruption. The new Assembly is unlikely to be more subdued, though it is unlikely to call for radical reform. The first task of the new Assembly was to elect the new State President and Vice-President (Choummali and former Prime Minister Bounyang Vorachit respectively) and to endorse a new government. The new Prime Minister is Mr Bouason Bouphavan, a southerner and protégé

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POLITICAL OUTLOOK of former President Khamtay, who won the position over Dr Thongloun Sisoulit, who takes over foreign affairs. While some former ministers gained promotion (including Soulivong Daravong from Industry to chair of the Investment and Planning Committee, overseeing all foreign investment in Laos), a majority retired or moved aside to make way for a younger, more technically qualified generation of leaders. Notable appointments included Dr Nam Vignaket to head Industry and Commerce, Dr Boviengkham Vongala to head a new Ministry of Energy and Mines, and Dr Somkot Mangnormek to the Education portfolio. Energy and Mines was the only new ministry, hived off from Industry and reflecting the growing importance of hydroelectricity and mining in the Lao economy. But the chairmen of the Tourism Authority, the National Mekong Committee, and the Science, Technology and Environment Agency all also have ministerial status. All these changes in the membership of the LPRP Central Committee, the National Assembly, and the government, so smoothly engineered by the Party, reflect its unassailable monopoly on power. A careful analysis reveals the judicious representation of different regions and of ethnic groups, though all three institutions are dominated by lowland Lao (Lao Loum). Of the ethnic minorities, the Hmong are best represented and the Lao Theung less so. Several new faces belong to relatives of powerful Party figures (two sons of the late Party President Kaison Phomvihan are now on the Central Committee) or to political protégés. This reflects Lao political culture in which power depends on personal relationships built into extensive hierarchical patronage networks centred on some senior political figure — in the present Lao political system a member or former member of the Politburo. In return for the influence of a patron (in obtaining a position, promotion, or business deal) a follower is expected to give political loyalty and financial recompense. Much of the politicking within the LPRP is more about powerful figures obtaining some advantage for their followers than it is about policy differences. The resultant corruption and the concentration of power and wealth in the hands of a small elite is widely resented, but only obliquely referred to in the tightly controlled media. An anti-

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THE ASEAN-10 corruption law is on the books, but no senior Party figure has ever been indicted. The Party has set a goal for the next five years, to 2010, of 7.5 per cent growth or more to raise average annual per capita income to US$800. It presently stands at less than half that amount. In the longer term the government still hopes its poverty alleviation programme, backed by the World Bank, will lift Laos out of its lesser developed country (LDC) status by 2020. This is a big task. Development over the last twenty years, since the introduction of the New Economic Mechanism (NEM) which saw Laos adopt a market economy and welcome foreign direct investment, has been very uneven, exacerbating wealth differentials and division between rural areas and urban centres along the Mekong River. The government is placing its hopes in the rapid development of four sectors of the economy: hydroelectricity, mining, tourism, and agro-industry. Light manufacturing is a fifth sector, but is disadvantaged by the country’s geographic position. Moreover it is doubtful whether Laos can retain more than a niche market in textiles or the assembly and export of appliances and motorcycles in the face of competition from Vietnam once it joins the WTO. Laos itself has said it wants to join the WTO by 2010. In conclusion, therefore, the new Lao government is likely to continue present policies. It would like to hasten development, but not at the expense of political reform. It will continue to depend to a large extent on foreign aid, both for larger infrastructure and for smaller human resources projects in education and health (including HIV/Aids programmes and bird flu.). It will continue to welcome foreign investment that will provide the government with a steady revenue flow. Lip service will be given to reforms in financial management and control of corruption, but little will be done that might threaten patronage networks.

Malaysia A piece of political news that carried huge political significance for Malaysia in 2007–2008 was the decision taken at the United

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POLITICAL OUTLOOK

MALAYSIA Land area:

330,434 sq. km.

Population:

24.385 million (July 2006 estimate)

Capital:

Kuala Lumpur

Type of government:

Federated parliamentary democracy with constitutional monarch

Head of State:

Yang Di-Pertuan Agong Mizan Zainal Abidin (after December 2006)

Prime Minister:

Datuk Seri Abdullah Ahmad Badawi

Next election:

By March 2009

Currency used:

Ringgit (RM)

US$ exchange rate on 1 December 2006:

US$1 = RM3.78

Malays National Organization (UMNO) Supreme Council meeting on 28 September 2006, that party elections expected at the end of next year would be held only after the general election, due to be called anytime before March 2009. Whether this means that the general election will take place early or whether party elections will be postponed for up to two full years remains to be seen. Speculation initially favoured the former, but after Prime Minister Datuk Seri Abdullah Ahmad Badawi claimed that he had no reason whatsoever to wish for an early general election, this has died down. The premier will therefore be able to carry out any major innovations in the party candidatures for the next general election without pressure from proximate party electoral results. The decision by the Supreme Council brought a sense of security for incumbents, both in the party and in the government, and this is expected to strengthen Abdullah’s hand in confronting the former premier, Dr Mahathir Mohamad, in coming months, or years. The Cabinet reshuffle that the Prime Minister carried out in February 2006 contained

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THE ASEAN-10 few changes but nevertheless served well enough to win him decisive support, as shown in the subsequent spat with Dr Mahathir, when the Cabinet backed the premier solidly. The postponement also frees Prime Minister Abdullah’s son-in-law, Khairy Jamaluddin, who is deputy chief of UMNO Youth, from having to make any potentially divisive and risky decision to seek higher office within the ruling party. Support for him among party members is uncertain, and now, when no party election stands between him and a candidacy in the general election, the way is open for him to stand comfortably for a parliamentary seat in a secure UMNO constituency. Khairy’s business deals and covert political influence have been major targets of Dr Mahathir’s attacks, and he has fared badly so far. His provocative warning that Chinese Malaysians would quickly take advantage of continued conflict within UMNO managed in the end, through the controversies and arguments it immediately generated, to deflect attention away from his business affairs. Nevertheless, his actions under pressure may have strengthened the public impression of him as an overly ambitious young politician. Over the past year, Abdullah Badawi has had to parry a series of attacks from his predecessor, which led to issues that were potentially explosive, such as inter-faith relations and the reformation of the police force, being put on hold and discussions about them strongly discouraged. One of the effects of the conflict between the two men has therefore been a reversal of the widening of space for public discussion that the retirement of Dr Mahathir had created, to an extent by default. Abdullah’s ad hoc way of controlling criticism is likely to continue in the immediate future. Dr Mahathir’s failure to gain attendance at the party general assembly in November 2006 as a delegate has been a big blow for him. Since the former premier has never been known to give up on a fight, and since lobbying within UMNO seems no longer possible for him, the Abdullah regime must remain apprehensive about where the next blows from Dr Mahathir will be coming from. The strongest reason for the postponement of party elections may be that the government wishes to avoid politicizing further the

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POLITICAL OUTLOOK sensitive atmosphere created by Dr Mahathir and by criticisms about the slow pace of reforms, rising prices, and inter-faith tensions. The coming year will be a busy one packed with events celebrating the country’s fiftieth anniversary, and officially the government wishes to concentrate on implementing the Ninth Malaysia Plan (9MP), made public in March 2006. In the face of rising oil prices, the government began a painful process of reducing fuel subsidies and increasing electricity rates. This led to demonstrations in Kuala Lumpur, which were finally broken up amidst accusations that the police had used excessive force. Such signs that the poor of various races are having economic difficulties were not lost on the government, which had been cutting down on federal spending over the last two years. Thus, on 1 September 2006, Abdullah presented the national budget for the coming year, which, unlike his earlier budgets, is an expansive one that increased government spending by 16.6 per cent compared with the 5 per cent increase in 2006’s budget over that for 2005. Significantly more contracts are now available for small Malay contractors who are dependent on government support. Many therefore identified this latest budget as an election budget. Given the busy year ahead, however, a comfortable period for holding the general election does not present itself before March 2008. The fasting month follows shortly after Merdeka Day on 31 August 2007, with Deepavali, the Indian Festival of Lights, coming in November, after which comes the international New Year, followed in February 2008 by the Chinese New Year. In 2007, new development projects will continue to be announced, followed by immediate scrutiny. Criticism of the 9MP has begun appearing, ranging from vague doubts about its efficacy to disappointment that the planning perspective, despite the Plan’s express wish to create a “Malaysian race” (Bangsa Malaysia), continues to be bumiputera-oriented. The general worry is that ills such as cronyism, widespread rentier activities, outright corruption, and inefficiency will continue to haunt government efforts for not only the next five years, but for the whole period running up to year 2020. Now that the Abdullah Badawi

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THE ASEAN-10 government is in its fourth year, public sentiments are expected to be more unforgiving than before. Government figures concerning equity ownership between the various races have been challenged by a research report from an institute based in Kuala Lumpur, which stated that the bumiputera share was already at 45 per cent, which exceeds the 18–19 per cent claimed by the government since 1990, and surpasses even the goal of 30 per cent set by the New Economic Policy. The government was left in the strange position, not of happily rejoicing that one of its major goals may have been accomplished, but of vehemently denying this to be the case. The institute felt compelled to retract the report on 10 September 2006. This matter will nevertheless continue to be debated, not only over where methodology and “ulterior motives” are concerned, but also over whether equity ownership shares distribution between the races is a viable way of measuring the success of affirmative action. Other stubborn issues relate to the growing worry among nonMalays that ground-level Islamization is impinging on their rights and cultural space. Recent cases of jurisdictional overlap between syariah courts and civil courts have caused confusion and controversy. In practically all the cases so far concluded, Islamic jurisdiction prevailed. Movements to debate the problem have also been told by the highest authority to desist. The ruling coalition has since the 1980s been incorporating Islam into its policies, and, in the long run, this strategy has worked in limiting the appeal of the major opposition party, Parti Islam SeMalaysia (PAS). PAS is, in turn, seeking to reform itself, but so far, the recent change in leadership has not brought radical changes. Recent resentment expressed in Kuala Lumpur over comments made by Singapore’s Minister Mentor Lee Kuan Yew that the Chinese in Malaysia and Indonesia were “systematically marginalized”, was a reminder of the uncomfortable nature of ties between the countries. Earlier in the year, Dr Mahathir had worsened the atmosphere by accusing Abdullah Badawi of bowing to pressure from Singapore when the latter cancelled the Johor-Singapore bridge project in April 2006.

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POLITICAL OUTLOOK Where foreign relations further afield are concerned, Malaysia continues to orient its foreign policy statements in line with Muslim concerns, whilst at the same time, it remains one of the main proponents of East Asian regionalism. Trade ties with major countries such as China and the United States continue to strengthen, while the haze problem caused by forest fires in Indonesia continue to plague Malaysia’s populace.

Myanmar Myanmar’s ruling State Peace and Development Council (SPDC) continues to develop its political and economic institutions at its own pace, despite attempts by various countries to speed up, and in some cases change, the direction of the nineteen-year-old military regime’s plans for the future governance of Myanmar. The immediate future looks to remain much the same, though it can be expected that the pace of political and economic reform may begin to increase by the end of 2006. The years 2007–2008 may hold out the prospect of perhaps the most significant changes in the nature of the regime since it took power in 1988. Hints to this effect were emanating from the new capital city, Naypyidaw, in 2006. The National Convention, reconvened after its adjournment in 1996, is expected to draft a new State Constitution. It will commence its final deliberations before the end of 2006 and possibly conclude its work in early 2007. This would lead the way to the holding of a national referendum on a draft constitution before the end of 2007 and the possible national elections in 2008. A timetable approximating this schedule would approximate the “road map” to the formation of a new “disciplined democracy” in Myanmar, as stated in the speech by former Prime Minister General Khin Nyunt in August 2003. One of his successors, Secretary 1 of the SPDC, Lt.-Gen. Thein Sein, noted in a mid2006 speech that the convention had completed 75 per cent of its work and that the convention might conclude its work early next year. Meanwhile, Prime Minister General Soe Win appeared to finally address the question of economic reform. Myanmar’s economic

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THE ASEAN-10

MYANMAR Land area:

678,675 sq. km.

Population:

54 million (2005 estimate)

Capital:

Naypyidaw

Type of Government:

Military

Head of State:

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

Prime Minister:

General Soe Win

Next election:

Currently suspended

Currency used:

Kyat

US$ exchange rate on 1 December 2006:

US$1 = 1,180 kyat (parallel market rate) US$1 = 6.72 kyat (official rate)

potential has been held back for several years by a number of constraints, including low foreign investment because of Western economic boycotts and sanctions, led by the United States, as well as by a continuation of cautious, dirigiste policies essentially carried over from the old socialist regime. The ability of the regime to carry out market-oriented economic reforms in the past was discouraged by the lack of international financial assistance from international institutions such as the World Bank, the Asian Development Bank (ADB), and the International Monetary Fund (IMF). However, there is growing evidence that China is willing to back Myanmar’s economic reforms. This could result in exchange rate rectification and an end to the old licensing system that had inhibited the growth of foreign trade since the 1950s, as well as a liberalization of the agricultural sector, which still comprises the largest share of GDP. These economic and political reforms, if they do indeed take place, should allow Myanmar to re-emerge as a more integrated player in

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POLITICAL OUTLOOK Asian economic growth as well as becoming less of a political and economic thorn for its ASEAN and South Asian Association for Regional Cooperation (SAARC) immediate neighbours, while confirming China’s influence in Myanmar. These changes, however, will do little to change the policies of some Western governments, particularly the United States, where anti-SPDC voices in Congress are far too vocal to allow the White House to moderate American policy towards Myanmar. European states will, however, face a more difficult dilemma as they attempt to increase trade and investment flows between Asia and the EU member states. The reason for this is that there is no future political role for Daw Aung San Suu Kyi and her National League for Democracy (NLD) in the government’s plans. It is increasingly clear that the Chairman and Vice-Chairman of the SPDC, Senior General Than Shwe and ViceSenior General Maung Aye, and the other top SPDC leaders see no role for the putative winners of the 1990 elections. This will pose a dilemma not only for some of the ASEAN states, which have been demanding her inclusion in the political process, but also for European governments which face small, but amazingly vocal and effective, lobbying campaigns on her behalf. The symbolic democracy icon that Daw Aung San Suu Kyi has become has created an obstacle to the normalization of economic and political relations with Myanmar. The armed opponents of the SPDC, primarily the Kayin National Union (KNU), are now in fundamental disarray. Their position has been weakened by recent military campaigns against the last KNU redoubts along the Thai border, and also, their increasingly aged and factionalized leadership is losing its grip on the movement. Some local units have stated that they will no longer follow orders from KNU leaders in exile and would be happy to enter into and maintain local ceasefire agreements with government troops in exchange for economic development aid for their people. The SPDC has now largely ended the possibility of a major KNU resurgence, and as more relatives of KNU troops leave Thai refugee camps to settle in the United States and elsewhere, what is believed to be the world’s longest-standing insurgent organization is withering away.

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THE ASEAN-10 The success of the SPDC in pursuing its own political plans at home has caused increasing frustration among the various exile groups in Thailand, the United States, and elsewhere. The exile community’s existence is a relatively new factor in Myanmar’s politics. It will become increasingly loud and shrill as it becomes clearer that its dream of power in Myanmar will not materialize. The government has accused some in the exile community of being behind several bombing incidents in Myanmar in conjunction with KNU remnants. Like the oft-repeated government claim that the NLD and Daw Aung San Suu Kyi are merely Western-backed neo-colonialist stooges, such accusations may find a largely willing domestic audience. While the future Constitution will leave the military still in a dominant position within the future governance of the country, it promises to open up some space for non-governmental and corporatisttype organizations to grow and develop influence within the state. This is the logic of the developments that are taking place. The slow but steady growth of private sector media outlets — still under close, but increasingly more lightly applied, government censorship — points to the development of a more relaxed attitude towards constructive criticism of those in power. Civil society organizations are gingerly attempting to push the boundaries of what they are allowed to do, but often come up against old rules applied in uncertain and contradictory ways by different local officials. Consistency has yet to be achieved in the implementation of government policies, and this is expected to remain in the future. Indeed, many of the government’s current economic policies are making life increasingly difficult for many people who are not employed by the government. While government employees are now largely content following their multiple pay increases in 2006, imported goods have become increasingly expensive as the government’s crackdown on smuggling and corruption in the Customs service has driven up prices. Similarly, the free-market rice price has been growing faster than incomes as the government has banned the transport of rice from one region to another in an illogical effort to make every region self-sufficient. A national campaign to grow physic nuts as a replacement for petroleum

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POLITICAL OUTLOOK products also seem like ill-fated, old socialist schemes. The government has a long way to go in achieving economic competence. But whatever other changes will emerge in the next two years, the coming to power of a new generation of military officers, now in their fifties, better educated, and more aware of developments in other Asian states, points in the direction of a further opening of Myanmar’s politics and society to new ideas and influences. The process will remain gradual but it is now perhaps inevitable that the next two years will see the emergence of a new leadership as the reclusive head of state, Senior General Than Shwe, fades away as various leaders in China and other Asian states, have done. But there is little in Myanmar’s past, or its present international position, which points in any other direction.

Philippines Two tragedies took place in the Philippines in one randomly selected month, February 2006, which trained a graphic spotlight on the desperate plight of many of the country’s poor. One was the stampede of people surging to get into a Metro Manila stadium and take part in a popular game show in the hope of winning a jackpot of 1 million peso or other prizes, and thus escaping the yoke of poverty. Seventy-four people died in the stampede, with almost 400 more injured. The other tragedy was the massive mudslides that demolished entire villages on the island of Leyte and claimed more than a thousand lives. The loosening of the soil that caused the mudslides was blamed on logging on the mountainside. If that was the case, defiance or co-optation of the state and its powers of enforcement by the commercial interests of the powerful had once more brought tragedy to the lives of the poor. Incidentally or not, in the same month of February 2006, President Gloria Macapagal-Arroyo declared a week-long state of emergency as the Philippine military claimed to have foiled plans for a coup d’état being laid by some of their members. Clearly, the Philippines’ relatively poor record in terms of the welfare of the vast majority of Filipinos amid relatively sound macroeconomic

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THE ASEAN-10

PHILIPPINES Land area:

300,000 sq. km.

Population:

89.468 million (July 2006 estimate)

Capital:

Manila

Type of government:

Presidential democracy

Head of State:

President Gloria Macapagal-Arroyo

Next election:

May 2010

Currency used:

Peso

US$ exchange rate on 1 December 2006:

US$1 = 54.15 pesos

conditions is a problem of economic distribution, which is a political issue. The question is: The Philippines is generally considered to be a democracy, not least by its own people, but is not a democracy supposed to ensure that the basic needs of the people, of the demos — jobs, homes, personal security, health care, and education — are attended to? A true democracy is expected to be the system most conducive to ensuring these, because a political party in power in a democracy is supposed to deliver the public goods needed by the electorate under pain of being voted out of office and replaced by a competing party. But what if the “democratic” political system, although guaranteeing freedom of expression, freedom of assembly, and free elections, is dysfunctional in the sense that elected politicians do not look after their constituents but win elections anyway? What if, as in the case of the Philippines, electoral success does not depend on the policy choices of elected representatives and on the impact of those choices on voters’ lives? What if voters do not make the connection between national policy and their own lives and do not vote on the basis of that connection? The Philippines does not have political parties that voters can blame for hard times or reward for good times.

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POLITICAL OUTLOOK Despite the dysfunctional nature of the Philippine political system, a measure of reform is possible. Fidel Ramos, when he was President, managed to undertake some meaningful reforms by going around or gaming the system, using persuasive powers and resources to win congressional support. Those reforms took place in the form of the (partial) liberalization of telecommunications, banking, inter-island shipping, and domestic air services, among other sectors. In her July 2006 State of the Nation Address, President Arroyo claimed that in Ifugao, in the mountains of northern Luzon, poverty had been cut in half, from 56 per cent to 28 per cent, in the first three years of her administration. According to her, poverty in the Muslim-majority provinces of Sulu, Lanao del Sur, and Tawi-Tawi declined at double-digit rates from 2000. She also pointed to achievements in infrastructure — rural roadways, a highway from Manila to Clark, the expansion of the roll-on-roll-off sea transport system of connecting Philippine islands. She cited gains in the anti-corruption and efficiency campaigns, with substantial reductions in the processing time for bids for government contracts and supplies and the adoption of electronic accounting systems by a number of municipal jurisdictions. The Philippine Secretary of Finance, Margarito Teves, told the Joint Annual Discussion of the International Monetary Fund (IMF) and the World Bank in Singapore in September 2006 about the country’s reforms in government procurement, tax collection, and the delivery of justice. In the past year, the political energies of the nation have been consumed by two issues — the attempt to impeach President Arroyo and the drive to revise the Philippine Constitution. Some opponents of President Arroyo, feeding on charges of election fraud and corruption, filed motions in the House of Representatives to impeach her in July 2005 and again in July 2006. Both attempts failed by large margins, but not before fuelling an atmosphere of political uncertainty and instability. The other political preoccupation has been the move to revise the Philippine Constitution, with the main aim of converting the political system from the presidential to the parliamentary (unicameral) and, in stages, from the unitary to the federal. The move would also promote

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THE ASEAN-10 the development of strong political parties and remove rigid restrictions on foreign investments. A Consultative Commission appointed by the President worked for two-and-a-half months and submitted its recommendations in December 2005. While the initiative enjoyed the support of the President, most of the House of Representatives, former President Ramos, and most local officials, it ran into opposition from the twenty-four-member Senate, which stood to be abolished by the proposed revision. Faced with this deadlock, the proponents mounted a “People’s Initiative”, an alternative mode of constitutional change that they claimed was allowed by the Constitution. The signatures collected exceeded the 12 per cent of all registered voters, including 3 per cent from each individual electoral district, required as a minimum by the Constitution for such an initiative. The move for change met with furious opposition from a wide spectrum of the middle class. The opponents charged that the initiative was merely a disguised measure to keep Mrs Arroyo in power beyond the end of her current term in 2010, cancel the May 2007 elections, and maintain the current political leaders in power indefinitely. On 30 August, people apparently fronting for the proponents of the “People’s Initiative” petitioned the Commission on Elections to put to a plebiscite the proposed change from a bicameral-presidential to a unicameral-parliamentary system of government. The next day, the Commission rejected the petition, citing the lack of enabling legislation. The proponents then appealed the Commission’s decision to the Supreme Court. On 25 October, the Supreme Court, in an 8–7 ruling, upheld the Commission’s decision, noting, in addition, that the text of the proposed amendment to the Constitution had not been properly shown to the people who signed the “initiative”. Moreover, the Court ruled that a “People’s Initiative” could only propose amendments to the Constitution but not fundamental revisions. Confronted with this ruling, the proponents of constitutional change are now seeking to turn the Congress into a constituent assembly to revise the Constitution. However, since the Senate seems to be opposed to its own abolition, there is little chance of this happening.

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POLITICAL OUTLOOK The prospect for 2007, therefore, is more of the same, with marginal improvements. The May 2007 elections for the House of Representatives, one-half of the Senate, and provincial and municipal officials will probably turn up a few more higher quality individual members of Congress and a few more honest and dedicated governors and mayors trying their best to make things better in their jurisdictions. The economy will plod along at a “respectable” rate, with much of the gains eroded by the high population growth. The government’s fiscal position will continue to improve, but with the tax burden borne disproportionately by the working class and the poor continuing to suffer from the lack of social services. Barring massive spikes in global oil prices, inflation will continue to be held down. Barring a recession in the United States, exports of goods and services will rise some more. At great cost and often pain, massive numbers of Filipino will seek better lives outside the country, a circumstance that serves as a safety valve for easing pressures for reform and contributing, in a somewhat perverse way, to the country’s apparent political stability. Thus, the Philippines will make incremental progress in economic growth and the reduction of poverty despite the absence of political parties vying for power with competing visions of how to achieve that progress. Without stronger leadership at the very top, however, progress will continue to be slow, hampered by the country’s political system of partyless, dysfunctional democracy.

Singapore The domestic highlight of 2006 was the 6 May general elections, which the ruling People’s Action Party (PAP) won by a 66.6 per cent margin. Prime Minister Lee Hsien Loong duly hailed the victory margin as a “strong mandate”. Without any extra parliamentary seats won or lost, cynics labelled the elections a “non-event” that only served to return the status quo. Meanwhile optimists, noting the rejection of estate upgrading enticements and the greater appeal of opposition parties, are exercising their imaginations to paint a political landscape marked by greater pluralism in the coming years.

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THE ASEAN-10

SINGAPORE Land area:

692 sq. km.

Population:

4.49 million (July 2006 estimate)

Capital:

Singapore

Type of government:

Parliamentary democracy

Head of State:

President S.R. Nathan

Prime Minister:

Lee Hsien Loong

Next election:

By 2011

Currency used:

Singapore dollar

US$ exchange rate on 1 December 2006:

US$1 = S$1.69

Lee’s cabinet reshuffle signals the end of the Goh Chok Tong era. Raymond Lim takes over as Transport Minister from the retiring Yeo Cheow Tong. Dr Vivian Balakrishnan, who is also Minister for Community Development, Youth and Sports, has been appointed Second Minister for Information, Communications and the Arts. This move may be an attempt to inject a younger and fresher government perspective over the fast-paced arts and cultural industry. Following PAP tradition, some newly minted members of parliament have been identified for higher office including Grace Fu (appointed as Minister of State for National Development), Lee Yi Shyan (Minister of State for Trade and Industry), Lui Tuck Yew (Minister of State for Education), Masagos Zulkifli (Senior Parliamentary Secretary for Education), and Teo Ser Luck (Parliamentary Secretary for Community Development, Youth and Sports). This reshuffle signifies more than just administrative transition but also the positioning of younger leaders to implement bolder and more aggressive policies, most notably in the areas of education, arts and culture, and youth development. These three areas would be most influential in the shaping of citizen mindsets and achieving

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POLITICAL OUTLOOK Lee’s vision of stronger “Singapore heartware”. The year ahead would probably see existing policies in these three areas undergo greater fine-tuning for the purpose of nurturing a stronger sense of citizenry belonging and ownership in the global city. With the economic restructuring already well underway, the Lee administration will now turn its attention to education, arts and culture, and youth development because they are crucial to the stimulation of creativity, vibrancy, and national identity, all of which will be needed for survival in the age of globalization. The benefits of such stimulations would also serve the political aim of mediating the negative effects of neo-capitalism and globalization. After all, structural unemployment and the widening wage gap will demand more than just government intervention, and it is hoped that citizenry self-help and mutual assistance schemes will lighten the burden of welfare on the government. This search for a “Singapore heartware” should not, however, lull political watchers into believing that the government will now refrain from pruning political debates or cutting critics down to size. The mr brown saga, in which a popular humour columnist was strongly chided by the government for suggesting that it withheld unflattering statistics on household income until after the general elections, demonstrates that, for all its avowed commitment to diversity, the government will still remain the final arbiter on what constitutes political criticism, even humour. Meanwhile, the entry of Sylvia Lim into Parliament as NonConstituency Member of Parliament (NCMP), in addition to Workers’ Party (WP) chief Low Thia Kiang, will strengthen the WP representation and voice. Low and Lim are popularly judged to be good foils for each other; the former cloaked in the image of the “everyday man” while the latter is deemed sensitive to the interests of the Englisheducated middle class. Political watchers will be interested in how this political odd couple will play out in Parliament not only because the WP emerged from the elections as a serious political party, but also because Low’s and Lim’s parliamentary performance over the next year will either strengthen or weaken the WP platform.

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THE ASEAN-10 The coming year will also see stronger political focus on three groups of people — the poor, immigrants, and young citizens. Data from the General Household Survey 2005, released in June 2006, show that while the top 10 per cent of household incomes grew by 2.8 per cent over five years, the bottom 10 per cent experienced an income drop of 4.3 per cent over the same period. These figures are significant in that they reveal a widening wage gap, a common phenomenon in capitalist societies, and one that will probably be a permanent feature of Singapore society. In addition to the messages of skills upgrading and education that will invariably be offered as part of the solution, it is hoped that longitudinal analyses and panel studies will be commissioned to track individuals over a period of time to ascertain if they eventually move out of their income bracket or if they reproduce themselves. Such studies will allow for a clearer assessment of social mobility in the city-state. Immigrants, or foreign talent, will also feature prominently in the local political landscape. The country’s perennially low fertility rate and ageing population have prompted the Prime Minister, in his 2006 National Day Rally speech, to speak at length about the necessity and fears surrounding the influx of foreigners. Thus far the government has managed to get a vital message across — foreigners do not steal jobs or scholarships from locals. However, as the opendoor policy bears fruit and when the proposed Citizenship and Population Unit gets underway expect sharper questions to be asked. What is the breakdown of job-type enjoyed by foreigners like, and how does it contrast with the broader population? How many foreigners working here eventually take up citizenship? What percentage of foreigners’ children opt for local citizenship? Are newly minted citizens more likely to vote PAP, and what does this new constituency mean for local politics? And finally will the Singapore identity be the same for both local-born and naturalized Singaporeans given that both would have different memories of places? How these questions are posed and the way they are managed by the government will influence the social compact between the state and its citizens.

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POLITICAL OUTLOOK The third group of people under the spotlight will be young citizens. The media focus on the possible voting patterns of Singaporeans born after independence in the run up to the general elections was a manifestation of government concerns over a shifting power base. Singaporean citizens and permanent residents aged 39 and below make up approximately 2.2 million of the 3.5 million population. Meanwhile, and more pertinently, approximately 40 per cent of eligible voters in the 2006 elections were born after 1965. In addition to these numbers, post65ers are an educated grouping with one in four possessing a university degree, compared to one in seven for those in their forties. Faced with an increasingly sophisticated electorate, the Lee administration will have to seek the as yet elusive balance between demands for continued economic delivery, political pluralism, and citizenry respect. The Prime Minister also alluded to young Singaporeans in his National Day Rally speech when he spoke of the digital divide. Although he focused on the need to manage the proliferation of new digital technologies and to utilize these technologies to engage the young, a more critical reading suggests that the PAP government will need to attune itself to the cultural vocabulary of younger Singaporeans if it wants to remain politically relevant.

Thailand Through most of its history Thailand has been run by the militarybureaucratic elite. The Chakri dynasty’s power has waxed and waned, but with the current King Bhumibol Adulyadej — Rama IX — it has arguably reached its zenith. It is Rama IX and his closest advisers who engineered the resurgence of the Chakri dynasty from a marginalized and fading symbol more than sixty years ago, to the most powerful position in the land. The Constitutional monarch has enormous extra-constitutional moral authority but takes great care not to appear politically biased. The King’s rise and consolidation of power — including the elevation in stature and consolidation of the Privy Council — has been well documented. His standing is such that any other leader, however powerful, will always have to live under the aura of the King.

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THE ASEAN-10

THAILAND Land area:

514,000 sq. km.

Population:

64.631 million (2002 estimate)

Capital:

Bangkok

Type of government:

Parliamentary democracy with constitutional monarch

Head of State:

King Bhumibol Adulyadej

Prime Minister:

Surayud Chulanont

Next election:

End 2007

Currency used:

Baht

US$ exchange rate on 1 December 2006:

US$1 = 41.24 baht

Thaksin Shinawatra’s political rise has been well documented as well. The recent crisis had its roots in Thaksin’s replacement of generations-old power networks with one of his own. He relied for money not on the old elite, nor on the wealthy regional satraps of the formerly agri-based economy. He bypassed them with his own wealth derived from shrewd and opportunistic investment in the new economy. The quintessential modern Sino-Thai businessman, he bets on the future, not on the past; thinks global; and thrives on risk. He and his close advisers — some of whom are former leftists — had little time for the carping of a Bangkok elite whose primacy they challenged with the masses Thaksin cultivated into a meaningful power base. They challenged the old paradigm — that the masses elect the government but Bangkok decides whether it survives. The Thai Rak Thai (TRT) was the first political party in Thailand to approach politics like a corporation would market a product — and grow through mergers and acquisitions of other parties. Resources were thus allocated according to what the electorate wanted. However, elections did not become any cleaner; the amount

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POLITICAL OUTLOOK of money spent on what is generally referred to as “vote buying” did not go down. Politics ultimately remains largely local — and much depends on the money. Pro-business policies and old-fashioned pump-priming dressed up as “Thaksinomics” also boosted the economy, lifting it out of the ruins of 1997–98. Thaksin, said one banker, “knows how to spend his way out of trouble”. But Thaksin hardly attended Parliament, rendering parliamentary debate virtually meaningless. He co-opted most of the electronic media. Through a weekly radio address he spoke directly to the masses in down-home language that went down well with voters who had for generations been largely ignored by the Bangkok elite. He used the radio address also to sneer at and belittle critics in Bangkok — to the dismay of the urban intellectual elite. He co-opted or otherwise undermined key institutions set up as checks and balances, including the Senate. He ignored human rights, unleashing police in a “war on drugs” that saw over 2,000 people including many innocents killed in 2003; and cracking down hard on a resurgence of insurgent-criminal activity in the south, which only produced a backlash and tarnished Thailand’s international image. Significantly, polls show the Thai public was never very concerned either about the killing of drug pushers, or over a crackdown on Muslims seen as “troublemakers”. Thaksin clearly has a firm understanding of the mindset of the electorate. But the pattern distressed the liberal intellectual and non-government organization (NGO) community. And other policies began to bother a section of the more organized and politically aware poor, specifically the labour unions. His family’s sale of Shin Corp to Temasek in early 2006 served as a trigger for pent-up opposition to spill into the streets. The demonstrators citing cronyism (Thaksin and his closest Cabinet colleagues controlled well over 10 per cent of the stock market); conflict of interest, corruption, and the systematic undermining of democratic institutions, were merely an instrument, the “Panzer unit that breached the gates” as one foreign analyst put it. The deeper power struggle pit Thaksin against Bangkok’s conservative old-money patricians, intellectuals, and

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THE ASEAN-10 much of the bureaucracy. The Privy Council is the embodiment of that sector of Thai society. Thaksin, with direct access to the King and other members of the royal family, largely ignored the Privy Council. In his meddling with army appointments and promotions to ensure his loyalists were in key posts, he stepped on the toes of another circle of officers, those who believed in a professional army and were loyal to the King — through Privy Council president general Prem Tinsulanonda. The phenomenon of street protests against Thaksin had been predicted over a year in advance by some academics, and among Bangkok’s chattering classes. But the outcome was not swift and was far from assured because Thaksin tried to fight back. The King stepped in with a lecture to the country’s top judges in late April, telling them in uncharacteristically strong and earthy language that they had to sort out the political “mess” — a euphemism employed by the Thai media for a much stronger word he used. The cards seemed finally to be on the table. Subsequently the courts in a series of judgements first annulled the election, and then finding the remaining three of five election commissioners guilty of violating electoral law to favour the ruling party, sentenced them to jail terms. Thaksin then brought some of the underlying currents of the conflict into the open in a calculated reference to a charismatic person outside the Constitution who was bent on ousting him. “It’s time to shine a light and chase the ghosts away”, he is reputed to have remarked to a trusted aide. It is widely assumed he was referring to eighty-six-year-old General Prem, former premier and armed forces chief, who enjoys elder statesman status in Thai society and more importantly is seen as a proxy for the King. General Prem, in speeches around the middle of the year, openly sent clear signals on which side the army should be on — the King’s. Despite the presence of Thaksin loyalists, when the writing was on the wall the army sided with General Prem and by extension, the Palace. However, it would be overly simplistic to see the Palace, and

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POLITICAL OUTLOOK the Privy Council, as monolithic. “The Palace is a big place”, as one analyst is fond of saying. Also, in Thailand power shifts are usually the result of indirect and deeply subterranean manoeuvring by power centres operating through networks. Events on the surface while appearing significant, are not always what they seem; it is the people behind them that are more revealing. Immediately after September 19 the regime began dismantling Thaksin’s networks in a clear attempt to make it impossible for him to reenter the scene. The generals can ill afford a scenario in which the man returns, wins an election and then proceeds to unleash a backlash. The effort therefore, is to shatter the TRT and make it impossible for Thaksin to come back. The generals have partially succeeded in doing this. At times through history, the Chakri kings have had to manage and accommodate the armed forces. Now, through the intermediary of General Prem, there is a seamless union of the immense moral authority of the King and the power of the armed forces. However, the situation could change if some of the main characters change places or leave the stage. Of note in the new and supposedly temporary era of military-backed rule is the higher public profile for HRH the Crown Prince Maha Vajiralongkorn. The average age of the current Cabinet is sixty-three, and the generals of the Council for National Security along with Prime Minister General Surayud Chulanont are firmly calling the shots. The National Legislative Assembly resembles the appointed Senate of old; it is topheavy with military and police officers and bureaucrats. At the time of writing, there are the beginnings of rumblings of disaffection over the military takeover, with mixed opinions among Thailand’s intelligentsia. Thailand remains a young democracy in a transition that is going to remain drawn out and at times messy before it stabilizes into a new order.

Vietnam Vietnam in 2006 had much to look back on, especially the important results of the Tenth Party Congress held in April 2006. Where

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THE ASEAN-10

VIETNAM Land area:

330,000 sq. km.

Population:

84.4 million (July 2006 estimate)

Capital:

Hanoi

Type of government:

Socialist republic

Head of State:

President Nguyen Minh Triet

Prime Minister:

Nguyen Tan Dung

Next election:

By mid-2007 (National Assembly)

Currency used:

Dong

US$ exchange rate on 1 December 2006:

US$1 = 15,910 dong

appointments were concerned, eight of the original fourteen Political Bureau members retired. Individual rights of party members were enhanced: individuals were allowed to nominate themselves for election to the Central Committee, when previously this had not been permitted. Provincial delegations were also permitted to nominate their candidates, in addition to the Party leaders’ list. Party members were permitted to conduct private business, although the Party leadership in ideological terms remains committed to a much-debated idea called “Market economy with Socialist orientation”. General Secretary Nong Duc Manh was voted in for a second five-year term. Other than this top Party position, all the other important posts of Prime Minister, State President, Chairman of the National Assembly, Party Secretariat Standing Secretary, and two out of the original three Deputy Prime Ministers’ posts saw new people appointed as the leadership renewed itself. Southerners, always stereotyped as being more business-friendly, now occupy three out of the five core Party/State positions. Another important policy result of this Congress was a renewed and more intense commitment to fight corruption (with a DPM appointed to

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POLITICAL OUTLOOK solely oversee this area), a momentum to continue economic reforms, and moving further towards integration with the regional and global economy. There were also new ministers appointed to the ministries of Defence, Foreign Affairs, and Education. In November 2006, Vietnam successfully staged the Asia-Pacific Economic Cooperation (APEC) Summit, adding to the country’s rising reputation. The key point in considering Vietnam’s political outlook is the economy. On the domestic front, very respectable economic growth rates and the spreading of development to lesser provinces are important economic dynamics for political stability. The dominance of provincial lobbies in the current Party Central Committee will probably help in this. The country continues to enjoy reduced poverty rates, although the GINI ratio has slightly increased. Entry into the World Trade Organization (WTO) was achieved in late 2006, with much fanfare locally and internationally. Big questions remain, however, on how able Vietnamese companies and state enterprises are able to compete. Some political developments can be expected in 2007. First, the election of a new National Assembly is due in 2007, by May. Since the early 1990s, the National Assembly has been highly critical of government officials and has questioned the fundamentals and implementation of government policy. This is despite the fact that Party members have and still constitute over 90 per cent of Assembly membership. This fiery role looks set to continue. Complete independence from Party control is not expected; nomination for election is still directed by the Party, and senior Party members occupy the most important offices of the Assembly, such as the Chairmanship, the Standing Committee, and the heads of the various Committees of the Assembly. Secondly, there could be appointment of one or two new DPMs in addition to the three already appointed. The new consensus within the government is that, while the government has managed with three DPMs in the past term, given the large scope of work and special attention that has to be paid to urgent areas such as corruption, public health, and education, two more DPMs would be required to spread the load. Traditionally, three DPMs are required for economics, foreign affairs and security, and social affairs. One DPM has already been appointed

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THE ASEAN-10 to lead work on corruption, and thus the two new DPMs are likely to take care of social affairs and the special portfolio of education. One other reason for the appointment of more DPMs than before is the Party’s awareness of the need to promote young and capable leaders much more quickly than in the past, in order to test them. There are two or three vacant seats in the Political Bureau and the new DPMs could be expected to be appointed from there, in 2007, when the seats are filled. There is no rule, however, requiring that a DPM must be a Bureau member. The only way that could lead to a change of mind — three or four instead of five DPMs — is the lack of consensus within the Political Bureau on the choices of candidates. If this occurs, filling up the post could be delayed for another six months, pending the next Central Committee meeting, held once every six months, to reopen discussions. Thirdly, the new Assembly is likely to appoint new ministers for the Office of the Government, the Ministry of Health, and the Ministry for the Environment and Natural Resources. Membership of the Party Central Committee is a prerequisite for heading ministries, and the incumbents in these ministries were not elected to the Central Committee in 2006. In addition, the current Minister for Trade is also due for retirement. There could also be a merger of two ministries, Industry and Trade, while the energy policy department in the Ministry of Industry would be detached and made a new ministry, signifying the country’s recognition of the importance of this area of public policy. While the National Assembly appoints ministers, the government usually appoints vice-ministers. Vice-ministers who have a career to speak of in the next few years would have been appointed before or close to the 2006 Party National Congress. In other words, the personnel situation in the bureaucracy has stabilized. The fourth development — the consolidation of power by three new leaders — began in 2006. After his ascendance in April 2006, Prime Minister Nguyen Tan Dung made strong moves in anti-corruption, reorganizing state enterprises, and disbanding the Prime Minister’s Research Commission. He is in favour of a leaner advisory body but its utility is being questioned. State President Nguyen Minh Triet

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POLITICAL OUTLOOK conducted high-profile state activities and was attentive to issues of resolving bottlenecks in the bureaucracy. He is a leader that has adopted popular causes such as the unity of all Vietnamese, but he may be due for retirement after one term, and thus there are limitations on what he can do in five years. These two men are Southerners; much is expected of them in terms of a positive attitude towards reforms. They are attempting to live up to the expectations of dynamism. The moves that the two leaders are making would likely stamp their authority on the system, and this is essential at a time when they have just assumed power. Similarly, while the new Chairman of the National Assembly, Nguyen Phu Trong, has no hangover of being a Southerner, he had openly admitted his inexperience in legislative work, his previous work being the head of the Central Theoretical Council and Party Secretary of Hanoi City. In 2007, we are likely to see these three men moving to shape things according to their preferences, although it is expected that Nguyen Tan Dung will be the most successful. In this sense, therefore, the prospects for anti-corruption and further socio-economic reforms are good in the short term. If the main part of the work is done within the executive part of the government — in Vietnam it is simply called the government — then the decisive style of Prime Minister Nguyen Tan Dung would be an asset. While his style gives him speed of change, however, his blind spot may be the lack of careful consideration of policy options that would make for less need to adjust policies in the future. In the long term, however, tackling corruption means tackling the very monopoly of political power that the Party now gives itself. The Party has never been challenged in competitive party elections since 1955. In the mid-term, however, the Party hangs its hopes on an interim strategy. There are plans afoot for deeper political reforms. Since the mid-1990s, political reforms have been euphemistically called “administrative reform”, and these have been limited to streamlining the bureaucracy and raising its capacity. After ten years of slow political change, the party now believes that there is a need to reduce even further the party’s interference and direct control of the daily running of the government. The purpose is to raise the bar in governance, and

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THE ASEAN-10 will close more doors to corruption and red tape. It might be possible to see, once the plans are firmed up, a drastic reduction of the party machinery that shadows the government, particularly at lower levels and in areas where the law and its enforcement can do a better job in governance than party secretaries.

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ECONOMIC OUTLOOK

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REGIONAL ECONOMIC TRENDS By Manu Bhaskaran

S

outheast Asian economies have weathered recent challenges in the global economic environment well, partly helped by the strongest global economic growth in years. As the regional economies move into 2007, the global economic headwinds are increasing as the U.S. economy slows and as the risks of a disorderly unwinding of global imbalances increase. Fortunately, Southeast Asia appears to also have some positive internal factors that can help mitigate risks emanating from the global environment.

Global Environment Likely to Be Less Supportive of Regional Growth Prospects There are several reasons to believe that global demand for Southeast Asian exports will decelerate as we move into 2007. First, there are clear

REGIONAL ECONOMIC TRENDS • Prospects for Southeast Asian economies are positive in 2007 despite some risks to global demand. • Slower U.S. growth, the lagged impact of tighter monetary conditions globally and the risks posed by unresolved global imbalances are concerns. • Nevertheless, Southeast Asia is in a far stronger position now than it has been for a long time: Japan’s recovery is a help as is the region’s renewed attractiveness as a location for outsourced production of goods and services.

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ECONOMIC OUTLOOK signs of a global economic slowdown. The latest OECD (Organization for Economic Cooperation and Development) lead indicators point to slower growth in at least the early part of 2007 in almost all the major developed economies. Although there is no strong consensus on just how much the U.S. economy will slow down, it is quite clear that the U.S. housing boom is ending in a way that will hurt U.S. growth: the risks are clearly to the downside in the United States whereas growth in Europe and Japan will probably decelerate by less. A crucial variable here is global demand for electronic components since this is the single most important export for most Southeast Asian economies: available lead indicators point to only a manageable moderation in demand, not a significant fall. Second, the lagged impact of tighter monetary policies as well as of higher energy prices is still only just feeding through to global economic activity. Higher interest rates in the United States, Europe, Japan, and many other economies will dampen demand and hurt financial liquidity. The latter effect could cause corrections in financial markets and lead to capital outflows from emerging markets, including Southeast Asian equity markets. In addition, the fall in oil prices from the peak levels in July 2006 only partially reverses the steep rise in the cost of energy to businesses and consumers. Third, Chinese policy makers are clearly intent on restraining the rapid growth of fixed investment in China. Over time, their efforts are likely to produce slower growth in China but what is of great concern are the risks that might be unleashed as a result of the blunt administrative tools they are using to achieve a slowdown. Since their exports to China have grown remarkably in the past few years, China has become an important source of demand for Southeast Asian exporters. In addition, Southeast Asia will also have to prepare for downside risks to global stability. The still-unsettled political situation in Iran and the Middle East raises the possibility of political crises in the largest oil-producing region in the world — thus elevating the risk of sudden and disruptive spikes in oil prices. It is also unclear just how the U.S. current account deficit will be resolved — unexpected weaknesses in the

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U.S. economy could precipitate a sharp depreciation of the U.S. dollar and set off a disorderly unwinding of these imbalances, which could then rebound on highly open economies such as Southeast Asia. Nevertheless, it should not be assumed that the global environment is only full of risks. There are a great number of positive developments as well. Japan’s structural recovery will continue even if it experiences a cyclical deceleration — this is highly positive for Southeast Asia given the strong economic links between Japan and the region. An increased import demand from Japan as well as stronger flows of foreign direct investment (FDI) by Japanese companies in the region can be expected. It is also likely that Japanese banks expand the range of lending and related activities in the region. Europe and the large emerging market economies such as India, Russia, Brazil, and Turkey are also in better shape now than for a long time. Companies across the world economy are seeking to relocate manufacturing production as well as services operations to cheaper locations — something which Southeast Asia clearly benefits from. Recent rankings of competitive locations for outsourced services, for instance, show a significant rise in rankings of Southeast Asian economies such as the Philippines, Thailand, Indonesia, and Vietnam. The bottom line is global demand will continue to support Southeast Asian growth but at a more moderate pace than in 2006. This raises the importance of internal factors.

Domestic Factors Could Mitigate Global Negatives The outlook for the regional economies in 2007 is likely to be boosted by many several internal factors in the region’s favour. First, many economies had suffered shocks in 2005–2006 which they have not fully recovered from. Political uncertainty in Thailand and the Philippines is likely to diminish in 2007, helping to boost business and consumer spending. The devastation of the December 2004 tsunami, which hurt Indonesia and Thailand very badly, is being repaired, with tourism in particular recovering. Indonesia is also likely to enjoy a rebound from the interest rate, currency, and inflation shocks

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ECONOMIC OUTLOOK of late 2005 and early 2006. With interest rates and inflation falling, Indonesia is likely to enjoy a rebound. Second, the regional capacity for policy stimulus has increased. Central banks around Southeast Asia have been generally proactive in addressing inflation. This has enhanced the credibility with financial markets of many regional central banks, with the Bank of Thailand in particular having done well. With inflation consequently coming under firmer control, monetary authorities have considerable scope for cutting interest rates and so stimulating demand. We see monetary policy being eased for instance in Indonesia, Thailand, and the Philippines. Governments have also been fairly rigorous in their conduct of fiscal policy, meaning that there is fiscal space for a step-up in public sector spending in case of weaker external demand. For instance, Malaysia pursued two years of tighter fiscal policy in 2005–2006 but is now likely to raise fiscal spending as it begins implementing the Ninth Malaysia Plan. The interim government in Thailand is also likely to substantially boost fiscal spending. Third, the cyclical weakening in external demand coincides with a structural recovery from problems that remained from the Asian financial crisis of 1997–98. In particular, we believe that the collapse in private investment after 1998 is being reversed. Not only have corporate balance sheets improved and capacity utilization rates increased but rates of return on capital are also improving across the region. Banks are also showing a greater interest in lending to companies again. In other words, the incentive to invest is increasing and the ability to finance that investment is also rising. We see the ratio of private investment to GDP rising by several percentage points over coming years. Fourth, several countries in the region are likely to see a recovery in construction activities. One reason for this is a likely rise in infrastructure spending as well as in residential construction. Thailand is likely to start implementing large-scale plans for expanding mass transit systems and motorways. Indonesia is working hard to overcome bureaucratic and other obstacles hindering development of infrastructure. The Philippines is also planning more infrastructure

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spending following up on the plans laid down by President Arroyo in her August 2006 State of the Nation speech. It is also important to observe that Southeast Asian economies have been adjusting to the increased competition in the global economy. Policy changes including deregulation and trade opening have helped, while regional companies have also worked hard to re-engineer themselves so as to remain competitive. The result is a greater focus on excellence in profitable niches of activity.

Conclusion: Moderately Slower Growth in 2007, Improved Resilience As Southeast Asia approaches the tenth anniversary of the start of the Asian financial crisis in July 2007, it can do so with reasonable confidence that domestic factors will lend the region more resilience. While global demand is likely to dampen the outlook for growth in Southeast Asia, the region should still be able to achieve decent growth rates accompanied by a comfortable level of economic stability as seen in contained inflationary pressures and strong external balances.

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THE CRUDE OIL MOVE: IMPLICATION FOR ASIA? By Sanchita Basu Das

O

il price have sunk to a five-month low of US$66 a barrel on 11 September from an average of US$67 a barrel in the first half of 2006 and a high of US$78.40 a barrel on 14 July 2006. The same is true for crude futures, which have pulled back by almost 14 per cent in the past one month (Figure 1). What has caused this sudden softness in prices? Let us look at the latest fundamentals. Firstly, from supply side, recent U.S. government data showed rising inventories of gasoline and distillate. According to the U.S. Department of Energy, though U.S. crude inventories fell 2.2 million barrels by end August 2006 to 330.6 million barrels, this is still 6.2 per cent above levels a year ago. Secondly, there is a possibility that British Petroleum (BP), which had a big oil spill in March and then a partial shutdown of an oil field, could restore production to 180,000 barrels per day (bpd) by the end of October. If this happens, BP would be pumping around 400,000 bpd. The market also anticipates the resumption of some oil production that was shut down in Nigeria following militant attacks. Thirdly, the Organization of Petroleum Exporting Countries (OPEC) decided on 11 September to maintain its current production limits at 28 million bpd, though it said that it would meet again before the end of the year to review the situation. All these factors have eased supply fears. From the demand side, though there are some softer trends in the short term, the overall fundamentals indicate a tightening in demand in due course. Why is it so? In the August data release of the International Energy Agency (IEA), there are indications that demand growth will accelerate further in 2006 to 84.8 million bpd, 1.4 per cent higher than 2005, and 86.4 million bpd in 2007 (+1.9 per cent over 2006), thanks mainly to persistent expansion of China’s

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•

2006 saw some soft patches in crude oil price when it hit the five-month low of US$66 per barrel in September.

•

However, the upside price risk remains, given the higher demand growth, less inventories and geopolitical complications.

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Although the Asian region is vulnerable to high oil prices, its huge current account surplus and foreign reserves provides a comfortable buffer, hence containing the damaging impact.

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Figure 1: Rise in Oil Price

80 WTI spot price Oil Futures (6-month forward)

70 60 US$

50 40 30 20 10 Aug-06

Mar-06

Oct-05

May-05

Dec-04

Jul-04

Feb-04

Sep-03

Apr-03

Nov-02

Jun-02

Jan-02

0

NOTE: WTI stands for West Texas Intermediate. SOURCE: Bloomberg.

oil use. For North America, despite slower economic growth, there is likely to be a rebound in the last quarter of 2006 relative to enormous hurricane damage and dislocations last year. As for the oil inventories, it looks less plentiful. The total oil stocks in the second quarter came to 67 million barrels, which is slightly lower than the historical second quarter average stock build. This implies that surplus inventory is being whittled down. Thus, with stocks not that fat, and oil demand still growing, supply risks take centre stage in the oil markets. Though the gross global oil supply may increase this year, a bout of unscheduled outages affecting Alaska, Nigeria, Iraq, and Lebanon, on top of heavier August North Sea maintenance and the upcoming North American hurricane season, look like the supply will be restricted in later months. In addition to these short-term concerns, pipeline issues in Alaska raise questions about ageing infrastructure in mature oil provinces like Canada, Russia, and the North Sea, among others. Given this, we feel that in the long run, any upside price risks can lead to a further price rally. How will it affect the Asian economies?

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THE CRUDE OIL MOVE: IMPLICATION FOR ASIA? (continued)

The Asian region is seen to be vulnerable to high oil price because of its high reliance on the fuel and openness of its economies (dependence on trade, investment flows). The impact is expected to feed into the economy via three main channels: growth of industrialized countries, deterioration in trade balance, and inflationary pressure. However, Asia’s huge current account surplus (see Figure 2) now means that domestic spending should be less susceptible to erosion of purchasing power. The strong build-up of foreign reserves over the last few years (covers around eight months of imports) also provides a comfortable buffer against the deterioration in trade balance.

Figure 2: Current Account Balance, 2005 30 25

(% of GDP)

20 15 10 5

Thailand

Taiwan

Singapore

Philippines

Malaysia

Korea

Japan

Indonesia

Hong Kong

-5

China

0

SOURCE: World Economic Outlook (IMF, April 2006).

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As for the inflation in the region, it is estimated1 to have picked up to 3.9 per cent this year (vis-a-vis 3.4 per cent in 2005), while it is expected to fall to around 2.8 per cent in 2007. However, most of these economies in 2006 are more concerned about their growth, which after growing by 5.6 per cent in 2005 is expected to hover around 5.4 per cent in 2006 and may fall to around 5 per cent in 2007. The Asian central banks after some monetary tightening may stall it further on fear of slowing the economic recovery. The Asian countries are also adversely affected through fiscal imbalances, as most of these oil-importing countries provide direct subsidies to protect the consumers. For example, Indonesia’s subsidy costs nearly US$10 billion in 2005, or 3.5 per cent of GDP. Therefore, all said, there might be some dampening effect on Asia’s economic growth, if there is a sustained oil price rise. However, with various mitigating factors, the damage is likely to be contained, especially if the oil price hovers around its current level. With 2006 almost over, if oil price peaks in the range of US$70 to US$80 per barrel (real oil price during the 1970s oil crisis), it is expected to show up more strongly in the 2007 growth story. On the whole, it seems very unlikely that the oil price will fall below $40 per barrel in future and is likely to be sticky around US$70 to US$75 per barrel. Both the spot and the forward markets are giving a similar indication. The ongoing soft patch in the oil price is a reflection of moderate rise in demand and sufficient supply. However, oil price risks remain stacked to the upside on the various geopolitical complications. As for the impact on Asian economies, if the oil price rises beyond the level of $70 per barrel and remains there for at least two quarters, there could be an adverse impact on overall GDP. Nonetheless, the effect is likely to be relatively modest. This is because strong competition in local markets means that the Asian firms are not able to pass the full price rise to the consumers, thus eroding the profit margin rather than pushing up the inflation. Moreover, an expected weaker dollar against the Asian currencies is also expected to offset the impact of higher oil prices to some extent.

1 Simple average of Singapore, Malaysia, Hong Kong, Taiwan, Thailand, Philippines, Indonesia, China, Japan, and Korea.

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EAST ASIAN REGIONALISM By Pradumna B. Rana

A

s is well known, East Asia’s1 remarkable transformation over the last five decades or so can be attributed mainly to its ambitious drive to open its economies to international trade and investment. This drive involved unilateral trade liberalization and multilateralism under the framework of the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO). The region’s integration with the world flourished in tandem with its integration with the region (Figure 1). Since the financial crisis in 1997–98, market-led integration has also been supported by government policies, and regionalism has emerged as a new component in East Asia’s development paradigm. Regionalism is also being seen as an effective way to address some of the adverse effects of globalization. Interest on regionalism can be attributed to various factors such as growing economic interdependence in the region, slow progress in multilateralism, popularity of regionalism elsewhere, and various lessons learned from the financial crisis. Regionalism in Asia has two features. First, it covers three areas in terms of scope — trade and investment, money and finance, and infrastructure and trade facilitation. Second, in terms of geographical coverage, it has been bilateral or sub-regional. More recently, bridges are starting to be built across the sub-regions (an example is the large number of free trade agreements (FTAs) under negotiation between South Asia and East Asia). On trade integration, East Asia has made remarkable progress with intraregional trade reaching 55 per cent in 2005, higher than the NAFTA (North American Free Trade Agreement) level but lower than that for the European Union, up from 43 per cent in 1990 (Figure 2). Much of this expansion is being driven by market

•

Since the 1997–98 Asian financial crisis, market-led integration in East Asia has been supported by various government policy actions.

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In the future, East Asia’s “multi-track, multi-speed” integration is expected to deepen further.

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Regionalism in East Asia will improve the medium- and long-term economic outlook for the region and enhance the region’s resilience to external shocks.

The views expressed in this box are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank, its Board of Governors, or the governments they represent. 1 East Asia is defined as ASEAN+3 (People’s Republic of China, Japan, and Republic of Korea) plus Hong Kong, China and Taipei, China.

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Figure 1: East Asia-15: Global and Regional Integration (In US$ billion) 3,000 2,500 2,000

Total exports to the world

1,500 1,000 500

Intra-regional exports 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

SOURCE: International Monetary Fund, Direction of Trade Statistics CD-ROM (July 2006).

forces especially the establishment of production and supply chains centred mainly in the People’s Republic of China (PRC) and ASEAN. More recently, given the uncertainties and risks in the multilateral trading system, the momentum for FTAs has also increased in East Asia with some 183 such agreements in existence or under negotiation compared with just a handful a decade ago. They will no doubt proliferate further if the Doha Round falters. There is a risk that the proliferation of FTAs could come at the expense of trade with non-members, known as trade diversion. It could also create an “Asian noodle effect” and raise administrative costs of trade. Broadening the membership of FTAs and deepening their coverage beyond tariffs into services, investments, technological cooperation, and so forth (called FTA Pluses) is one way of making FTAs stepping stones rather than stumbling blocks to multilateralism. Monetary and financial integration is essentially a post-crisis phenomenon in East Asia. East Asian governments have (1) started to engage each other in policy dialogues (the two important initiatives are the ASEAN Surveillance Process and the ASEAN+3 Economic Review and Policy Dialogue); (2) established a regional financing mechanism — the Chiang Mai Initiative (CMI) under which sixteen bilateral swaps

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EAST ASIAN REGIONALISM (continued)

Figure 2: East Asia-15, EU, and NAFTA Intra-regional Trade Shares (In percentages) 80 70 60 50 40 30 20 10

East Asia-15

EU

NAFTA

0 1980

1985

1990

1995

2000

2001

2002

2003

2004

2005

SOURCE: International Monetary Fund, Direction of Trade Statistics CD-ROM (July 2006).

amounting to US$75 billion have been established and efforts to multilateralize the bilateral swaps are ongoing; and (3) taken collective actions to develop local currency bond markets (for example, ASEAN+3 Asian Bond Market Initiative and Asian Bond Fund I and Asian Bond Fund II). Steps have also been taken to monitor short-term capital flows and to develop early warning systems of currency and banking crises. An ASEAN+3 Research Group, comprising about thirty think-tanks from across the region, has also been established to support the regional policy dialogue processes. Lack of data makes it difficult to measure the level of financial integration in East Asia, but those that are available suggest that it is now starting to increase. There is some evidence that the increasing level of trade and financial integration in East Asia is starting to make business cycles in the region more synchronized, paving the way for more advanced forms of integration. In East Asia, most of the poor live in remote or isolated areas, especially in regions close to national borders. They need to be linked to commercial and industrial centres not only in their own countries but to those in other countries in the region and beyond — via highways, railways, ports, telecommunications, and other hard infrastructure.

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The “software” aspects of infrastructure development, including trade facilitation, are also important to reduce transportation costs. Greater connectivity enhances trade and investment integration by facilitating the movement of goods. The most advanced programme in East Asia is the Greater Mekong Subregion — comprising Cambodia, Lao People’s Democratic Republic, Myanmar, Thailand, Vietnam, and the Yunnan Province of the PRC. Other initiatives include the Brunei Darussalam-Indonesia-Malaysia-Philippines East ASEAN Growth Area and Indonesia-Malaysia-Thailand Growth Triangle. East Asia’s market-led integration, which is now also being driven by various policy actions, is expected to deepen further. Given the intensity and purpose in the discussions, the question of East Asian regionalism has shifted from “if” to “when”. As in the past, the process will continue to be multi-track with a trade track and money and finance track. On the trade track, efforts are expected to be made to consolidate the proliferation of FTAs into a single East Asian FTA. Calls for such an FTA have already been made in several fora, at least among the academics. On the money and finance track, efforts to multilateralize the CMI are expected to continue. At their meeting in Hyderabad earlier this year, the ASEAN+3 Finance Ministers decided that “all swap providing countries can simultaneously and promptly provide liquidity support to any parties involved in bilateral swap arrangements at times of emergency”. They also decided to “set up a new task force to further study various possible options toward an advanced framework of regional liquidity support arrangement (CMI multilteralization or Post-CMI)”. Some commentators see increased trade and financial integration in the region as heralding the eventual adoption of a single currency or the establishment of an East Asian monetary union. Europe’s experience shows that a monetary union imposes stringent demands on policy coordination and institution-building that needs strong political will and a strong sense of common purpose which East Asia lacks at the present. In addition to being multi-track, East Asian regionalism is also expected to be multi-speed — with the pace of progress for different aspects of regional cooperation and integration varying, and with members, from other Asian regions as well, joining as and when they feel that they are ready to do so. Regionalism in East Asia is expected to improve the medium- and long-term economic outlook for the region and enhance the region’s resilience to external shocks through the expansion of trade and investment based on comparative advantages of member countries; lead to greater monetary and financial stability and prevent financial crises; and provide cross-border connectivity which is essential for the movement of goods, services, labour, and information across countries. Competitiveness, industrial production, and productivity of East Asian countries are expected to increase.

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ASIAN CURRENCIES AND GLOBALIZATION By Joergen Oerstroem Moeller

T

he international currency markets look stable at first glance, but a closer look reveals potentially strong volatility even fragility auguring upheavals in the years to come. The main problem is that a currency anchor is missing. A currency anchor is the currency commanding respect and credibility — a currency trusted by other countries, lending itself to be a safe haven in case of turbulence on the markets. When fluctuating it does so gradually and with small steps; the market takes the view that its value is largely correct. For many years, the U.S. dollar has served the world as a currency anchor. When talking about fluctuations in a currency’s value it was always seen vis-à-vis the U.S. dollar. The U.S. economy was without comparison the strongest, most buoyant and dynamic economy in the world. Even more important, economic globalization is apprehended as a global edition of American capitalism albeit with modifications and adjustment. This gave the U.S. dollar an unparalleled strength. This is not so anymore. After many years, the deficit on the U.S. balance of payments seems to latch on to a size of 5 to 7 per cent of GDP. That is manageable for an economy like the American one in a short period, but not any more as it now looks more or less permanent. The fears are creeping into the soul of many investors that the U.S. real estate market is in for a real downturn pulling the economy along with the inevitable result that former high growth at 3 per cent per year or more will fall visibly, even dramatically. All in all, the picture of a less strong American economy appears on the horizon, making the U.S. dollar less attractive as an anchor currency. But what are the alternatives? The euro has now been in place for about six years and survived its initial phases, which many observers expected to present the crucial test. It is doing well on the market. After having fallen to approximately US$80 to 100 euro in early autumn 2000, it rose to approximately US$135 in 2005 to stabilize around US$125 during most of 2006. The euro is an attractive alternative to the U.S. dollar but is still new and to a certain extent unproven to the markets. The European Central Bank in Frankfurt has apparently gained a fine reputation for itself as a respectable central bank,

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There is a risk of volatile international currency markets.

•

Small and individual currencies will be in the firing line.

•

This makes it worthwhile to think about currency rate cooperation among the Southeast Asian countries making them less vulnerable or exposed.

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but it takes a long time to build up a reputation comparable to that of the Federal Reserve System in the United States and the former German Bundesbank. Many countries may look to the euro, but not put all their eggs in that basket. The low growth in Euroland, problems for some of the major member states such as France and Germany to respect the ceiling for deficits on the public finances and rumours about political forces in Italy contemplating to take the country out of the euro — though completely unrealistic — complicates the picture and puts a question mark on the future strength of the euro. The Japanese yen is a serious contender on the market, but neither the Japanese economy nor the Japanese financial markets have reached a size and a strength making them a solid foundation for an anchor currency or, as it is sometimes called, a reserve currency. Growth disparities among the three main economies and large imbalances in the United States and Japan gives further credence to expecting swings on the currency markets. For the smaller currencies dependent on economic globalization this is bad news. Experience indicates that the first victims in case of trouble will be the smaller and more vulnerable currencies not having the size and the strength to withstand speculation as it was seen during the financial crisis in 1997–98. They are the weak links in the chain and have to shoulder the first onslaughts. Robert Mundell, who won the Nobel Prize for his work on optimum currency areas, once formulated this by saying that if you throw a stone in a small pond it will make heavy waves but if you throw it in a lake it will hardly be noticed. For the Asian currencies, which apart from the Japanese yen, are exposed to the whims of the currency markets, the challenge is to create a lake instead of a small pond. This is the background for the talk and various proposals about an Asian Currency Unit or a stronger cooperation among Asian countries with regard to currency rates. The question may be asked right away: Why are stable currency rates preferable, why not let market supply and demand determine the rates? The answer falls in two parts. Firstly, fluctuating currency rates convey an impression of a political system that is not able to control the national economy and lay down an economic policy. Experience indicates that highly volatile currency rates go hand in hand with weak political systems. So a large majority of politicians prefer stable currency rates, to inspire confidence in their political system instead of the other way round.

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ASIAN CURRENCIES AND GLOBALIZATION (continued)

Secondly, even if the empirical evidence is neither uncontested nor unequivocal, there is a growing consensus that stable currency rates promote trade as industry knows the currency rates and regard them as fixed. Stable rates help in the planning and implementation of investment and trade runs without fear of unpleasant surprises stemming from fluctuating rates that may jeopardize the investment calculus. For countries in Southeast Asia which are heavily dependent on economic globalization, strong volatility among their currency rates would unquestionably be detrimental to trade, investment, and economic growth. This opens the door for ideas as to how to introduce currency rate cooperation among not necessarily all but most of the Southeast Asian countries. Such cooperation may at a later stage fit into a larger Asian cooperation. In this regard, there are three points to look at: • Consultation about national economic policies to achieve, if possible, a higher degree of convergence. It is not imperative to have analogous economic policies but a certain degree of convergence is called for. • Mutual credits among central banks to assist partners whose currencies are exposed to speculation. This is important because without international credits no individual country can withstand pressure emanating from the international markets. • There should be a system based upon the keywords “fixed but adjustable currency rates” meaning that in principle the currency rates are fixed vis-à-vis each other but they can and should be adjusted if comparative competitive analysis warrants it. The true test for currency rate cooperation comes when the system is under stress. The solidity will then depend on the willingness of the strong countries to lend and the readiness of the weaker countries to realize that strings and conditions for national economc policies will be attached to currency credits. The markets are not impressed by the size of currency credits. The markets look at economic policies to remove the underlying causes and only if these policies are judged effective will the storm blow over. These are some of the valuable lessons drawn from the mechanism of European Monetary System (EMS) in the late 1970s and early 1980s. An Asian Economic and Monetary Union, like the European one, is not on the cards in the foreseeable future. But the lessons learned by the Europeans to achieve currency stability under difficult circumstances are available free of charge.

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THE ASEAN-10 Lee Poh Onn • Mya Than • Aris Ananta • Nick J. Freeman • Sanchita Basu Das • Lorraine Carlos Salazar • Manu Bhaskaran • Sakulrat Montreevat

Brunei Darussalam There are many promising developments on the horizon, some occurring during the forecast period, some a bit after the end of 2008 which would exert positive influences on Brunei’s near and longer term development prospects. Based on the International Monetary Fund’s, World Economic Outlook Database in September 20061 and the author’s own estimates, growth forecast in Brunei Darussalam for the period will range between 2 and 4 per cent for 2007–2008.

BRUNEI DARUSSALAM • Economic fundamentals are set to remain strong for the Bruneian economy in the forecast period because of higher oil prices. • Persistently high oil prices could however dampen demand from Brunei’s trading partners which will have negative impacts on Brunei growth prospects. • Construction of infrastructure in the the Sungai Liang Industrial Park and the Pulau Muara Besar Mega Port will provide a positive boost to employment and growth. • Over the longer term, the industrial park and the port projects will bolster the country’s diversification efforts.

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ECONOMIC OUTLOOK Over the forecast period, oil and gas will continue to be the main contributors to GDP with government revenue contributing over 40 per cent to GDP, and 75 to 90 per cent to revenues. With the completion of upgrades and repairs to the production facilities, oil production increased from 2005 and will continue to be on a steady if not upward trend in the forecast period of 2007–2008. This is a positive, given the currently high prices of petroleum in the world economy. Inflation has been under control, averaging below 1.5 per cent in recent years (2000–2005) and is not expected to be a dampener on growth in 2007 and 2008. Because of high oil prices, the fiscal and the current account balance position of the Bruneian government has also been in strong positive territory and is expected to remain so during the forecast period. Tax revenue increased by 29.5 per cent to B$7.9 billion in 2005 compared to 2004.2 The current account balance is estimated to be above 70 per cent of GDP for 2007–2008. The Brunei government is continuing in its efforts to promote diversification away from oil and gas. There have been many notable developments in 2006 which would bode well for Brunei’s economy in 2007 and 2008 and beyond. With high oil prices, economic fundamentals, as seen above, will remain strong for the country. There have been criticisms from outside observers that the government’s diversification efforts so far have yet to bear fruit. While there is some truth to this, matters are expected to change once the Sungai Liang Industrial Park is completed in the coming years. Besides the Sungai Liang Industrial Park development, the Brunei government currently has one other main draw card that would serve its economy in the years ahead: the construction of the Pulau Muara Besar (PMB) Mega Port and economic processing zones facilities. During the forecast period, both entities will still not be fully operational to reap the complete fruits of diversification, but the construction process is expected to boost the construction and construction-related sectors in the country. The construction of the Sungai Liang Industrial Park is proceeding according to plan. Tenders from about a hundred companies (service providers), Bruneian and non-Bruneian, have been submitted to the

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THE ASEAN-10 Brunei Economic Development Board (BEDB) as at end August 2006. The next stage would the engagement of a service provider (consisting of a consortium) to proceed with the construction of shared infrastructure and utilities scheduled to commence in the fourth quarter of 2006. In September 2003, a memorandum of understanding (MOU) was signed by the BEDB and the U.S.-based Alcoa for a smelting plant in the proposed Sungai Liang Industrial Park. Still at the MOU stage, if the projects gets underway, Brunei could see about 700 additional jobs created for its citizens and a positive boost for growth over the longer term.3 The smelting plant will be located in the Sungai Liang Industrial Park. Representing a major effort at diversification, the BEDB announced that it has signed an agreement with Mitsubishi Gas Chemical Company, Inc., the Brunei National Petroleum Co. Sdn Bhd, and the ITOCHU Corporation (the Brunei Darussalam Methanol Consortium) on 9 February 2006 to establish Brunei’s first methanol plant. When completed, the plant would create employment opportunities, technological transfers, and attract spin-off industries for Brunei’s longer-term economic development. The plant is expected to produce around 850,000 tonnes of methanol per annum which would be exported to Asian markets, and create 122 permanent jobs and a further 208 indirect jobs. Also located at the Sungai Liang Industrial Park, the plant will commence commercial operations in the second quarter of 2009.4 Construction of the plant commenced in the first quarter of 2006 and is scheduled for completion by the third quarter of 2007. The construction of the ammonia/urea plant has started in mid2006, with the first production set for January 2009. The consortium members are Incitec Pivot Limited (Australian manufacturer of fertilizers), Mistsubishi Corporation (Japanese company which also trades in fertilizers), and Westside Limited (U.S. company specializing in ammonia and urea). In total, the consortium plans to invest around US$600 million in the venture to set up the ammonia/urea plant with the capacity to produce 2,000 tonnes of ammonia and 3,500 tonnes of urea per day. Around 200 direct jobs will be created as a result of this venture, with a further 300 positions in spin-off industries.

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ECONOMIC OUTLOOK If everything goes according to plan, Brunei’s PMB Mega Port and the associated industrial zone project in Sungai Liang is expected to generate around 4,000 new jobs and over US$1.7 billion in longterm investments. The initial development of PMB, estimated to cost around US$400 million is scheduled for completion in the third quarter of 2008, with construction beginning at the end of 2006. Over the longer term, in terms of economic linkages, the port is expected to generate spin-off industries and opportunities that support port activities. All this is, of course, based on the premise that the port will be able to attract a sufficient volume of container ships that carry trans-shipment cargo in order to become viable.5 Besides providing this infrastructural platform for Brunei’s diversification of its economy, the shorter term includes benefits in terms of cost savings on imports which again will be a positive for its economic growth prospects when the port is completed in 2008. Construction of the port will begin in January 2007. The development of the liquefied natural gas (LNG) industry is another positive element that will provide the main impetus for Brunei’s diversification into non-oil growth with more than 90 per cent of its LNG currently being exported to Japan. Brunei is considering using these reserves to develop its petrochemical and energy-intensive industries in its long-term development strategy. Notable developments in other areas include in the fisheries and small and medium enterprises (SME) sectors. In February 2006, the Belait Fisheries Trade and Commerce building was completed and rented out to the Kuala Belait Fisherman Cooperation with Tanggungan Berhad. The fisheries industry is a potential sector that contributes to the diversity of the Bruneian economy and is expected to contribute about B$230 million by 2010. There are plans by the Fisheries Department to develop the fisheries industry, including preparing the general infrastructure for fish and prawn rearing sites in Telisai in the Tutong district. At present, the Fisheries Department is providing seafood-processing facilities in Serasa such as the Phase II Fish Storing and Distribution Centre, Regional Fisheries Operation Centre (HUB). Under the Eighth National Development Plan, the government has

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THE ASEAN-10 prepared industrial sites and factory buildings for the processing of seafood resources like the Muara Fish Storing and Distribution Centre Phase 1 and 2. In April 2006, Brunei also announced the establishment of the SME Innovation Centre in Kg Anggerek Desa, initiated by the BEDB. This is in line with the country’s intention to nurture and support the growing number of technopreneurs and info-communication technology (ICT) in the country. Malaysian ICT firms have expressed interest in establishing a strategic networking relationship with local Brunei SMEs with the proposed development of the SME Innovation Centre.6 With the SME Innovation Centre, Brunei Darussalam will be moving towards a more innovative and knowledge-focused economy in the years ahead. Meanwhile the BEDB has been exploring possible technology collaborations with Sun Microsystems and SKALI. Sun Microsystems plans to open a laboratory to promote Java Technology and Open Source in the hub, while SKALI is an e-business specialist based in Malaysia that will work with Bruneians to provide the necessary technology infrastructure and services to assist start-up IT companies in Brunei. Brunei’s main trading partner for its exports, Japan, is also likely to boost growth prospects for Brunei during the forecast period. Japan’s expansion has been well into its fourth year now, and it is likely that Bruneian exports will continue to be fuelled by Japan’s domestic demand. However, a more than rapid and massive slowdown in the U.S. economy during the forecast period is worrisome and may serve as a dampener on global as well as Brunei’s economic growth prospects. Higher oil prices serve as a double-edged sword for Brunei’s economy. High oil prices have boosted revenues for Brunei. Many oildependent countries have been able to absorb higher fuel costs so far, thus staving off a widespread global slowdown. However, corporate profit margins of these countries may be squeezed due to weaker global demand. The risks of an avian flu pandemic remains ever looming, with any uncontrolled outbreak having a significant impact on regional economies as well as the Bruneian economy.

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ECONOMIC OUTLOOK NOTES 1. International Monetary Fund, World Economic Outlook Database (September 2006), http://www.imf.org (accessed 15 October 2006). 2. Economist Intelligence Unit, Country Report: Brunei (United Kingdom: Economist Intelligence Unit, September 2006). 3. “Brunei: Introduction”, Asia & Pacific Review World of Information, 1 August 2005. 4. “Brunei: New Investment Deal”, Borneo Bulletin, 10 February 2006. 5. The Halcrow Group, which carried out consultancy work with the Brunei government, has estimated that if Brunei were to capture 5 per cent of ASEAN trade by 2015, this would place the PMB at the world’s top fifity container ports. See “A Logical Evolution”, Dredging and Port Construction, November 2004, p. 39. 6. “FDIs get hot for Brunei”, Borneo Bulletin, 21 December 2005.

Cambodia In 2005, according to the official estimates, Cambodia’s growth rates fell slightly to 10 per cent from 11.3 per cent in 2004. This figure, along with the growth rates estimated by the Asian Development Bank (ADB) and the Economic Intelligence Unit (EIU), 8.4 per cent and 13.4 per cent respectively in 2005, suggests that the Cambodian economy performed strongly in 2005 although there were gloomy predictions owing to negative growth in the agricultural sector in 2004 caused by the drought and expiry of WTO’s Multi-Fibre Agreement (MFA) in January 2005 (which would also affect its manufacturing sector). However, in 2005, both the ADB’s and EIU’s estimates that Cambodia will experience spectacular economic growth — attributable

CAMBODIA • Increased agricultural production , garment exports, and tourism are boosting economic growth. • Corruption still threatens growth prospects. • Weakness in the agricultural sector and greater competition and lower efficiency in the garment sector will dampen growth rates in 2007 and 2008.

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1.8 2.6 –0.8 –8.9 3.3 775.6 139.1 31.1 3,912

Exports (US$ billion) (EIU) Imports (US$ billion) Trade balance (US$ million) Current account balance (% of GDP) (ADB)

Inflation CPI average (% change) (ADB) Foreign exchange reserves (US$ mil) (EIU) Foreign direct investment (US$ mil) (ADB) M2 growth (% change) (ADB) Exchange rate (average riel/US$) (CDR)

1.2 815.5 74.0 15.3 3,973

2.0 2.6 –0.4 –10.1

5.0 11.9 0.2 12.2

7.1 7.0 5.1

2003

3.9 943.1 121.0 30.0 4,035

2.5 3.2 –0.7 –9.8

6.5 16.1 9.2 –2.0

11.3 7.7 10.0

2004

5.8 n.a. 216.0 16.1 4,092

2.8 3.6 –0.8 –11.7

5.5 8.5 7.5 9.5

10.0b 8.4 13.4

2005

4.5 n.a. n.a 22.0 4,107

3.1 4.1 –1.0 –11.8

4.5 2.9 5.5 3.5

7.0c 6.3 5.8

2006E

3.5 n.a. n.a. 25.0 4,217

3.4 4.5 –1.1 –12.5

5.0 4.0 6.0 3.7

n.a. 6.4 5.0

2007E

NOTES: CDR = Cambodia Development Review; Data given for 2006E–2007E are estimated figures; n.a. = Not available. SOURCES: a. National Institute of Statistics, 2004; b. Official estimates, 2003; c. Government of Cambodia; Country Presentation for Cambodia, Third United Nations Conference on the Least Developed Countries, 2001; Asian Development Bank (ADB), Asian Development Outlook 2006; ADB, Key Indicators 2003, Economist Intelligence Unit, EIU Country Reports, August 2006 and June 2006.

4.0 17.3 4.4 –2.8

5.3 5.2 5.5

Regional Outlook — Industry sector growth (% change) (ADB) — Services sector growth (% change) (ADB) — Agriculture sector growth (% change) (ADB)

GDP growth (% change) — NISa — ADB — EIU

2002

Cambodia: Selected Economic Indicators, 2002–2007E

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ECONOMIC OUTLOOK to high growth in the agricultural sector due to favourable weather conditions, increases in irrigated areas, improvements in plantation techniques, and a considerably larger fish catch mostly from Lake Tonle Sap and Mekong River. In 2005, the agricultural sector grew significantly by 9.5 per cent from –2.2 per cent in 2004 which increased agriculture-related incomes (ADB 2006). The EIU’s estimates indicated that the growth rate of agriculture significantly grew from 2 per cent in 2004 to 12 per cent in 2005. The same source quoted the Ministry of Agriculture that total rice output grew by 43.6 per cent year-onyear to 6 million ton. Moreover, the rise in the export of garments of 23 per cent in volume terms and 12 per cent in value terms, was due to “in large part a consequence of temporary safeguard measures against textiles and clothing exports from the People’s Republic of China (PRC) imposed by the European Union (EU) and the United States” (ADO 2006) also contributed to Cambodia’s GDP growth in 2005. At the same time, exports of rubber and other agricultural produce also grew strongly. Although the growth rate of the industrial sector fell from 16.1 per cent in 2004 to 8.5 per cent in 2005, garment output increased along with improvements in labour conditions, which made garment manufacturers better able to withstand greater international competition. According to the Ministry of Commerce, exports of garments increased by 26.4 per cent year-on-year to US$689 million during January–April 2006. The U.S. Census Bureau’s data shows U.S. imports of garments from Cambodia in 2005 were about US$1,700 million. The same ministry also revealed that the total number of employees in the garment manufacturing sector reached 293,600 in April 2006, an increase of 11 per cent since January 2005. Moreover, in 2005, the number of factories in operation increased by twenty-eight, an increase of 13 per cent (EIU June 2006). This suggests that even though the global quotas (MFA) have expired in January 2005, the garment sector is expanding in terms of the number of factories, output, and workers. In addition, a surge in tourist arrivals and a boom in the construction sector both in the residential and hotel sectors pushed up the country’s GDP — despite the slowdown of the performance of the

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THE ASEAN-10 services sector which declined slightly from 9.2 per cent in 2004 to 7.5 per cent in 2005. Cambodia’s most attractive place for tourists is the Angkor Wat temple complex in Siem Reap. In the first quarter of 2006, about 460,000 tourists visited Cambodia, a year-on-year increase of about 18 per cent, and 53 per cent of all tourist arrivals visited Angkor Wat. Another push factor for the economic performance came from the demand side. For example, increases in private investment, resulting from the favourable investment climate, also supported the overall economic growth. According to the Council for the Development of Cambodia (CDC), approved private investments increased fourfold to about US$1.1 billion in 2005 from 2004, in which investment in the industry sector accounted for about 83 per cent of the total. In 2005, investment in agriculture also jumped twofold from 2004. It is interesting that, despite the WTO’s MFA issue, the garment industry has continued to attract foreign investments, mainly from China and Taiwan. In addition, public consumption also increased in 2005 due to a rise in the income of farmers as output in the agricultural sector significantly grew and the prices of rice and some other agricultural produce also rose. Apart from foreign investments, as in other underdeveloped countries, Cambodia received grants and loans from foreign donors to support developments in the country. In 2005, the government received a total of US$254.9 million in the disbursement of grants and loans which fell from US$555.4 million from 2004. The total disbursement that Cambodia received between 1992 and 2005 was US$6.3 billion for the rehabilitation and reconstruction of the country. Despite the scandals of corruption in Cambodia, at the recent meeting of the Consultative Group (CG), in March 2006, donors pledged US$601 million, and Japan was the leading donor pledging US$115 million, followed by the ADB (US$88 million), the United States (US$62 million), and the World Bank (US$53 million). As far as foreign trade is concerned, exports grew at the rate of 11.5 per cent in 2005 due to strong growth of garment exports supported by gaining recognition for their compliance with international labour

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ECONOMIC OUTLOOK standards. It would have increased more if not for rampant corruption in the country. At the same time, Cambodia’s imports expanded strongly by about 18.2 per cent reflected by the rise in world oil prices and import-dependent garment industry. As a result, trade deficits widened by about 14.2 per cent but revenues from buoyant growth in tourist arrivals would have cushioned the current account deficit along with foreign aid and foreign direct investment (FDI). The current account deficit widened from 3.5 per cent of GDP in 2004 to 5.7 per cent in 2005. At the end of 2005, Cambodia had gross foreign exchange reserves of US$943.1 million, providing about three months of import cover. Inflation grew from 3.8 per cent in 2004 to 5.8 per cent in 2005 — a 2 percentage point increase owing to the high fuel and food prices including rice. However, in April 2006, inflation slowed down to 4.8 per cent on year-to-year basis, mainly due to the government’s efforts to stabilize retail fuel prices through subsidies, and prices for food and beverages and tobacco began to decline in early 2006 (EIU June 2006). It seems that the country’s money supply (M2), which contracted from 30 per cent in 2004 to 16 per cent in 2005, did not have any impact on increasing inflation. In Myanmar’s case, foreign exchange rates pushed up the inflation, apart from the financing of budget deficits through the central bank, the government’s raising of retail fuel prices eightfold, and salary increase of between 500 to 1,000 per cent. In Cambodia’s case, the exchange rate increased from 4,016 riel per U.S. dollar in 2004 to 4,093 riel in 2005 — a 1.9 percentage increase. Hence, there is little impact of foreign exchange rates on inflation. Here, it is interesting that, despite the general weakness of the U.S. dollar against all major currencies, the riel has continued to depreciate steadily. However, despite the stability of the riel against the U.S. dollar, the riel has lost ground to the Thai baht and Vietnamese dong probably because most imports of Cambodia come from these two neighbours. One piece of good news was the debt service ratio relative to goods and services, including the debt under renegotiation, compared with the ratios of several developing countries, was very low at 1.9 per cent at end-2005. In fact, Cambodia’s external debt and debt service

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THE ASEAN-10 ratio declined steeply from 2001 to 2005. According to the ADB, about two-thirds of external public debt, estimated at US$3.2 billion or 59 per cent of GDP in 2005, is owed to the Russian Federation and the United States. Like other external debts owed to multilateral creditors, Cambodia has special and highly concessional terms, and this debt is not being serviced while under renegotiation. In sum, Cambodia’s economic performance, pushed by the stronger agricultural output, is quite impressive at 8.4 per cent. However, the nation’s overall well-being in terms of development indicators of per capita income, educational levels, health care, and life expectancy, represented by the Development Index of the United Nations Development Program (UNDP), suggests that Cambodia’s ranking in the world in 2004 was quite low at 130 among 162 countries. However, it is in a better position than some of its fellow ASEAN members — Myanmar (132) and Lao PDR (135). Moreover, another UNDP report on Cambodia estimated that 1 million Cambodians, nearly a tenth of the total population of an overwhelming agrarian population, are now landless. In addition, socio-economic indicators suggest alarming trends in nutrition and infant mortality (The Nation, 1 March 2005). Although the beginning of 2005 marked the ending of the MFA, which was expected to cause a sharp decline in economic growth since Cambodia’s preferential access to the U.S. market for garments are put at risk at an estimated 20 per cent of GNP and a quarter of million jobs, nothing happened. Instead, garment exports grew from US$520.3 million in the fourth quarter of 2004 to US$601.0 million in the same period — a surge of 15.6 per cent. As mentioned earlier, this was in large part a consequence of temporary safeguard measures against textile and clothing exports from China imposed by the European Union (EU) and the United States. These measures allowed Cambodia to push up its exports of garments to the United States. It is expected that exports of garments sector will contribute to a better economic performance in the immediate future — in 2006/07 and 2007/08. Last year’s growth rate was impressive largely due to a strong performance in the agriculture sector and garment sector. However, the agricultural sector depends largely on the weather conditions, and it is

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ECONOMIC OUTLOOK difficult to predict the sector’s performance in 2006 and 2007. Looking at the climate pattern in Cambodia over last seven years, there was drought or flood in every other year since 1999. It seems that there was flood due to storms instead of drought in the late 2006, and that the agriculture output would not be affected much. The industry sector, especially the garment sector, will grow as the temporary safeguard measures against China still exist. It is expected that the country’s exports, particularly of garments, will continue to grow in 2006 and 2007, but due to poor infrastructure and rampant corruption, exports growth will be lower than expected. At the same time imports will increase faster than exports growth due to the fall in tariffs owing to membership in the WTO and ASEAN. This will result in a widening of trade deficits, which will drag the GDP down in 2006/07. In addition, foreign investments will flow in on the grounds that the business environment will be improved due to the accession into WTO, and tourist arrivals will rise more than in previous years. As far as consumer spending is concerned, it will continue to grow strong since farmers’ income are continuing to increase as a result of rises in the price of rice, rubber and other agriculture produce, and increased job opportunities in the garment sector. One positive trend is that the rise of world crude oil prices are expected to fall in 2007, and it is expected that food and fuel prices will slightly slow down. These trends will bring down the inflation rate to between 4 and 4.5 per cent in 2006 and 2007. However, trends of foreign exchange rates of the riel suggest that it will continue to depreciate further in spite of the fall in the U.S. dollar against major currencies. However, there is one possible stumbling block. The World Bank said it had found misuse of funds and irregularities in seven projects. The three projects that are still underway were worth more than US$64 million and implemented by three Cambodian ministries. The World Bank also made it known that the problem is serious and could lead to total cancellation of the funds, and the government would be forced to refund the World Bank any amount already disbursed under inappropriate contract (The Nation, 30 May 2006). This corruption case

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THE ASEAN-10 may become an obstacle for the economic development of Cambodia in the near future. In the light of the trends of economic development mentioned above, the economic outlook for Cambodia in terms of GDP growth rates for the next two years, 2006 and 2007, is expected to be modest — between 4.5 per cent and 5 per cent. REFERENCES Asian Development Bank (ADB). Key Indicators 2006. ———. Asia Development Outlook 2006. Economic Intelligence Unit. EIU Country Report — Cambodia (June 2006).

Indonesia Mini Crisis1 As anticipated, a “mini crisis” occurred at the last quarter of 2005, soon after the heavy cut in fuel subsidy on 1 October 2005. As a result, the inflation rate surged to 8.7 per cent in October 2005. However, the surge was only temporary with rates dropping to 1.31 per cent in November and to negative 0.04 per cent in December 2005. The economic performance in the last quarter of 2005 was poor with GDP declining by 2.18 per cent, in contrast to the positive

INDONESIA • The Indonesian economy has quickly recovered from the “mini crisis’” which occurred in late 2005. • International communities have shown their confidence for Indonesian economic policy-makers. • Poor infrastructure, inefficient bureaucracy, and overcautious bureaucrats are some of the economic challenges faced by the current government. • Overall, the Indonesian economy has a positive outlook.

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ECONOMIC OUTLOOK growth rate in the third quarter at 3.05 per cent. Investment declined by 4.75 per cent. Exports grew a little, at 2.49 per cent. Household consumption grew by 1.1 per cent. In contrast, government contributions rose dramatically by 33.22 per cent, because of the government’s cash programme to compensate the poor for the impact of the heavy cut in fuel subsidies. Despite the mini crisis, the economy in general managed to maintain an ongoing positive trend which started in 2001. The economy grew at 5.6 per cent in 2005, higher than 5.05 per capita in 2004. The per capita GDP rose from US$1,166.6 in 2004 to US$1,308.1 in 2005. In 2005, however, the household consumption component in GDP declined to 65.41 per cent from 67.43 per cent in 2004. The role of investment almost remained the same, 21.97 per cent in 2005 compared with 21.68 per cent in 2004. The contribution of export rose from 32.04 per cent in 2004 to 33.54 per cent in 2005.

Recovery2 The Indonesian economy has again shown resilience to crises.3 After experiencing a negative growth rate in the last quarter of 2005, Indonesia recovered in the first quarter of 2006. GDP grew at 2.14 per cent, followed by another higher growth rate of 2.2 per cent in the second quarter of 2006. Measured on a year-on-year basis, GDP at the second quarter of 2006 grew at 5.22 per cent, higher than the 4.7 per cent in the first quarter of 2006. The government had been able to control inflation at 4.06 per cent from January to September 2006, lower than the 6.39 per cent of January to September in 2005. Responding to the declining inflation rate, Bank Indonesia has progressively reduced interest rates since 9 May 2006 to boost investment activity. Interest rates remained at 12.75 per cent from 6 December 2005 to 8 May 2006. Since then, rates have been declining progressively: 12.5 per cent (from 9 May 2006), 11.75 per cent (from 8 August 2006), and 10.75 per cent (from 5 October 2006).4 Helped by a favourable harvest season, the first quarter of 2006 recorded high growth rates in the agricultural sector (18.78 per cent),

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THE ASEAN-10 a huge contrast to the last quarter of 2005. However, mining suffered negative growth in the first quarter of 2006. The growth rate in trade, hotel, and restaurant sectors also declined. Signs of an encouraging development was seen in the second quarter. The growth rate of agriculture was still relatively high at 3.21 per cent. All other sectors grew at positive growth rates, with transportation and communications showing the fastest growth (5.03 per cent) while manufacturing having the slowest (1.01 per cent) but still positive rate. On the expenditure side, the second quarter of 2006 saw export volumes increasing by 5 per cent in the first quarter of 2006, a big improvement over a decline of 1.58 per cent in the last quarter of 2005. However, the volume of imports rose by 7.86 per cent in the second quarter of 2006, higher than the rise in exports. On the other hand, measured at year-on-year basis, exports from January to July 2006 grew by 16.42 per cent over imports (2.42 per cent) at the same period in 2005.5 The second quarter of 2006 also recorded positive rates of growth in household consumption, investment, and government expenditure from the first quarter, a recovery from the negative growth of the last quarter of 2005 to the first quarter of 2006. The contribution of investments to GDP rose a little from 21.11 per cent in the first quarter to 21.24 per cent in the second quarter, though still a little lower than 22.01 per cent in the last quarter of 2005. At the same time, household consumption remained the largest contributor to GDP, though the contribution was lower when compared with the last quarter of 2005, from 60.7 per cent in the last quarter of 2005 to 58.27 per cent in the second quarter of 2006.

Rising Confidence among Economic Policy-Makers The good macroeconomic fundamentals in Indonesia has been recognized by the international community. According to the Global Competitiveness Report 2006–2007, released by the World Economic Forum, Indonesia’s ranking has improved from 69 in 2005 to 50 in 2006. The favourable macroeconomic condition in the first half of 2006 and the success in overcoming the mini crisis have prompted the international community to praise improvements in Indonesia’s fiscal

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ECONOMIC OUTLOOK condition. Finance Minister Sri Mulyani Indrawati was awarded “The Best Finance Minister in Asia” from the Emerging Market Forum (EMF) during the World Bank–International Monetary Fund (IMF) meeting held in Singapore in September 2006. She was said to have very welllaid fiscal policy plans for long-term development within a complex social political condition. With the improvement in the macroeconomic condition, Bank Indonesia on behalf of the Government of Indonesia decided to repay all its IMF loans. The remainder of the loans, amounting to US$3,181,742,918, was due at the end of 2010. However, by 12 October 2006, the Government of Indonesia had effectively repaid all loans. With this settlement, Indonesia no longer has to follow the post-programme monitoring of the IMF. The Governor of Bank Indonesia said that the “settlement of the IMF loan is a signal of increasing confidence and flexibility of the government’s fiscal position”.6 In other words, Indonesia can now decide its own economic programmes without any intervention from the IMF. Some observers perceived this as rising economic sovereignty. However, it may also simply mean that Indonesia is not happy with the IMF’s policies and would like to have economic policies with different paradigms.

Challenges The heavy cut in fuel subsidies, to bring the domestic price of fuel closer to the world price, has also raised the prices of consumer goods and services on par with world prices. With the mismatch of local salaries with that of international standards, Indonesian workers may be increasingly facing the phenomenon of global consumption with local earnings. The declining, but still positive, inflation rate does not mean declining price levels. As long as the inflation rate is positive, price levels are still on the increase. To put it another way, though the inflation rate has been falling, the price level has been rising and is much higher than levels before the mini crisis period. It was 14.55 per cent higher in September 2006 than in September 2005.7

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THE ASEAN-10 In other words, the people, particularly those with fixed earnings, will continue to suffer from a decline in real income, especially compared with the period before the heavy cuts on fuel subsidy. People must find other earning opportunities to maintain their lifestyle, or they may have to change their lifestyle and consumption patterns. The economy still suffers from poor infrastructure and an inefficient bureaucracy, which result in a high-cost economy. In addition, the euphoria of democracy may have caused some bureaucrats to be overcautious in their decision-making. As a result, some government projects have been delayed. The relatively low budget deficit (–0.5 per cent in 2005 and estimated –1 per cent in 2006) is partly because of the many unspent budget allocations.8 The year 2006 also witnessed a relatively large earthquake in Yogyakarta and tsunami in West Java, other than numerous smaller earthquakes throughout Indonesia. There were also many natural disasters such as landslides, floods, haze that resulted from forest burning, and the recent “non-stoppable” hot mud flow eruption9 in East Java. All these disasters may continue to burden the government budget and local economies. Natural disasters and their environmental damages have been and will continue to pose the government with increasing social, political, and economic costs.

Outlook10 Recovery will continue throughout 2006. People have been and will be able to quickly adjust to the much higher cost of living, particularly compared with the period before the mini crisis. Bank Indonesia is expected to continue to reduce its interest rate, eventually to a range between 9 and 10 per cent at the end of 2006. Interest rates may continue to fall to between 8 and 9 per cent in 2007 and between 7 and 8 per cent in 2008. This low rate of interest may further boost the level of investment activities and hence GDP growth as long as there is an improvement in legal certainty and reforms in the bureaucracy.

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12/26/06 10:49:37 AM

5.05 6.54b 6.99b 3.26b –4.48b

4.78 5.45b 6.36b 3.79b –1.37b

Fiscal balance (% of GDP)

Fiscal balance (billion rupiah) –1.42i

–23,575i –1.91i

–35,110i

8.12

4.72

M2 money supply growth (%)h

8.31

12.93

Interest rate (1-month Bank Indonesia certificate)g

5.06

61,058.8 32,550.7 28,508.1 8,106 —

10.03

57,158.8 31,288.9 25,869.9 7,822 —

4.38 5.39a 4.97a 3.32a 1.00a

Inflation/CPI averagef

Export (US$ million)c Import (US$ million)c Trade balancec Current account balance (US$ million)d Current account balance (US$ million)e

GDP growth (% change) — Industry (% change) — Service (% change) — Agriculture (% change) — Mining and quarrying (% change)

–1.38i

–28,570i

8.14

7.43

6.40

71,584.6 46,524.5 25,060.1 3,108 1,564

b

2004

a

b

2003

2002

–0.5j

–12,137j

16.42

12.75

17.11

85,660.0 57,700.7 27,959.3 2,996 340

5.60 5.12b 8.12b 2.49b 1.59b b

2005

between –0.9 and –1.1

between –35,000 and –45,000

4.0–6.0

9.0–10.0

7.0–8.0

90,000–95,000 55,000–60,000 30,000–40,000 — 4,000–5,000

5.4–5.6 5.0–6.0 5.0–6.0 4.0–5.5 4.0–5.5

2006E

Indonesia: Selected Economic Indicators, 2002–2008F

between –1.0 and –1.2

between –40,000 and –55,000

4.0–7.0

8.0–9.0

6.0–7.0

110,000–120,000 70,000–80,000 30,000–50,000 — 5,000–6,000

5.5–6.5 5.5–7.0 5.5–7.0 3.0–4.5 3.0–4.5

2007F

between –1.1 and –1.3

between –45,000 and –65,000

3.0–8.0

7.0–8.0

5.0–6.0

120,000–140,000 80,000–100,000 20,000–60,000 — 6,000–7,000

6.0–7.0 6.0–8.0 6.0–8.0 3.0–4.5 3.0–4.5

2008F

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97

8,465

36,296l

135,401

9,290

36,320m

137,024

9,830

34,724m

130,652

9,000–9,300

41,126

123,000–126,000

8,900–9,500

42,000–44,000

115,000–125,000

8,500–9,500

43,000–46,000

90,000–110,000

NOTES: Data given for 2006E are interval estimate prepared by the author in October 2006; Data given for 2007F and 2008F are interval forecast prepared by the author in October 2006. a Calculated from Badan Pusat Statistik, Statistik 60 Tahun Indonesia Merdeka (Jakarta: Badan Pusat Statistik, 2005), Table Lampiran (Appendix) 3.1. b Badan Pusat Statistik, Laporan Perekonomian Indonesia 2005 (Jakarta: Badan Pusat Statistik, 2006), Table 3.2. c Calculated from Economic Indicators, June 2006, Table 6.2. d Bank Indonesia, Indonesian Financial Statistics, February 2006, Table VI.2 e Bank Indonesia, Indonesian Financial Statistics, August 2006, Table VI.2. f Badan Pusat Statistik, Laporan Perekonomian Indonesia 2005 (Jakarta: Badan Pusat Statistik, 2006), Table 4.2. g Bank Indonesia, Indonesian Financial Statistics, August 2006, Table II.29. h Calculated from Bank Indonesia, Indonesian Financial Statistics, August 2006, Table II.1. i Bank Indonesia, Indonesian Financial Statistics, August 2006, Table V.3. j Indonesia’s Trade and Investment News, 16 October 2006. k Bank Indonesia, Indonesian Financial Statistics, August 2006, Tables VII.1. l Bank Indonesia, Indonesian Financial Statistics, October 2004, Table VI.5. m Bank Indonesia, Indonesian Financial Statistics, August 2006, Table VI.6. n Bank Indonesia, Indonesian Financial Statistics, August 2006, Table VI.19.

8,940

32,039l

Foreign exchange reserves (US$ million)

Exchange rate at year-end (Rp/US$)n

131,073

Total debt outstanding (US$ million)k

98

ECONOMIC OUTLOOK Along with the decline in interest rate, inflation rate will also decline to between 7 and 8 per cent in 2006, between 6 and 7 per cent in 2007, and between 5 and 6 per cent in 2008. The burden on the consumers may be eased but they will continue to face rising living cost. Overall, the Indonesian GDP growth rates will continue to improve until end 2006, though the overall growth rate for 2006 may not be higher than that of 2005. It may be in the range of 5.4 to 5.6 per cent. As the economy keeps improving, it may reach around 5.5 to 6.5 per cent in 2007 and 6 to 7 per cent in 2008. NOTES 1. Statistics in this subsection are cited from Badan Pusat Statistik, Laporan Perekonomian Indonesia 2005 (Jakarta: Badan Pusat Statistik, 2006) and Berita Resmi Statistik, No. 09/IX/15 February 2006. 2. Except mentioned otherwise, the statistics in this subsection are cited from “Pertumbuhan Ekonomi Indonesian Tahun 2005”, Berita Resmi Statistik, No. 99/IX/15 Februari 2006 and “Pertumbuhan Ekonomi Indonesia”, Berita Resmi Statistik, No. 40/IX/14 August 2006. 3. For more discussion on the resilience of Indonesian economy since late 1960s, see Aris Ananta and Yohanes Eko Riyanto, “Riding Along a Bumpy Road: Indonesian Economy in an Emerging Democratic Era”, ASEAN Economic Bulletin 23, no. 1 (2006): 1–10. 4. The BI rates were cited from www.bi.go.id/Web/EN/Indikator+Moneter+ dan+perbankan/birate/, accessed on 17 October 2006. 5. “Perkembangan Ekspor dan Impor Indonesia”, Berita Resmi Statistik, No. 44/IX/ 1 September 2006. 6. “The IMF Loans Effectively Settled Today”, Bank Indonesia Press Release, No.8/55/PSHM/Humas. 7. “Perkembangan Indeks Harga Konsumen/ Inflasi”, Berita Resmi Statistik, No. 49/IX/ 2 October 2006. 8. Sri Mulyani Indrawati, Minister for Finance, as cited in Indonesia’s Trade and Investment News, 16 October 2006. 9. At the time of writing, the mud flow shows no sign of abating. 10. Written in October 2006, this outlook reflects what was known and anticipated up to that month.

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THE ASEAN-10

Laos The Lao People’s Democratic Republic (Lao PDR) is a less developed country, with approximately a third of its population living below the food poverty line. The average per capita income is just US$490. Inputs provided by the international donor community currently account for around 7 per cent of Laos’ total GDP, almost 40 per cent of national public expenditure, and over 60 per cent of the country’s capital budget. Indeed, when measured on a per capita basis, Laos receives one of the highest levels of donor assistance in the whole of Asia. Although Laos is technically eligible for debt relief under the HIPC (heavily indebted poor countries), it has thus far chosen not to avail itself of this programme. With a total population of less than 6.5 million and an average density of just twenty-five people per square kilometre, the country is sparsely populated, and around 40 per cent remains forested. Only 21 per cent of Lao citizens reside in urban areas, and 18 per cent live in Vientiane province alone. Around 45 per cent of the country’s population lives in just four of the country’s eighteen provinces: Vientiane, Savannakhet, Champasak, and Luang Prabang. Average life expectancy in Laos is no more than 56 years, compared with 69 years in neighbouring Thailand and Vietnam. Almost 45 per cent of the population is aged 15 or less. The adult literacy rate is around 50 per cent, and only about 30 per cent of Lao citizens have attended lower secondary school or

LAOS • The Lao economy appears poised for higher economic growth, thanks in large part to a few large-scale investment projects in the mining and energy sector. • Economic reform momentum will be maintained in the coming years, albeit at a pace that continues to frustrate those seeking a more strident approach on issues like business sector liberalization. • No major changes in economic policy seem likely in 2007–2008, unless triggered by an external event, and Laos’ economic reliance on the international donor community will persist.

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ECONOMIC OUTLOOK above. Of a total labour force of just 2.6 million, only 15 per cent are salaried, and the majority of the rest are semi-subsistence farmers. In 2005, Laos became self-sufficient in rice production for the first time, with a total paddy harvest of 2.6 million metric tonnes. Looking ahead, Laos aspires to have graduated from its current less developed country status by 2020. Over the last two decades, the country has been undergoing a very gradual process of economic transition, away from the central planning methods initially adopted after the overthrow of the Royal Lao Government in late 1975, and towards a more market-oriented economy. This transition process has been dubbed the “New Economic Mechanism” (NEM) by some, and broadly parallels — but is not a simple copy of — the doi moi economic reform and business liberalization process underway in neighbouring Vietnam. For the leadership of the Lao PDR, the need to maintain socio-political stability is paramount, and so the government’s approach to economic reform has been highly risk-averse. Also, the limited pressure for reform, mostly voiced by the resident donor community, has been partly offset by vested interests within the country that are understandably reluctant to surrender privileges they have enjoyed until now. In late 2004, President Bush formally granted Laos “normal trading relations” (NTR) status. This normalization of trade permits Laos to have a markedly lower tariff rate for goods exported to the United States, down from an average of 45 per cent to just 2.5 per cent. In terms of specific export items in which Laos has some competitive edge, this includes: a drop from 40 per cent to 7 per cent for tariffs on cotton garments; a drop from 60 per cent to zero for handicrafts; a drop from 42 per cent to zero for wooden furniture; a drop from 90 per cent to less than 1 per cent for Lao silk textiles; and a drop from 10 per cent to zero tariffs for coffee and tea. This is likely to have been a contributory factor in Lao export volumes rising by over 50 per cent in 2005, with robust export performance particularly seen in coffee, electricity, wood products, garments, and gold and copper. Having attained NTR status, the Lao government has now turned its attention towards gaining WTO accession, and has set itself a target date of 2010 to gain permanent member status of the organization.

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THE ASEAN-10 For some time now, Laos has aspired to better exploit its considerable hydropower potential, and thereby become the “battery of Asia”. While its own power energy needs are limited, Laos sees potential in exporting electricity to neighbouring countries. However, a number of factors have cumulatively served to constrain the development of various proposed power plants over the last decade or so, not the least being access to sufficient financing. The largest single proposed hydropower project has been the 1,070MW Nam Theun 2 project, located roughly 250 kilometres east of Vientiane. On the drawing board since the early 1990s, construction of Nam Theun 2 was initially scheduled for 1996, with commissioning slated for 2000. However, extended delays were encountered in putting together a financing package, including attaining partial risk coverage from the World Bank. On its part, the World Bank was concerned about the potential environmental, social and other costs stemming from the 450 square kilometre reservoir that it will create, necessitating the relocation of sixteen villages. In early 2005, however, the World Bank gave the green light to proceed. This is the single largest investment project ever undertaken in Laos, at a cost of around US$1.45 billion — equivalent to 50 per cent of Laos’ total GDP. Power generation should commence in 2010, with the majority of the electricity produced by the build-own-operate-transfer (BOOT) project destined for Thailand. This single project should generate an additional US$200 million in foreign exchange revenues for Laos each year, and that as a direct result of Nam Theun 2 alone. Laos’ exports in 2010 (that is, the year the power plant should enter production) will grow by 27 per cent and real GDP will rise by 11 per cent. Another hydropower project that is likely to proceed in the next few years is the 615MW Nam Ngum 2 project, being developed by a consortium of Thai developers. Most of the debt financing is expected to come from a number of Thai banks, some of which have a permanent presence in Vientiane. But in an unprecedented development, the Export-Import Bank of Thailand has raised the possibility of issuing and guaranteeing a US$78 million bond issue, all the proceeds of which will be given to state-owned Electricite du Laos to help finance its equity stake in this power project. Should the bond issue proceed, then this would be a first for Laos, which currently lacks a domestic

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102

ECONOMIC OUTLOOK bond or equity market of its own and has never issued any sovereign bonds overseas. Another large and high-profile investment project is expected to make its mark on Laos’ economy. It is the Sepon gold and copper mine, located near to Savannakhet. The open pit mine is being operated under a thirty-six-year exploration and production agreement between the Lao government and Oxiana Resources of Australia. The mine is believed to contain 1 million tons of high-grade copper and more than 3.5 million ounces of gold, and has turned Oxiana Resources from being a relatively small independent mining firm into a major international player. The success of the Sepon mine, and recently high prices for minerals and commodities, has sparked renewed interest in Laos by the international mining community. In 2006, Pan Australian Resources announced that it was to embark on a new US$230 million copper and gold mine, with production expected to commence in early 2008. Rox Resources, also of Australia, reported that it had possibly found a commercial deposit of zinc and lead in Laos. Such mining projects will bolster exports, and thereby support Laos’ current account, as well as bolster budget revenues from royalty payments. Laos’ budget revenue shortfall has long been a source of concern. Much of the blame is attributed to: poor administrative capacity by various pertinent state agencies; a generous array of fiscal incentives offered in a bid to stimulate investment activity; and a process of decentralization of public administration to the provincial level, which is fragmenting the collection of taxes. Although one could argue that a degree of economic and administrative decentralization is appropriate, given Laos’ poor communications and transport infrastructure, considerable doubt surrounds the capacity of some provincial authorities to sensibly manage and balance public finances. For those provinces fortunate enough to host one or more of these new mining projects, the test of managing relatively large revenues in a competent and transparent manner will grow. Worryingly, the U.S. State Department recently said that corruption levels in Laos are on the rise.

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10.7 27.0 –8.3

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

Fiscal balance (as % of GDP)

196 10,056

SOURCES: Asian Development Bank and author’s estimates.

Foreign exchange reserves (US$ million) Exchange rate at year-end (kip/US$1)

1,284 8.9

324 470 –146 –2.1

Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Current account balance (% of GDP)

Total debt outstanding (US$ million) Debt service ratio (as % of exports

5.9 10.1 5.7 4.0

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

2002

216 10,056

1,390 6.8

–7.8

15.8 19.2

373 506 –133 –2.6

5.9 11.5 7.5 2.2

2003

225 10,380

1,961 9.4

–4.8

10.6 22.9

455 600 –349 –8.6

6.5 11.4 7.3 3.5

2004

240 10,500

2,212 12.0

–5.3

7.2 8.1

600 942 –342 –8.1

7.2 11.9 7.3 4.1

2005

Laos: Selected Economic Indicators, 2002–2008F

260 10,100

— 14.0

–3.9

9.0 12.0

550 955 –405 –10.0

7.5 12.0 7.0 3.2

2006E

280 10,000

— 14.5

–3.8

9.0 15.0

562 1,019 –457 –10.0

7.5 12.0 7.0 3.2

2007E

300 9,800

— 14.5

–3.5

8.9 15.0

600 1,050 –450 –9.5

7.0 12.0 6.7 3.0

2008F

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104

ECONOMIC OUTLOOK

Malaysia After growing by 5.2 per cent year-on-year in 2005, Malaysia is set to grow by another 5.4 per cent year-on-year in 2006, and an average of 5.6 per cent during 2007–2008. This is below the government’s forecast of 6 per cent GDP growth in 2006. Till the first half of 2006, Malaysia’s average growth was around 5.7 per cent year-on-year, driven mainly by consumption demand and investment activities. Going forward, although we expect exports to slow down towards the end of the year, the pickup in business conditions and additional investment spurred on by the Ninth Malaysian Plan (9MP) should support the growth story. First, let us look at the domestic economy. The government came out with the 9MP in April 2006. Like earlier Plans, the current one continued with the theme of promoting the development of a “knowledge-based economy”, by supporting education and training, technology, and research and development (R&D). As the country is facing strong competition from other Southeast Asian countries, the 9MP tried to improve its competitiveness in high-end activities. One notable initiative is an increase in planned spending on agriculture and related industries and a shift away from infrastructure spending. This is partly a reflection of the government’s concern over rising urban-rural income inequalities and a desire to promote rural development. Besides, this sector has a comparative advantage that could be exploited to boost GDP growth in the next few years. The Plan further describes the

MALAYSIA • Malaysia is set to grow by another 5.4 per cent year-on-year in 2006, and an average of 5.6 per cent during 2007–2008. • The pick-up in business conditions and additional investment spurred on by the 9MP should support the growth story. • The government kept its 2007 budget expansionary. • While growth in manufacturing output is supported by the recovery in external demand for electronics and demand from China, moving towards 2008, there could be bias towards a more services-oriented economy.

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THE ASEAN-10 government’s proposal for its development spending. While the Plan promises to spend about RM200 billion (18 per cent rise) over the next five years, the government remains committed to fiscal consolidation, with the fiscal deficit expected to narrow from 3.8 per cent of GDP in 2005 to 3.4 per cent of GDP in 2010. In terms of fiscal policy, the government kept its 2007 budget expansionary. For the first time in nine years, the corporate tax rate has been reduced from 28 per cent to 27 per cent in 2007 and will be cut further to 26 per cent in 2008. This is expected to stimulate investment. In addition to this cut, under the sector-specific incentives, Islamic banks will be provided with income tax exemption for ten years on foreign currency business. This move is likely to encourage companies to raise more syariah-compliant foreign currency debt and attract Middle Eastern investors. According to officials, Malaysia is now the world’s largest issuer of Islamic bonds and accounts for nearly 70 per cent of global issuance. The development spending has been given a big push as it raised the development spending to GDP ratio from 6.5 per cent in 2006 to 7.5 per cent in 2007. This should have a positive effect on the construction sector which is expected to pick up growth to 3.7 per cent in 2007 from 0.7 per cent in 2006. The government, in order to calm the discontent over rising prices, has also stepped up on transfer payments to the household sector. Lower income civil servants will receive a bonus payment of 1–2 months while almost 542,000 pensioners will be entitled to a one-off special payment. This will raise the contribution of public demand to overall GDP. Based on these, the budget deficit is expected to decline to 3.4 per cent of GDP in 2007 from 3.5 per cent in 2006 (original target 3.8 per cent). Overall, given the expected slowdown in the coming quarters, both the policies in Malaysia are favourable and are well timed. A higher allocation for development outlays in the 2007 budget and implementation of new projects under the 9MP will lead to modestly higher growth in public investment. However, this is not expected to affect fiscal consolidation because higher revenue from oil production and reduced fuel subsidies provide room for the extra spending. Hence

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ECONOMIC OUTLOOK the target of reducing the fiscal deficit to 3.5 per cent of GDP in 2006 and to 3.4 per cent in 2007 looks achievable. On the supply side, manufacturing and services still remain the engines of growth. While the growth in manufacturing output is supported by the recovery in external demand for electronics and demand from China, the services sector, which accounts for about half of the economy, is underpinned by continued buoyant consumption and an increase in business activity. The manufacturing sector is further supported by an 8 per cent rise in planned manufacturing investment approved in 2005 by the Ministry of International Trade and Industry. However, moving towards 2008, there could be bias towards a more services-oriented economy. Hence health, tourism, retailing, ICT, transport, and education are all targeted as important sources of future growth. Construction is expected to post a mild recovery in 2007–2008 with new infrastructure projects coming under the 9MP. However, some moderation is likely to come in consumption expenditure, given the rising interest rates and increase in household debt to 61.5 per cent of GDP. Moreover, consumers are sensitive to inflation, which is forecasted to average around 3.5 to 4 per cent in 2006, the highest rate in seven years. It is expected to taper off in 2007–2008 due to the higher base effect. In early 2006, the government raised the price of gasoline, diesel, and liquefied petroleum gas by about 20 per cent. This move and a 12 per cent hike in electricity rates in June 2006 will maintain an upward pressure on inflation. Bank Negara Malaysia (BNM) raised the Overnight Policy Rate by 25 bps to 3.5 per cent in April 2006. The officials still believe this to be below the “neutral” level and thus supportive of economic activity. Nonetheless, given the inflationary pressure, negative real interest rate and the interest differential with the United States and the rest of Asia, it is highly expected that BNM will raise rate by another 25 bps to 3.75 per cent before exiting the tightening cycle. Looking at the external dynamics, stronger investment and moderate growth in consumer spending will result in a higher growth rate of imports. However, exports may deteriorate given a moderating global economy in the later part of the year. While the U.S. economy is

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3.80

SOURCES: Economic Intelligence Unit and CEIC Database.

Exchange rate at year-end (ringgit/US$)

1.3 3.7

50.7 48.3

Total external debt (% of GDP) Total external debt (US$ billion)

Net FDI (US$ billion) M2 growth (% change)

1.8

93.4 –75.2 18.1

4.4 4.3 6.5 2.8

2002

Inflation/CPI average (% change)

Goods: exports f.o.b. (US$ billion) Goods: imports f.o.b. (US$ million) Trade balance (US$ million)

GDP Growth (real, % change) — Industry sector growth (real, % change) — Services sector growth (real, % change) — Agriculture sector growth (% change)

3.80

1.1 9.6

46.7 48.5

1.0

105.0 –79.3 25.7

5.4 7.3 4.7 5.5

2003

3.80

2.6 19.3

44.1 52.1

1.5

126.6 –99.1 27.5

7.1 7.9 6.9 5.0

2004

3.79

–0.1 11.0

40.0 52.2

3.0

141.0 –108.2 32.8

5.2 4.0 6.5 2.5

2005

Malaysia: Selected Economic Indicators, 2002–2008F

3.66

0.5 15.8

35.8 53.1

4.1

158.0 –128.7 29.3

5.4 4.2 7.2 2.8

2006F

3.62

0.8 9.0

34.0 55.4

3.9

176.9 –149.1 27.8

5.5 3.2 7.7 3.2

2007F

3.60

0.9 6.5

32.7 56.4

2.8

190.8 –165.6 25.3

5.8 3.0 6.8 3.0

2008F

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108

ECONOMIC OUTLOOK expected to slow down to 2.6 per cent in 2007 (3.4 per cent in 2006), Eurozone and Japan are expected to be at 1.7 per cent and 2.3 per cent respectively (vis-à-vis 2.1 per cent and 3.2 per cent respectively in 2006). With the slowdown in its major export markets, China’s growth could also moderate in 2007–2008, lowering Asia’s overall growth at the same time. All this will worsen Malaysia’s trade surplus and hence the current account surplus, though it will remain substantial at around 12 per cent of GDP. A positive current account, thus, would continue to fuel domestic liquidity and boost the growth of money supply, maintaining the expansionary effects in the economy. As for the exchange rate, the ringgit till now is reacting not only to moderating growth but also to the rising political tension. Political tensions also appear to be stemming foreign capital inflows. Going ahead, US$/RM is expected to see continued appreciation. With growth underpinning the strength of the Malaysian ringgit and expected RMB appreciation, US$/RM is expected to head towards 3.55 in the next ten to twelve months. All said, the real GDP growth in Malaysia is estimated to be in the range of 5.5 per cent in 2007 and 5.8 per cent in 2008. Internally, while the 9MP will encourage further investment in agriculture and construction sectors, this will offset the emerging weakness in external demand. However, the fear remains that as Malaysia’s main export markets decelerate, external demand would slacken, and this would also have an impact on domestic activity.

Myanmar As in previous years since 1999/2000, the military regime in Myanmar announced that, in 2005/06, the country’s GDP was growing at a double-digit rate. According to the Minister of National Planning and Economic Development, U Soe Tha, the growth rate of the country’s GDP stood at 12.2 per cent in 2005/061 compared with 12 per cent in 2004/2005. Myanmar’s official average growth rate over the last five years of 12.3 per cent suggests that it is one of the world’s fastest growing economies. However, international financial institutions

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THE ASEAN-10

MYANMAR • Economic growth will be boosted by the export of gas. • High inflation and unpredictable economic policy changes will put a constraint on economic growth. • A moderate economic growth rate is expected for 2007 and 2008. • Without significant economic reforms, growth prospects are likely to be weak.

such as the IMF, ADB, and the London-based Economist Intelligence Unit (EIU) have ruled out the government’s official GDP figure as unrealistic mainly due to deficiencies in data in terms of its reliability, comparability, completeness, and timeliness. As such, their assessments are much lower than such official rates (see accompanying table). All international and regional financial institutions and most academics and Myanmar watchers agree on one point: as in the previous years, there is no strong evidence that the economy is growing at rates indicated officially. While the military government, the State Peace and Development Council (SPDC), insists that the economy is growing at such rates, a more realistic estimate would be that economy is performing at the modest rate of between 4 and 5 per cent in 2005/2006 (see Regional Outlook estimates in the table). There are a few factors supporting this more modest economic performance. First, there was a surge in revenue from exports which is responsible for the growth in GDP. Exports increased from US$2.9 billion in 2004/2005 to US$4.6 billion in 2005/2006 — a 58.6 per cent jump. This expansion of exports was attributed to the growth in the oil and gas industry along with the price hike in gas as demand for energy rose significantly during this period. In fact, the rise in output of state-owned enterprises (SOEs), particularly in the oil and gas industry, contributed significantly to GDP growth.

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6.6 900

Exchange rate — Official (kyat/US$) (average) — Market (kyat/US$) (average) 6.1 950

0.0 24.9 7.3 550 91.2 25.5

2.4 2.2 0.2

4.2 20.8 14.5 11.7

13.8 –2.0 10.1 5.1

2003/ 2004

5.7 1,000

0.1 4.5 7.2 672 158.3 22.2

2.9 2.0 0.9

4.0 21.3 13.8 9.6

12.0 0.2 12.2 4.3

2004/ 2005

5.8d 1,300

0.7 9.0 6.8b 771d 30.6 24.1d

4.6b 1.7b 2.9b

4.5 14.7a 9.0a 3.5b

12.2 5.2 n.a. 3.7

2005/ 2006

6.0e 1,250e

0.7 26.3c 7.2b n.a. n.a. n.a.

5.3b 2.0b 3.1b

3.4 14.7a 9.0a 1.2b

11.3a 2.6 n.a 5.6

2006/ 2007F

6.0e 1,400

0.4 37.5c 7.7b n.a. n.a. n.a.

5.5b 2.4b 3.0b

4.0 14.4a 9.0a 1.4b

11.3a 2.5 n.a n.a

2007/ 2008F

NOTES: Data from International Monetary Fund, Asian Development Bank, and the Economic Intelligence Unit are for calendar year ending December. Data given for 2006/2007F and 2007/2008F are forecast figures. n.a. = Not available. a Government Third Five-Year Plan. b Economist Intelligence Unit, EIU Country Report — Myanmar, May 2006 and September 2006. c IMF, World Development Outlook 2006. d First quarter of the year. e Estimate.

0.0 58.1 6.6 470 86.9 34.6

Current account balance (US$ billion)b Inflation (CPI) average (% change) (CSO) External debt (US$ billion)b Foreign exchange reserves (US$ million)b Foreign direct investment (US$ million) (CSO) M2 growth (% change) (average)b

3.1 2.3 0.8

4.5 35.4 14.8 6.0

Regional Outlook — Industry sector growth (% change) — Services sector growth (% change) — Agriculture sector growth (% change)

Exports (US$ billion) (official) Imports (US$ billion) (official) Trade balance (US$ billion)

12.0 5.3 10.0 5.5

GDP growth (% change) — Official — Economic Intelligence Unit — Asian Development Bank — International Monetary Fund

2002/ 2003

Myanmar: Selected Economic Indicators, 2002–2008F

110 ECONOMIC OUTLOOK

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THE ASEAN-10 After the oil and gas industry, there were also increases in the exports of teak and other wood, mining products, and agricultural products such as pulses, rice, and fish and fishery products. However, the exports of garments and textiles have significantly contracted over the last two years due to the import sanctions imposed by the United States and the ending of the WTO’s Multi-Fibre Agreement (MFA). Apart from the United States, the European Union and Canada also imposed sanctions against Myanmar. Currently, natural gas has become the top export earner, and most of the gas is exported to Thailand through the Yadana and Yetagun offshore gas fields. In addition, according to the EIU (May 2006), Myanmar’s export is expanding into the Chinese and Indian markets for its mining, energy, and agricultural and forest products. Among the importers of Myanmar’s exports, Thailand is the top importer in 2005/2006. According to the Minister for Planning and Economic Development, it is interesting that official and unofficial border trade between Myanmar and the three neighbouring countries of China, India, and Thailand have been rapidly growing since the country formalized its border trade in the early and mid-1990s. However, in 2005/2006, total exports including unofficial border trade has been estimated to be about 6 per cent of GDP only. On the other hand, imports decreased from US$2 billion in 2004/2005 to US$1.7 billion due to the government’s restrictions and weakening of the kyat and the country’s domestic demand. For example, Myanmar’s imports of machinery and transport equipment, fabrics, metals, mineral oil and electrical machinery fell during this period. According to the EIU (May 2006), “the fall in mineral oil imports in value terms through January–May 2005 is surprising, given the high world oil prices during this period. However, high oil prices combined with a weak exchange rate may have forced the junta to cut back on mineral oil imports in volume terms.” As a result, trade surplus grew from US$0.9 billion to US$2.9, and foreign exchange reserves increased from US$671 million to US$771 million between 2004/2005 and 2005/2006. However, at the same time, Myanmar’s foreign exchange reserves in 2005 (end of first quarter) is more than ten times less than that of Vietnam’s US$8602 million. One piece of good news for economic growth: tax revenues have been rising steadily during the same period. This was the first time in the

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ECONOMIC OUTLOOK country’s economic history (2005/2006) that foreign exchange reserves reached its highest level. Also, the current account surplus stood at the equivalent of 12.1 per cent of GDP. At the same time, a relatively small amount of foreign direct investment (FDI) of US$30.6 million flowed in 2005/06 mainly into the oil and gas sector, and the remaining to the manufacturing and industry sectors. During the period 1995–2003, Myanmar’s FDI inflow was US$3,484 million, whereas those of other newer ASEAN members such as Vietnam was US$14,694 million (ASEAN Statistical Pocketbook 2005). This is probably because, in Myanmar, there is a lack of a conducive business environment with the presence of trade restrictions, multiple exchange rates, high inflation, restrictions in repatriations, strong bureaucracy, and sanctions from Western countries. In Myanmar’s total (approved) FDI of US$7.8 billion (cumulated amount as of 30 January, 2005), oil and gas accounted for 34 per cent, manufacturing 20 per cent, real estate 13.7 per cent, and hotel and tourism 13.3 per cent. In fact, FDI inflow of US$30.6 million in 2005/2006 declined significantly from US$158.3 million in 2004/2005, out of which FDI from China (including Hong Kong), Thailand, and Japan accounted for US$126.6 million, US$29.0 million, and US$2.7 million respectively. According to unconfirmed reports, the Chinese government’s and Chinese citizens’ investment are increasingly making their way into Myanmar although such data is not fully reflected in official statements and accounts. Despite the record growth in the external sector and tax revenue, several factors have dragged down the potential growth of the country. First, the agricultural sector, which used to be the traditional engine of growth accounting for about 57 per cent of the country’s GDP, is stagnant due to the lack of inputs such as fertilizers and pesticides, which in turn, has lowered the level of productivity, as the government has restricted the imports of such inputs. At the same time, the export of agricultural produce, particularly rice and rice products, has been declining drastically since 2001/2002. For example, exports of rice declined drastically from 1.04 million metric ton in 1994/95 to 0.18 million metric tons in 2004/2005, partly because of the decrease in

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THE ASEAN-10 per capita production and partly due to the government’s measures to restrict the export of rice in case of “rainy day” emergency needs for domestic consumption. Secondly, the manufacturing sector suffered from electricity/power shortages and lack of inputs in terms of quantity and quality because of a non-access to imports. Moreover, there was a limited demand for manufactured exports such as garments partly due to the import ban from the United States,2 and domestic manufactured goods also cannot compete with neighbouring countries such as Thailand, China, and India in terms of quantity, quality, and price. Third is the inflation factor. The inflation rate (Consumer Price Index or CPI) has been growing at double-digit rates for most of the years since the present military junta took over, and real bank interest rates have been mostly in the negative since inflation rates superseded interest rates. This is because fiscal deficits, which are automatically financed by the Central Bank of Myanmar, contribute to the rapid growth of money supply of around 30 per cent annually. To make matters worse, the CPI has continued to increase sharply as prices of essential commodities has risen due to the government’s measures of raising the salaries of public servants of between 500 per cent and 1,200 per cent in May 2006. In addition, the junta raised the retail price of fuel eightfold in October 2005 in order to ease the burden of its fuel price subsidy programme. At the same time, as the country had to import petroleum and diesel oil for transportation, which pushed inflationary pressures upwards. As a result, gold prices increased from 200,000 kyat (US$154) per tical (0.525 troy oz) to 500,000 kyat (US$345) because of the fear of further accelerating inflation, depreciation of the local currency, weakness of the U.S. dollar, and rising prices of fuel and other essential commodities. This led to the rising of the price of rice to historical highs. To prevent further hikes, authorities in Yangon have strictly warned rice traders against raising prices and have even arrested some traders in August 2006. Another factor that has pushed up inflation is the heavy cost of building the new capital, Naypyidaw, and the shifting of the

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ECONOMIC OUTLOOK administrative base and civil servants to the new capital. No one knows how much money the government is spending for the move to the new capital. In addition, as mentioned earlier, financing the fiscal deficits by borrowing from the central bank has raised the money supply which, in turn, increased the rate of inflation. The table on page 110 reveals that broad money supply (M2) grew rapidly from 22.2 per cent in 2004/2005 year -on-year to 24.1 per cent in 2005/2006. Official consumer price inflation, many believe, never reflects the actual rate. The official inflation rate in 2004/2005 was 4.5 per cent, a steep reduction from 24.9 per cent in 2003/2004. However, academics and businessmen inside and outside the country consider 50 per cent to be a more realistic rate. This applies for 2005/2006, although estimates of UN/ESCAP, IMF, and EIU suggest 40 per cent, 10.1 per cent, and 9.3 per cent respectively. Fourthly, there exist multiple foreign exchange rates such as the official rate, foreign certificate rate, market rate, and custom duty rate. The country’s fixed exchange (or official) rate of US$1 is more or less equivalent to 6 kyat. In 2005/2006, the market rate of US$1 is about 1,300 kyat — more than 200 times that of the official exchange rate. As shown in the table, this resulted in a lack of people’s confidence in their own currency, which, in turn, has lowered the average income, leading to lower levels of consumption, savings, and investment. Finally, the government’s overall economic policy failures have caused weakness in its economic performance. These include Myanmar’s fiscal, monetary, and exchange rate policies. A researcher mentioned that fiscal policy is simply concerned with the raising and spending of funds, monetary policy likewise, with keeping interest rates sufficiently low to minimize financing costs. Neither plays a counter-cyclical or developmental role.3 According to the ADB, “(s)ignificant improvements in economic performance are unlikely in view of structural weaknesses in domestic policies, which include the monetization of fiscal deficits and dual exchange rate”.4 It further stated that the monetization of fiscal deficits contributes to inflation pressures and puts fiscal and monetary stability at risk. In addition, the fiscal constraints limit resources available for poverty reduction and for investments in infrastructure.

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THE ASEAN-10 Overall, the reason for weakness in economic performance is due to the government’s reluctance to continue some of its reform measures and back-tracking. As a result, some critics say that Myanmar’s “Open Door” policy has changed to “Swing Door” policy — a “now you open, now you don’t” approach. Several economic activities are still heavily controlled by the junta after sixteen years of economic liberalization, that is, transforming the command/control economy into the market-oriented system. This is supported by the Economic Freedom Index (EFI) for 2006, released by the Heritage Foundation, that Myanmar is ranked 155 in the index out of 157 countries.5 It fell from a ranking of 145 in 2002. The country’s official average economic growth rate for eight years between 1998/99 and 2005/2006 was 11.4 per cent. If the data is reliable, national income would be doubled and the quality of life would also have been higher. However, according to New York-based firm Mercer, which evaluates the quality of life in 215 world cities, Yangon stood at number 185 in 2006, behind Zimbabwe’s capital Harare (169) and Laos’ Vientiane (170).6 While Myanmar’s official estimate of economic performance in 2005/06 is high with a double-digit growth, its performance in “social sectors” is very weak. Anecdotal evidence suggests that, lately, there exists a prevalence of poverty in the country. If this is true, as the Heritage Foundation states, poverty is a symptom and the lack of economic freedom is the cause. Moreover, the World Health Organization (WHO) ranks Myanmar second from bottom of its list of 191 countries. The Human Development Report (1997) states that Myanmar’s expenditure on military as percentage of combined education and health expenditure was 222 per cent. In the light of the developments mentioned above, it is obvious that the economy is growing at a modest rate of between 3 and 4 per cent in 2005/2006 against the government’s estimate of 12.2 per cent mainly because of a lack of macroeconomic reforms. In short, as in previous years, there is no strong evidence that the country’s economy is growing at the double-digit rate in 2005/2006. For the years 2006/2007 and 2007/2008, the EIU report estimates GDP to grow by 2 and 2.5 per cent respectively, while IMF estimate

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ECONOMIC OUTLOOK for 2006/2007 is 5.6 per cent. However, Myanmar’s forecast for the growth rates for the same period is 11.3 per cent for both years, based on the government’s Third Five-Year Plan. There are also favourable reasons for optimism for the short-term perspective. First, the revenues from export will be expanded due to the surge in exports of gas if all plans go well. China, Thailand, India, Russia, Republic of Korea, and Malaysia have already signed MOUs with the Myanmar government to buy oil and gas and for joint exploration and production, since production and exploration of oil and gas are expected to grow. Revenues from rice exports will increase as the rising prices of rice and pulses are expected to increase further in 2007. Revenue increases will depend on whether Myanmar’s production plan can be materialized. However, economic sanctions imposed by the West and self-imposed trade restrictions will become obstacles to the export trade. On the other hand, due to the expansion of exports in 2006/2007 and 2007/2008, imports will rise but current account surplus will remain strong although it will be partly offset by the large deficit on combined services and income. Although income is expanding in line with the repatriation of profits by foreign investors, it will be offset by incomes from overseas migrant workers and limited foreign aid flowing into the country. Second, foreign investment is expected to flow in from China, Thailand, Republic of Korea, and India into the oil and gas sector. Third, tax revenues will grow as the junta’s effort has become more efficient. A 30 per cent growth in revenues is expected in 2006/2007 and 2007/2008. Finally, production of rice will grow although it would be less than the potential that can be fully achieved in the country. Except for the extraction sector, the rest of the economy is expected to be weak in coming years. Next year, output of the agricultural sector will be affected by floods, the shortage of fertilizers, and a lack of incentives such as little credit, suppression of farm-gate prices and unstable and restricted market policies. The industrial sector will suffer because of a lack of inputs, in terms of quantity as well as quality, due to obstacles as a result of import restrictions owing to the shortage

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THE ASEAN-10 of foreign exchange. The shortage of power supply will also create problems for the manufacturing sector. Consumer goods will also be restricted by high import taxes which in turn would be encouraging more cross-border smugglings. The inflation issue still remains one of the biggest stumbling blocks in Myanmar today. According to the Chairman of the First Private Bank in the country, inflation should be considered as the “People’s Enemy Number One”.7 Although the regime increased the existing interest rate of 10 per cent by another 2 per cent, it still remains in negative territory since the inflation rate is still higher than interest rate. It is expected that average inflation will be around 50 per cent in 2006/2007 owing to a rise in the salaries of public servants, fuel prices, and financing of fiscal deficits by the central bank by printing money, but it may possibly decrease to around 30 per cent in 2007/2008 since the government is trying to reduce it by using policy tools. However, this has rarely been successful. Another economic obstacle is the foreign exchange rates. It is expected that the market exchange rate (kyat per U.S. dollar) will rise to 1,600 kyat in 2006/2007 from 1,400 kyat despite the current account surplus, mainly due to political and economic uncertainties including a loss of public confidence in their own currency owing to sharply increased salaries of an estimated one million civil servants, a move that has in turn fuelled fears of accelerating inflation (EIU, September 2006). The official exchange rate will remain at 6 kyat per U.S. dollar. Lastly, the poor prospects of consumer spending is also creating weak economic growth. This has been attributable to a low average income, despite recent salaries hike and high inflation. In short, unless there is a proper economic management with significant macroeconomic reforms including the monetization of fiscal deficits and a dual exchange rate and political stability, Myanmar’s growth prospects are likely to remain weak. After reflecting the above-mentioned developments, the economic outlook for Myanmar for 2006/2007 and 2007/2008 is estimated to be in the range of 3 per cent to 5 per cent.

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ECONOMIC OUTLOOK NOTES 1. Quoted in Myanmar Times, 20–26 February 2006. Except for GDP growth rate and export and import figures for 2005/2006, no official economic data for 2005 have been released to public so far. 2. See Regional Outlook: Southeast Asia 2006–2007 (Singapore: Institute of Southeast Asian Studies, 2006) p. 117, for a detailed list sanctions imposed on Myanmar. 3. Sean Turnell, “Burma’s Economy 2006: An Overview”, paper presented at the 2006 Myanmar/Burma Update Conference, 17–18 July 2006, Institute of Southeast Asia Studies, Singapore. 4. Asian Development Bank, Asian Development Outlook 2006 — Myanmar. 5. The assessment is based on ten broad measures of economic freedom such as trade policy, fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulations, and informal (or black) market activity. 6. Mercer’s survey takes into account factors including political stability, health services, environmental standards and personal safety, and it is designed to help companies which are relocating staff around the world understand local conditions. 7. Quoted from a Myanmar private business magazine, Dana 14, no. 7, February 2006.

Philippines For a country characterized by political manoeuvring and a dearth of positive developments, the economic and fiscal data seems to be a source of good cheer in 2006, leading some analysts to speculate on the emergence of a firewall separating the economy from the political system. For 2007 and 2008, the prospects of respectable GDP growth trajectory are highly probable. Defying expectations of both domestic and international analysts and in spite of high oil prices, the Philippine economy grew at 5.6 per cent during the first half of 2006, compared with 4.2 per cent a year ago. On the supply side, growth was underpinned by a rebound in the agricultural, manufacturing, and financial sectors. On the demand side, the economy was driven by robust domestic consumption and strong demand for electronics exports, growing at 22.3 and 5.2 per cent respectively. Despite uncertainties in the global environment, the country’s exports grew due to a rise in intra-regional trade, Japan’s

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PHILIPPINES • In 2007 and 2008, the economy is likely to grow between 5 and 5.5 per cent, underpinned by a revival in agriculture, continued growth in manufacturing and services, and resilient personal spending. • The country’s fiscal performance has improved in 2006, pointing to the government’s sustained revenue collection efforts and commitment to reduce spending. The government is expected to reach its goal of reducing the budget deficit to 1.1 per cent of the GDP in 2007. However, the goal of a balanced budget by 2008 is unlikely. • Domestic political stability, the peaceful conduct of the May 2007 elections, and possible revisions of the economic provisions in the Charter will be important factors in improving the country’s economic prospects. • External risks such as high oil prices, the impending rise in U.S. interest rates, and volatility in international financial markets will act as constraints.

economic recovery, and high demand from the United States despite the slowdown in its economy. In addition, export of services has been growing strongly, up by 25.2 per cent, owing to transport services and the healthy growth in the business processing and outsourcing sector. Using another measure, the GNP rose 6.6 per cent, fuelled by an 18.3 per cent increase in the net factor income from abroad. Overseas Filipino workers’ remittances grew 15.4 per cent during the first half of 2006, totalling US$6 billion compared with US$5.2 billion in the same period last year. This has led to enhanced consumer demand, and raised the country’s gross international reserves to an all-time high of US$21 billion. Also, this has contributed to the peso’s strength, which reached a four-year high of 50.06 to the U.S. dollar on 19 September. Given these developments, the economy is likely to grow around 5.5 per cent in 2006 and is forecast to expand at that level in 2007. The other positive development is that the government is on the road to reaching the goal of reducing its fiscal deficit to 125 billion peso

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ECONOMIC OUTLOOK (2.2 per cent of GDP) for 2006, down from 5.3 per cent in 2002. For all the political noise, the government is actually making headway in reducing the deficit through implementing the expanded value added tax (EVAT), improving revenue collection, and freezing spending at 2005 levels — due to an impasse between the House and the Senate. The deficit is expected to further shrink to 1.1 per cent of GDP in 2007, as the benefit of higher revenues due to the EVAT is felt. However, given traditional election spending in the run-up to the May 2007 elections, it is likely that the forecast deficit will be slightly higher. This also means that the goal of having a balanced budget by 2008 is in doubt. Nevertheless, revenue collection is set to improve. The EVAT, considered the centrepiece of the Arroyo administration’s fiscal reform agenda, raised the tax rate from 10 to 12 per cent in February 2006 and expanded its coverage to include previously exempt products like electricity and oil. With the EVAT, the government hopes to raise its revenues to improve the country’s fiscal health and creditworthiness. Already, for the first half of 2006, total tax collection rose 25 per cent — something that has not happened since 1997. Though the Bureau of Internal Revenue (BIR), which accounts for about two-thirds of the government’s total tax collection, did not reach its collection target, it nonetheless registered a 22.4 per cent year-on-year increase in revenue. Currently, the effective tax collection rate stands at 62.5 per cent of the potential total, which means there is considerable room for improvement. Thus, the government has to focus on improving tax revenue collection in 2007. The Bangko Sentral ng Pilipinas (BSP, Central Bank) has held the overnight borrowing rate at 7.5 per cent and 9.75 per cent since October 2005, despite increases in U.S. rates and the inflationary effects of higher oil prices and the rise in the EVAT rate. The BSP decided to stay put with its rates as inflation started to ease in July and August 2006 to a two-year low of 6.3 per cent due to a stronger peso (which kept down the prices of imported goods) and an improvement in agricultural output (which helped stabilize food prices). Inflation for 2007 is projected to hover between 4 and 5 per cent, though a more realistic range is

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THE ASEAN-10 between 6 and 7 per cent. The BSP is likely to maintain its present rates in order to prop up economic growth. Yet, pressures to increase its rates by at least 25 basis points could escalate during the forecast period as the U.S. Federal Reserve hikes its rates. The peso has been volatile in the past five years, but has been gaining strength in 2006 due to improvements in the fiscal outlook, record levels of overseas Filipino worker (OFW) remittances, and improving export performance, which propped up the currency. For the forecast period, the peso is expected to stabilize between 50 and 52 to the U.S. dollar. The strengthening of the peso is generating billions of savings in debt servicing for the government. In a sensitivity analysis, the Department of Finance said the National Government could save 4.369 billion peso in 2006 for every unit of peso appreciation and another 5.137 billion peso for every percentage-point decline in interest rates. For the first half of 2006, OFW remittances rose 15.4 per cent, totalling US$6 billion compared with US$5.2 billion a year ago. This has led the BSP to raise its forecast level of remittance growth to 11 per cent in 2006, to reach US$12 billion, from a high of US$10.7 billion in 2005. This projection is likely to be reached, if not surpassed in 2007, given the continued deployment of highly skilled workers as well as the provision of enhanced banking services. The steady growth of remittances has been fuelling consumption growth, impacting positively in the current account as well as the level of gross international reserves. The government’s outstanding public sector debt (OPSD) is also improving, falling to US$98 billion (89 per cent of the GDP) at the end of March 2006, from 93 per cent of GDP in 2004. The OPSD includes liabilities of the national government, local government units, and state-owned firms. On its own, the national government debt totals 71 per cent of GDP, down from 78.5 per cent in 2004. While the current OPSD is still high compared with other Southeast Asian countries, it is the first time since the 1997 financial crisis that public sector debt fell below 100 per cent of GDP. The improvement in debt levels is a result of reduced government borrowing, appreciation of the peso, and economic growth.

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For 2007 and 2008, the government, which spends about a third of its annual budget on debt servicing, expects to further lower its debt levels. A key factor in achieving this is the much-awaited privatization of the state power utility National Power Corp, which is one of the biggest drains on the government’s finances. Finally, with the stronger peso, the BSP proposes that the government shifts its borrowing to domestic sources to lessen its dependence on external sources, thus lowering the cost of borrowing. This also means that, for the first time, the government can consider lowering its debt stock and not merely pay the interest on its debts.

Growth Projection for 2007–2008 For 2007–2008, targeted growth is in the range of 5 to 5.5 per cent, to be driven by: • • • • • •

a rebound in the agricultural sector; the services sector; growth in mining investments; higher government spending in infrastructure; an expected rebound in global demand for electronics; and continued strength in OFW remittances.

While the economy has grown respectably in 2006 and can be expected to follow the same path in 2007 and 2008, a lot more needs to be done. First of all, the economy is currently driven by consumption, not by increasing levels of production. For the latter to occur, investments in public infrastructure and social services are necessary. However, the government’s capacity to do so is constrained by its fiscal position. The challenge is thus to increase investment in strategic areas without sacrificing its fiscal targets. Second, without doing something to control the population growth rate, the economy’s modest rate of expansion will not translate into higher per capita incomes or make a dent on poverty levels. In the past years, the Philippine economy has remained resilient amidst external and domestic threats. The main challenge is to sustain and accelerate growth to a level where it can really make an impact on the

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34.4 –34.0 0.4 4.4 5.7 3.0 10.4 –5.3 59.9 78.0 114 16.4 51.6

Exports f.o.b. (US$ billion) Imports f.o.b. (US$ billion) Trade balance (US$ billion) Current account balance (US$ billion) Current account balance (% of GDP)

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

Fiscal balance (as % of GDP)

Total external debt (US$ billion) Total external debt (% of GDP) Debt/export ratio (%)

Foreign exchange reserves (US$ billion) inc gold Exchange rate (peso/US$1) (average)

17.1 54.2

62.5 78.5 118.0

–4.6

3.5 3.6

35.3 –40.6 –5.3 1.4 1.7

79.6 4.9 4.0 6.1 3.8

2003

16.2 56.0

60.6 69.8 104

–3.8

6.0 9.9

38.7 –44.5 –5.8 2.2 2.6

86.7 6.2 4.7 7.6 5.3

2004

18.5 55.1

60.7 61.7 98

–2.7

7.6 6.4

40.3 –47.7 –7.4 2.5 2.5

98.4 6.1 4.9 6.4 1.8

2005

17.8 52.3

62.0 54.1 90

–1.6

6.6 12.4

45.3 –50.8 –5.5 4.6 4.0

114.5 5.3 5.0 6.3 3.0

2006E

19.8 52.1

65 51.6 89

–1.1

5.2 9.9

48.6 –53.7 –5.1 4.7 3.7

126.1 5.0 5.0 5.6 3.4

2007F

SOURCES: National Economic Development Authority, Economist Intelligence Unit, September 2006 country forecast.

76.8 4.4 3.9 5.1 4.0

GDP (US$ billion) at current prices GDP growth (% change) — Industry sector growth (% change) — Services sector growth (% change) — Agriculture sector growth (% change)

2002

Philippines: Selected Economic Indicators, 2002–2008F

22.5 52.5

65.6 47.7 87

–0.5

5.7 10.5

49.9 –55.9 –6.0 4 3.1

137.4 5.2 5.5 5.6 3.5

2008F

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ECONOMIC OUTLOOK standards of living of the majority of Filipinos. According to the ADB, the economy needs to grow consistently between 7 and 8 per cent before growth can significantly reduce poverty. Given the high rate of population growth along with respectable — but not rapid — economic expansion this does not bode well for the Philippines. External risks such as high oil prices, an impending rise in U.S. interest rates, and volatility in international financial markets will temper the economy’s growth. Domestic political factors such as the conduct of the May 2007 elections, the possible shift to a parliamentary system from the current presidential system, as well as progress in the peace talks with the Moro Islamic Liberation Front could have an impact on the overall investment climate. The Philippines is making progress at improving its fiscal position through new tax measures and better collection efforts. Despite continued political noise, the Philippines’ economic fundamentals are robust, fiscal conditions are getting better, and the economy is growing respectably. These developments are likely to progress in the same manner, if not better, in 2007 and 2008.

Singapore After enjoying several years of vibrant growth in 2004 to 2006, Singapore is likely to see some deceleration in economic activity as it labours against decelerating global demand for its exports. Still, its domestic fundamentals are in far better shape than they have been for a decade, providing the economy with greater protection against the potential shocks in the global economic environment. Singapore is one of the most open economies in the world, with a trade to GDP ratio approaching 300 per cent. Consequently, the retardation in global economic activity and downside risks that forecasters such as the IMF point to will certainly detract from Singapore’s growth prospects. The OECD lead indicators have been decelerating, supporting the view that growth in developed economies’ demand for Singapore’s exports is set to weaken.

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SINGAPORE • The economy is likely to decelerate closer to trend rates of growth after the strong surge in 2006. • The key risk to the outlook is external demand given the uncertainties surrounding OECD economic prospects. • Still, Singapore’s economy is likely to be much more resilient to external shocks than it has been for a while — domestic engines of growth are strong again, and there are some positive global drivers as well.

A crucial determinant of Singapore’s prospects will be the pattern of a U.S. slowdown. Our baseline scenario sees the U.S. economy slowing as a result of a correction in its housing market which hits consumer spending and residential construction but which still allows business spending on information technology to grow. It also sees economic growth in Japan, Europe, and the emerging market countries slowing moderately compared with the U.S. slowdown. In such a scenario, the impact on Singapore’s exports will probably be similar to the experience in 1990–91 when a similar U.S. slowdown unfolded. Then, Singapore’s key export, electronics-related components, decelerated but still grew. With the growing importance of China and India to Singapore, the performance of these economies will be key to Singapore’s prospects. As far as lead indicators can tell, the prospects in both Asian giants are likely to be for continued high growth, albeit not as high as in 2006. However, while there are these cyclical risks described above, there are also some favourable developments in the global scene which will help Singapore. First, Japan’s recovery is positive for Singapore. Japanese banks are already stepping up their activities in the offshore U.S. dollar market in Singapore and are likely to do even more through Singapore in future. Japanese corporations are likely to seek more business opportunities in the region now that they have

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–1.09

Fiscal balance (as % of GDP)

82,189 1.74

2.9 1.1 3.3 n.a.

2003

95,949 1.70

n.a. n.a. n.a.

–1.58

0.51 8.1

159,958 136,265 23,694 24.1

SOURCES: CEIC Database and Forecasts by Centennial Group.

Foreign exchange reserves (US$ million) Exchange rate at year-end (S$/US$1)

n.a. n.a. n.a.

–0.39 –0.3

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

Total debt outstanding (US$ million) Long-term debt (US$ million) Debt service ratio (as % of exports)

125,177 116,441 8,736 13.4

4.0 4.0 4.0 n.a.

Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Current account balance (% of GDP)

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

2002

112,525 1.63

n.a. n.a. n.a.

–1.14

1.66 6.2

198,627 173,577 25,050 24.5

8.7 10.5 7.6 n.a.

2004

116,333 1.66

n.a. n.a. n.a.

–0.34

0.47 6.2

229,627 200,029 29,599 28.5

6.4 7.7 6.0 n.a.

2005

Singapore: Selected Economic Indicators, 2002–2008F

135,000 1.52

n.a. n.a. n.a.

0.04

1.22 10.9

270,960 236,034 34,926 32.3

7.6 13.3 5.3 n.a.

2006E

145,000 1.48

n.a. n.a. n.a.

0.16

1.01 11.2

308,894 267,898 40,996 28.7

4.8 4.5 4.9 n.a.

2007F

160,000 1.42

n.a. n.a. n.a.

0.56

1.11 7.6

360,480 305,404 55,076 30.8

5.5 6.8 5.1 n.a.

2008F

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127

THE ASEAN-10 overcome their structural problems and are again focusing on growth. This means more activity in regional headquarters based in Singapore. Second, Singapore is a substantial beneficiary of changed rules in Europe regarding banking secrecy — this is resulting in a significant shift of funds into private banking operations based in Singapore. Third, Singapore does well out of the surge in oil exploration activity resulting from rising oil prices — its transport engineering cluster which is a globally competitive fabricator of specialized oil rigs and related structures is booming as a result. Singapore’s vulnerability to a possible U.S. economic downturn hinges very much also on its hinterland, in particular Malaysia, Indonesia, and Thailand. We see encouraging signs that these economies are putting some of the misfortunes they suffered in 2005– 2006 behind them. Thailand and Indonesia are finally getting over the devastation wrought by the December 2004 tsunami, with tourist arrivals into Phuket, for instance, recovering strongly. Indonesia has also had to deal with the mini currency crisis in August–September 2005 which brought a large interest rate, currency, and inflation shock in its wake. Thailand and the Philippines are also overcoming some serious political uncertainties which held back consumer and business spending. We are also likely to see some demand-stimulating developments in Singapore’s hinterland. Malaysia is embarking on its Ninth Malaysia Plan. This will help reverse several years of fiscal austerity. Indonesia, Thailand, and the Philippines also have major plans for infrastructure spending that will help boost their economies. Within Singapore, the underlying economy has improved in several respects. •

First, it is now much more diversified than before. For example, where before manufacturing was skewed to electronics production, which at its peak accounted for close to half of manufacturing production, that ratio is now down to around 35 per cent — as a result of the explosive growth of the pharmaceutical sector and the boom in the transport engineering sector. The services sector has also enjoyed an unleashing of new energies with many new

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ECONOMIC OUTLOOK

128

•

•

higher-value activities rising — creative industries, consulting, wealth management, and exportable educational and medical services. Second, the recovery in the property market after almost a decade in the doldrums is important. It is helping households extricate themselves from conditions of negative equity and generally creating a wealth effect. The better prospects in the sector have led to a recovery in construction as well — a sector which has been declining for about a decade is finally turning around. Third, the labour market has also strengthened considerably, with unemployment now down to 2.8 per cent by mid-2006. Job creation has reached a record level in the first half of 2006, with 81,500 new jobs created. The improved job security and higher wage growth that this strengthened labour market implies will help support domestic demand.

Singapore is one of the most open economies in the world. An unexpectedly poor performance of the U.S. economy will hurt Singapore badly as will a worse than expected downturn in electronics demand, since Singapore is still highly geared towards electronics despite the diversification of the economy. As a regional transportation hub, it will also be hurt badly should highly contagious diseases such as avian flu reach a pandemic stage. These risks are real but we would also argue that Singapore’s resilience in the face of such risks has improved markedly in recent years because of the improvements to the underlying economy described above.

Thailand The Thai economy continues to grow moderately in 2007–2008, supported by government spending. The interim government expects to use public investment as a key engine to fuel the country’s growth during the transitional period. The Bank of Thailand has also tended to relax monetary policy through its key policy rates if oil prices soften. To maintain the country’s growth, the Cabinet approved a budget deficit for FY 2007. The budget is set at 1.57 trillion baht, 11.8 per

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THE ASEAN-10

THAILAND • The Thai economy is forecast to grow by 4.5 to 4.7 per cent in 2007 and 2008, assuming fiscal stimulus and falling oil prices. • The short-term outlook hinges largely on the political situation, budget disbursement, oil prices, and the global economy. • Thailand’s economic fundamentals, however, remains strong with declining inflation rate, manageable public debt levels and ample international reserves.

cent above that of the FY 2006 budget. With an assumption of 4.8 per cent GDP growth, a deficit of 146 billion baht is equivalent 1.72 per cent of GDP. It is the first time in three years that the country is recording a budget deficit. Out of the total budget, 72.2 per cent will involve regular government expenditure. About 24.3 per cent is allocated for public investment and 3.5 per cent for debt repayment. The government expects to implement the budget in January 2007. Earlier, the Thaksin government had planned to run a balanced budget for FY 2007 with spending of 1.48 trillion baht. One positive impact of the 19 September coup is a higher budget spending and an earlier budget disbursement. According to the interim government, the FY 2007 budget aims to develop rural areas, citizens and communities, raise efficient use of energy, restructure for a balanced growth and to improve public administration. If Thailand manages to hold general elections at late 2007 as originally planned, the budget for FY 2008 (October 2007–September 2008) will be delayed. The spending plans of FY 2007 may then be continued until a new Cabinet is appointed. According to Prime Minister Surayud, his government’s economic policies must be placed in line with the sufficiency economy philosophy. As well, government spending should conform to the Tenth National Economic and Social Development Plan (2007–2011) which places emphasis on a sufficient economy. According to Finance

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42,148 39.6

51,783 40,879 16.0

0.6

1.8 4.9

78,105 74,346 3,759 5.6

7.0 9.4 4.2 11.4

2003

49,832 39.1

51,312 39,138 8.5

0.3

2.7 5.4

94,941 93,481 1,460 4.2

6.2 8.0 6.9 –4.8

2004

SOURCES: Bank of Thailand; Economist Intelligence Unit; author’s estimates.

38,924 43.2

International reserves (US$ million) Exchange rate at year-end (baht/US$1)

–2.2

Fiscal balance (as % of GDP) 59,459 47,540 19.6

0.7 2.6

Headline inflation (%) M2 money supply growth (% change)

Total debt outstanding (US$ million) Long-term debt (US$ million) Debt service ration (as % of exports)

66,092 63,353 2,739 5.5

5.3 6.9 4.5 0.7

Exports (US$ million) Imports (US$ million) Trade balance (US$ million) Current account balance (% of GDP)

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

2002

52,066 41.0

52,040 36,026 10.8

0.2

4.5 8.2

109,211 117,788 –8,578 –2.1

4.5 5.7 4.6 –2.4

2005

Thailand: Selected Economic Indicators, 2002–2008F

61,000 36.0

58,826 40,988 7.9

0.0

4.7 5.7

126,903 128,036 –1,133 –0.8

4.5 5.0 4.3 2.9

2006E

59,000 37.5

59,767 43,630 6.3

–2.0

2.0 4.6

138,324 138,919 –595 –1.9

4.5 5.3 4.2 1.5

2007F

60,000 37.6

61,560 48,017 5.9

–2.4

2.3 6.5

153,540 152,811 729 –1.7

4.7 5.5 4.3 2.3

2008F

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131

THE ASEAN-10 Minister Pridiyathorn, sufficiency economy is interpreted as a concept which focuses on moderation as well as equitable development. The government plans to submit the final draft of the Tenth National Economic and Social Development Plan to the Cabinet for approval in late 2006. The Tenth Plan aims at creating a sustainable society and development. It seems that continuity in the Thaksin’s populist policies has no political momentum. Privatization of state enterprises and bilateral trade talks are likely to remain. The Bank of Thailand’s monetary policy and operations are unlikely to change significantly after a new central bank governor was appointed in October 2006. The inflation targeting policy and supervision of financial institutions are expected to be maintained. With declining inflationary pressure, the central bank is inclined to relax its monetary policy by cutting its key policy rate. Real deposit interest rates are expected to remain positive to boost savings and slow down the household debt burden. Thailand’s economic outlook for 2007–2008 hinges largely on the political situation, oil prices, and the state of the global economy. Private consumption is likely to slow in pace, owing to accumulating household debt and expected moderation in GDP growth. Household debt has been on a rise since 2002. The average debt per household rose from 82,485 baht in 2002 to 118,434 baht in 2006. With high lending rates, household debt burden tends to increase. To sustain private consumption, value added tax is expected to remain at its current level of 7 per cent. Investor confidence has deteriorated since the 2006 political turmoil. Although the interim government was appointed at an early stage, concerns over political and policy uncertainty remain. It is still not clear how much the government would be able to push forward with its economic policies during the transitional period. There are doubts whether the policies would be continued under the newly elected government administration. More importantly, political uncertainty will remain if Thailand returns to an unstable coalition government. It can then be expected that investors will continue to take a waitand-see stance before making any big investment decisions. Together

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132

ECONOMIC OUTLOOK with sluggish domestic consumption, private investment is likely to remain weak in 2007–2008. Export growth is forecast to slow down in 2007–2008 in line with the world economy, particularly the United States’. To push Thailand’s export growth to a target of 15 to 18 per cent in 2007, the Ministry of Commerce plans to promote the automobile industry and strengthen the competitiveness of its small- and medium-sized enterprises. The import demand for capital goods remains strong due to the continuing infrastructure projects. Oil import values are expected to decline, owing to falling global oil prices. Import demand on luxury goods may decrease in response to the government’s campaign for import reduction. Thailand’s import growth is therefore expected to slow down in 2007–2008. The Tourism Authority of Thailand projects foreign tourist arrivals of 15 million with total revenue of 547.5 billion baht in 2007. The government expects that the new Bangkok international airport, the Suvarnabhumi Airport, will boost the country’s tourism industry, and tourism revenue could rise to 1 trillion baht over the next five years. Foreign direct investment is likely to drop in 2007–2008 mainly due to the persisting political and policy uncertainty and a slowdown in key investing partners of Thailand, particularly Japan, the United States, and the European Union. Capital outflows may increase sharply if foreign shareholders decide to divest their shares and the restructuring of shareholders occur in the coming years. In all, Thailand’s GDP growth is expected to stay between 4.5 and 4.7 per cent in 2007 and 2008, about equal to the pace in 2006. The country’s economic fundamental remains strong with ebbing inflation rate, manageable public debt level and ample international reserves. Acceleration of budget disbursement and clear direction of economic policies will help the country boost its economic growth in the near term. To achieve a sustainable development, the country needs to reduce its oil dependency, increase skilled manpower, and improve education system, and importantly to adopt a new Constitution to hold future leaders more accountable.

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THAILAND’S FINANCIAL AND CORPORATE SECTOR REFORMS AND CONSEQUENCES By Sakulrat Montreevat

A

fter the drastic depreciation of the baht in mid-1997, many financial companies and corporate firms plunged into heavy debt. In addition, economic meltdown and tight liquidity gave rise to downsizing and bankruptcies in the corporate sector. As a result, non-performing loans (NPLs) of banks and finance companies increased rapidly. Weakness and instability have become the image of Thai financial institutions. Restructuring in the financial and corporate sectors, therefore, were required in order to restore banking system soundness and investor confidence. In response to the crisis, key restructuring measures included the closure of insolvent institutions, mergers and privatization of weak institutions, strengthening of loan classification and capital adequacy requirement, use of public funds to recapitalize institutions, relaxation of restrictions on foreign ownership, asset disposal, corporate debt restructuring, and improvements in the corporate governance structure. A number of government agencies were established with specific responsibilities for the financial and corporate restructuring. The Financial Institutions Development Fund (FIDF) was in charge of managing liquidity and solvency support to financial institutions which have received government intervention. The Financial Sector Restructuring Agency (FRA) was established to decide on the viability of banks and finance companies and to oversee the liquidation process. The Corporate Debt Restructuring Advisory Committee (CDRAC) was set up to facilitate and expedite corporate debt restructuring negotiations. The Thai Asset Management Corporation (TAMC) was established

•

Thailand has made significant progress in financial and corporate sector reforms since the 1997 financial crisis.

•

A mixture of family, government, and foreign ownership has become the image of the Thai financial sector. The entry of foreign bank have improved operational efficiency, banking products and corporate governance in the Thai banking sector.

•

Non-performing loans in the financial sector and debt-to-equity ratio of listed companies declined substantially in recent years mainly due to asset management companies and corporate debt restructuring.

•

The Thai banking sector, however, has to cope with new challenges from intensified competition through the Financial Sector Master Plan, tough tracks under the Basel II framework, competition from specialized financial institutions, and the capital market.

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THAILAND’S FINANCIAL AND CORPORATE SECTOR REFORMS AND CONSEQUENCES (continued)

to manage impaired assets transferred from state-owned and private financial institutions as well as asset management companies (AMCs). By end-2000, one bank and fifty-nine finance companies were closed down. Three banks and twelve finance companies were merged. Four small- and medium-sized banks were nationalized. Foreign banks acquired four troubled Thai banks. As a result, shares of family ownership in the Thai banks declined considerably. A mixture of family, government, and foreign ownership has become the image of the Thai banking sector. There is evidence of the benefits of the entry of foreign bank by way of improvements in operational efficiency, introduction and application of new technologies, banking products, marketing skills and management, and good corporate governance structures. With challenges from global forces, further structural reform has been made under the Financial Sector Master Plan since January 2004. The Plan is a mediumterm policy framework, aimed at enhancing efficiency and stability in the financial sector, broadening accessibility of financial services to all market segments, and ensuring consumer protection. During the first phase, the implementations focused on consolidating and strengthening existing financial institutions and enhancing competition. According to the Plan, there are only two types of banking licences — commercial and retail banks. Foreign banks are able to apply for two types of licences: full branches and subsidiaries. Both full branches as well as subsidiaries of foreign banks have the scope of business as commercial banks. But a full foreign bank branch is not allowed to open any branches while a subsidiary of foreign bank is allowed to open one in Bangkok and three branches elsewhere. A succeeding implementation phase will allow qualified existing full branches to apply for an upgrade to subsidiaries. With the International Banking Facilities (IBFs) being phased out, Bangkok IBFs have to upgrade to full branch or subsidiary status. The Plan has allowed consolidation within the financial sector, as evidenced by the number of institutions declining from eighty-three at end-2003 to fortynine at mid-2006. Despite the consolidation process, the number of banks in the system increased due to the granting of six new banking licences from 2004 to the first quarter of 2006, thus increasing the competitive environment. Moreover, acquisition of foreign banks in Thai commercial banks is still allowed. It is expected that the number of financial institutions would still to be less than forty at end-2006 as finance companies and credit fonciers are being phased out. To broaden accessibility of financial services, financial institutions are encouraged to increase its services to low-income households. Towards this end, the Bank for Agriculture and Agriculture Co-operatives (BAAC) is to be

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transformed into a rural bank. It is believed that its established branch network would greatly facilitate accessibility of financial services in rural areas. Since early 1997, financial institutions have been pressured to adhere to international banking standards. Banks and finance companies have been required to meet the minimum capital adequacy ratios (CARs) stipulated by the Baselbased Bank for International Settlements (BIS). In post-crisis period, all financial institutions exceed the requirements. To achieve a standard upgrade, the Bank of Thailand (BOT) has prepared for the full implementation of the new Basel Capital Accord (Basel II) issued by the Basel Committee of Banking Supervision (BCBS) by end-2008. The Basel II framework is based on three pillars: minimum capital requirement, supervisory review, and market discipline. The BOT has provided a number of prudential guidelines to strengthen banks’ risk management, loan portfolio management, credit scoring, risk model validation, and credit and market risk stress testing. To improve the corporate governance structure, the BOT has issued guidelines of good practices for directors of financial institutions and notifications to spell out the requirements of an external auditor’s qualifications, approval criteria, and the scope of audit work. Meanwhile, the Securities and Exchange Commission (SEC) and the Stock Exchange of Thailand (SET) have issued principles and best practices of corporate governance of listed companies, including financial and non-financial companies. According to the World Bank’s assessment on Thailand in 2005, the country has made a significant progress in the overall corporate governance framework. However, legal enforcement remains a major challenge in improving actual practices. The SEC and the SET plan to take further steps along the World Bank’s recommendations. The relevant agencies have stepped forward with fine-tuned plans to improve the country’s corporate governance towards international standards. But more are in the works to put the principles into actual practice. The SET has established the Corporate Governance Center to advise listed companies on developing their corporate governance system. Nevertheless, good governance is not an easy task for corporate firms to achieve. Improving corporate governance takes time and incurs costs in implementation. The improvement comes with costs but pays only in the long term. On corporate debt restructuring, completed debt restructuring through CDRAC out-of-court process represented 85 per cent of the cumulative debt restructuring by financial institutions as of September 2005. This is because court-supervised debt restructuring is a lengthy process. Foreclosure is relatively less used since unpaid interest has to be accrued for five years. Such legal procedure, however, can also be lengthy and costly.

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135

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ECONOMIC OUTLOOK

THAILAND’S FINANCIAL AND CORPORATE SECTOR REFORMS AND CONSEQUENCES (continued)

NPLs in the financial sector continued to decline as a result of corporate debt restructuring and asset management companies. NPLs as a share of total loans fell to 8.2 per cent in August 2006 from the peak 47.7 per cent in May 1999. To clear up their balance sheet, banks plan to sell their remaining NPLs to asset management companies, mainly Bangkok Commercial Asset Management, in late 2006 and 2007. According to the BOT, NPLs of the financial sector would be reduced to the target of 2 per cent by end-2007. All banks recorded profits in 2004–2006 due to improvements in operational efficiency, asset quality, and declining NPLs. Corporate loans grew moderately in line with the country’s growth and partly due to caution in bank lending and alternatives of corporate financing. There is a sign of growing confidence in the Thai banking sector. Rating agencies have upgraded their foreign currency and/or debt ratings for Thai banks over the past few years. In the corporate sector, listed firms have continued to improve in their financial health. Corporate profitability was recovering from the sharp declines during the crisis. Their debt-to-equity ratio declined substantially in recent years as a result of corporate debt restructuring, paying down of debt, and improving profitability. The lower debtto-equity ratio implies less vulnerability of firms to volatile economic conditions that could drive them into insolvency and inability to service their debts. Since the crisis, corporate financing has depended mainly on domestic credit and capital markets. Small firms rely on credits from commercial banks and specialized financial institutions (SFIs) such as the Small and Medium Enterprise Development Bank of Thailand (SME Bank) and the Government Savings Bank (GSB). The SET has become the main source of funds for large and medium firms, particularly financial institutions, property developers, and telecommunications and energy companies. Bond issuing is an attractive financing option for large firms when interest rates are at low levels. To accelerate the development in the capital market, a draft of Capital Market Master Plan II (2006-10) has been proposed to the Finance Ministry as a follow-up to the Capital Market Plan I (2002–2005). The proposed Plan II aims to make the Thai capital market an efficient channel for fund-raising as well as a good saving choice, helping to increase the overall market capitalization, and improving price stability. In sum, the restructuring and reforms in financial and corporate sectors have continued and financial institutions and corporate firms have regained their strength. The banking sector, however, has to cope with new challenges from intensified competition through the Financial Sector Master Plan, tough tracks under the Basel II, and competitions from SFIs and capital market. It can be expected that the number of financial institutes would continue to decline, and the viable ones would be in a strong financial position and clear strategic positioning.

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THE ASEAN-10

Vietnam Vietnam can be broadly characterized as a developing country undergoing gradual economic transition, away from a centrally planned to a more market-oriented economy. The first seeds of this economic transition process began in 1979, and were concretized under the banner of doi moi (renovation) at the Sixth Party Congress in 1986. The basic thrust of Vietnam’s economic reform and business liberalization process has been fairly consistent since then, if sometimes a little slow. In return, the country has been rewarded with robust GDP growth, averaging around 7.5 per cent per annum over the last decade. Lacking a domestic private sector of its own before the mid-1990s, and burdened by an inefficient and unwieldy state-owned enterprise (SOE) sector, Vietnam’s policy-makers initially focused considerable attention on attracting foreign capital and expertise, and foreign direct investment (FDI) has continued to be a key component of Vietnam’s economic and industrial development programme. Although not a major source of employment (around 1 million), FDI projects account for a substantial proportion of export earnings, and not insubstantial corporate tax revenues. Indeed, the most recent five-year socio-economic development plan, issued in March 2006, which serves as a blueprint for policy-making until 2010, still envisages FDI as “the driving force for capital reinforcement, technological renovation and management capacity improvement”.

VIETNAM • Vietnam’s sustained economic growth trajectory remains strong, at around 8 per cent per annum, and there are no apparent signs of a slowdown in 2007–2008. • With a new leadership line-up now in place, economic reform and business liberalization efforts will be pushed further in 2007–2008, particularly with regard to state enterprise sector reform. • Foreign investor appetite in Vietnam has risen sharply of late, due to a number of factors, including Hanoi’s recent hosting of the APEC summit, and the country’s impending accession to the WTO.

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138

ECONOMIC OUTLOOK The past five years or so has seen Vietnam also developing a more robust domestic private sector, principally through regulatory reform and the provision of a more conducive enabling environment for entrepreneurs. With the SOE sector being gradually “right-sized” and consolidated, it is the private sector that must absorb most of the estimated 1.5 million young people that are entering the country’s labour force each year. Comfortably recording double-digit growth each year, the domestic private sector is burgeoning in Vietnam, albeit from a low base point. Most private firms are still very small, and it will take time for a corporate community of large-scale non-state firms to become truly apparent. Nonetheless, the private sector is becoming an important engine of economic growth and foreign exchange for Vietnam, in some business sectors at least. The passing of an Enterprise Law in 2000 was widely perceived as an important milestone in Vietnam’s economic reform process, as it made it much easier for private firms to formally register their businesses and commence operations on a firm legal footing. In July 2006, a revised Enterprise Law came into effect, which builds on the sentiment contained in the 2000 law, and takes it a few steps further, notably on issues like corporate governance. The new law was issued in tandem with a new Investment Law, intended to replace both the Foreign Investment Law and the Domestic Investment Promotion Law. In effect, the two new laws seek to bring about a more level playing field for business, whether state-owned or private, and whether local or foreign-invested. Foreign investment projects have got two years to convert into corporate entities under the new Enterprise Law, and SOEs have four years to do the same. This levelling of the playing field is part of Vietnam’s bid to meet the conditions necessary for WTO accession. But looking to the next five years of economic reform, a critical measure of success is going to be the degree to which the government finally seeks to grapple with the vexing issue of SOE reform, including partial divestment by the State. Until now, SOE reform has been conducted in a rather half-hearted manner, and attempts to partially privatize SOEs (known as “equitization” in Vietnam) have been somewhat

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THE ASEAN-10 less than inspiring. Most SOEs to have equitized thus far have tended to be relatively small entities, with the government retaining a substantial (often majority) equity stake, and most shares sold to employees and other related parties. But this is about to change, it seems, with the government gearing up for a much more ambitious equitization drive, to include much larger state corporations, and the participation of outside (including foreign) investors, and strategic investors. In the next few years we can expect to see some of the big names of corporate Vietnam being partially divested by the State. This accelerated equtization programme should be a fillip to the financial services sector in Vietnam, and the stock market in particular. Although still very small by even regional standards, the stock market passed an important psychological milestone in 2006 when the fiftieth company was listed on the Ho Chi Minh City bourse. (A further fifteen or so firms are listed on a smaller over-the-counter stock exchange in Hanoi.) Also in 2006, the National Assembly passed Vietnam’s first Securities Law, which came into effect at the beginning of January 2007. With most private firms in Vietnam still too small to even consider a public share offering, let alone a stock market listing, the development of the local bourse is very much dependent on the SOE equitization programme as a source of potential listee companies. This anticipated acceleration of the equitization campaign, and resulting increase in stock market capitalization, prompted considerable interest from leading investment banks and institutional investors in 2006. In the next few years we should see foreign portfolio investors — and not just foreign direct investors — seeking to gain more exposure to Vietnam, as the country graduates from being a rather esoteric emerging market that only specialist boutique investors had previously monitored. Tellingly perhaps, Standard & Poor’s recently announced that Vietnam was being included in its new S&P Frontier Composite Index — a sign that the country is becoming more mainstream, as an investment proposition. At the time of writing, Vietnam seemed poised to gain WTO entry in just a few months, having agreed on basic terms with all of the organization’s members on a bilateral basis, and made considerable

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ECONOMIC OUTLOOK changes to the legislative and regulatory regime governing business practices in the country. Indeed, one might argue that the pursuit of WTO accession has been the principal driving force behind the economic reform agenda in Vietnam over recent years, in tandem with various commitments made to the international donor community. When Vietnam does accede to the WTO, its garment manufacturers in particular will benefit from the Agreement on Textiles and Clothing (ATC), introduced in January 2005, which sees an end to all quota restrictions (but not tariffs) for textile and garments produced by WTO members. Other Vietnamese exporters should also benefit from better access to overseas markets, although it remains to be seen the extent to which export-oriented companies have adequately prepared to take advantage of this new opportunity. Conversely, it is also unclear to what extent many small Vietnamese companies have prepared themselves for greater competition in the domestic market, following WTO entry. A consolidation trend may occur in some business sectors, as local firms seek to generate economies and synergies of scale, when faced with more vigorous market penetration by foreign firms. But one undoubted winner of WTO entry will be Vietnamese consumers, as market liberalization triggers greater competition in the retail sector. As Vietnam is discovering, the economic reform agenda can sometimes feel like an endurance test, posing new — and sometimes seemingly more difficult — challenges with each passing year. As the “low hanging fruit” of initial economic reforms are successfully addressed, it is necessary then to pursue economic reforms that are less easily grasped. In the case of SOE reform, for example, renewed efforts here will need to tackle vested interests that are reluctant to surrender the kind of privileged comfort zone they have inhabited for some time. To overcome such resistance requires not only political will at the policy level, but also the institutional capacity necessary to execute the policy effectively at the implementation level, despite resistance from powerful lobbies. Reform efforts will, however, gain extra strength from a spate of recent corruption scandals in the SOE sector that have cumulatively served to underline the need for change.

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–0.3 39.0 –3.0 12.3 2.9 10.6 3.4 15,084

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

Fiscal balance (as % of GDP)

Total debt outstanding (US$ billion) Private sector external debt (US$ billion) Debt service (as % of exports)

Foreign exchange reserves (US$ billion) Exchange rate at year-end (dong/US$1)

3.7 15,403

12.2 2.5 8.3

–3.8

4.1 25.5

16.7 17.6 –0.9 –1.2

6.4 8.9 6.0 3.0

2002

SOURCES: Asian Development Bank, HSBC, and author’s estimates.

15.0 14.4 0.6 2.1

5.8 9.7 4.4 2.3

Exports (US$ billion) Imports (US$ billion) Trade balance (US$ billion) Current account balance (% of GDP)

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

2001

5.6 15,646

13.3 2.7 8.0

–4.6

3.1 17.6

20.0 22.5 –2.5 –4.7

7.1 9.6 6.8 3.1

2003

6.3 15,777

15.5 3.1 6.7

–3.8

7.8 24.9

24.6 27.0 –2.5 –4.3

7.5 10.2 7.4 2.8

2004

7.7 15,875

16.9 2.9 6.1

–4.9

8.3 30.4

30.0 32.0 –2.0 –2.6

7.6 10.1 7.6 2.6

2005

Vietnam: Selected Economic Indicators, 2001–2008F

9.5 16,077

19.3 3.3 6.0

–5.0

7.5 26.7

34.8 36.5 –1.7 –1.8

7.8 10.8 7.5 2.3

2006E

11.6 16,237

21.6 3.6 5.7

–4.8

6.6 26.0

37.6 40.1 –2.5 –2.8

8.0 10.5 7.7 2.7

2007F

13.0 16,400

23.0 4.0 5.8

–4.4

6.1 24.0

40.0 43.0 –3.0 –2.2

7.8 10.3 7.5 2.7

2008F

THE ASEAN-10 141

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142

ECONOMIC OUTLOOK At the time of writing, Vietnam’s long-term sovereign rating by Standard & Poor’s was BB, BB– by Fitch, and Ba3 by Moody’s. All three ratings agencies gave Vietnam a stable outlook. Vietnam’s 2006– 2010 socio-economic development plan calls for an average of 7.5 to 8 per cent GDP growth in the coming years, largely driven by 9.5 to 10.2 per cent growth industry and construction, and 7.7 to 8.2 per cent growth in the services sector. Export turnover is to increase by an average 16 per cent annually. These targets are attainable, as long as economic reform efforts are maintained and Vietnam continues to better integrate its domestic economy with that of the international business community.

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SELECTED SOURCES OF DATA Asian Development Outlook (Asian Development Bank) http://www.adb.org/Documents/Books/ADO/default.asp Wall Street Journal (Asia section) http://www.wsj.com/public/asia Bangkok Post (Thailand) http://www.bangkokpost.net Borneo Bulletin (Brunei) http://www.brunei-online.com/bb/ Business Times (Singapore) http://business-times.asia1.com.sg/ Business Day (Thailand) http://www.biz-day.com/ CEIC Database http://www.ceicdata.com Economist Intelligence Unit, Country Reports http://www.eiu.com/ Jakarta Post (Indonesia) http://www.thejakartapost.com Manila Bulletin (Philippines) http://www.mb.com.ph/ Nation (Thailand) http://www.nationmultimedia.com New Light of Myanmar (Myanmar) http://www.myanmardigest.com/eng_md/eindex.html New Straits Times (Malaysia) http://www.nst.com.my/ Newsbreak Magazine (Philippines) http://newsbreak.com.ph/newsbreak/home.asp

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SELECTED SOURCES OF DATA Nhan Dan (Vietnam) http://www.nhandan.com.vn/ Philippine Daily Enquirer (Philippines) http://www.inq7.net/index_network.htm Philippine Star (Philippines) http://www.philstar.com/ Phnom Penh Post (Cambodia) http://www.phnompenhpost.com/ Star (Malaysia) http://thestar.com.my/ Straits Times (Singapore) http://straitstimes.asia1.com.sg/ Tempo (Indonesia) http://www.tempointeractive.com/ Thanh Nien (Vietnam) English on-line edition http://www.thanhniennews.com/ The Economist http://www.economist.com The Edge (Malaysia) http://www.theedgedaily.com Utusan Malaysia (Malaysia) http://www.utusan.com.my/ Vientiane Times (Laos) http://www.vientianetimes.com/ VietnamNet e-newspaper http://english.vietnamnet.vn/

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THE CONTRIBUTORS

Political Outlook Terence Chong is a Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Singapore. Sudhir Devare is Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the section “India’s Strategic Engagement with Southeast Asia: 2007–2008”. Azhar Ghani is the Straits Times’ Indonesia Bureau Chief. He contributed the country section on Indonesia. Nirmal Ghosh is the Straits Times’ Thailand Correspondent. He contributed the country section on Thailand. David W.H. Koh is a Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Vietnam. A. Mani is Dean of International Cooperation and Research at Ritsumeikan Asia Pacific University, Japan, and an Associate Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Brunei Darussalam. Verghese Mathews is a Visiting Research Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Cambodia. Ooi Kee Beng is a Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Malaysia. Rodolfo C. Severino is a Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the overview section “The Asian Security Environment” and the country section on the Philippines. Sheng Lijun is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the section “China’s Relations with Southeast Asia”.

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THE CONTRIBUTORS Daljit Singh is a Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the section “The United States and Southeast Asia”. Martin Stuart-Fox is Professor Emeritus at the University of Queensland. He contributed the country section on Laos. Robert H. Taylor is former Professor of Politics at the School of Oriental and African Studies, London. He is now an independent scholar. He contributed the country section on Myanmar.

Economic Outlook Aris Ananta is a Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Indonesia. Manu Bhaskaran is Partner/Head, Economic Research, Centennial Group Holdings. He contributed the overview section “Regional Economic Trends” and the country section on Singapore. Sanchita Basu Das is a Research Associate at the Institute of Southeast Asian Studies. She contributed, the section “The Crude Oil Move: Implication for Asia?” and the country section on Malaysia. Nick J. Freeman is an Associate Senior Fellow of the Institute of Southeast Asian Studies. He contributed the country sections on Laos and Vietnam. Lee Poh Onn is a Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Brunei Darussalam. Joergen Oerstroem Moeller is a Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the section “Asian Currencies and Globalization”. Sakulrat Montreevat is a Fellow at the Institute of Southeast Asian Studies. She contributed the country section on Thailand and the section “Thailand’s Financial and Corporate Sector Reforms and Consequences”. Pradumna B. Rana is Senior Advisor, Office of Regional Economic Integration, Asian Development Bank. He contributed the section “East Asian Regionalism”.

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THE CONTRIBUTORS Lorraine Carlos Salazar is a Visiting Research Fellow at the Institute of Southeast Asian Studies and Assistant Professor, University of the Philippines. She contributed the country section on the Philippines. Mya Than is an Associate Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country sections on Cambodia and Myanmar.

THE EDITORS Asad-ul Iqbal Latif is a Visiting Research Fellow at the Institute of Southeast Asian Studies. Lee Poh Onn is a Fellow at the Institute of Southeast Asian Studies.

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