Regional Outlook: Southeast Asia 2008-2009 9789812307682

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Reproduced from Regional Outlook: Southeast Asia 2008-2009, edited by Deepak Nair and Lee Poh Onn (Singapore: Institute of Southeast Asian Studies, 2008). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

REGIONAL OUTLOOK

Southeast Asia 2008–2009

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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 2008–2009 Editorial Committee Chairperson K. Kesavapany Editors Deepak Nair Lee Poh Onn Production Editor Rahilah Yusuf

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Southeast Asia 2008–2009

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First published in Singapore in 2008 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.

© 2008 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: 978-981-230-767-5 (soft cover) ISBN: 981-981-230-768-2 (PDF) 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 Deepak Nair and Lee Poh Onn

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POLITICAL OUTLOOK ■

Southeast Asian Security: An Overview

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ASEAN at Forty: Perception and Reality

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China’s Relations with Southeast Asia

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India’s Growing Profile in Southeast Asia

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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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Regional Economic Integration and the ASEAN Charter

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Energy and Environment

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Evolving Regional Financial Architecture in East Asia

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The GMS Economic Corridors

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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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Selected Sources of Data

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The Contributors

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PREFACE

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he first Regional Outlook had its inception in 1992, offering a concise analysis of the political and economic trends in Southeast Asia and the wider region. Since then, an annual succession of this publication has tracked many political and economic developments and their implications on the region. This year is no different, with emerging political and economic trends that warrant scrutiny. Written in an accessible and scholarly style, this publication is suited for a modern audience of business and research analysts, 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. The year 2007 was a historic one for the Association of Southeast Asian Nations (ASEAN) in that the ASEAN Charter was signed by all member countries at the ASEAN Summit in Singapore in November. When ratified by all countries, this document will garner positive political, economic, and social benefits for the region. An ASEAN Economic Community will be formed by 2015, effectively unifying ASEAN into a single market. The implications in the years to come, though not during the period 2008–2009, will be significant. In socio-political terms, the charter is a landmark as it sets out rules for good governance, democracy, and the rule of law in ASEAN countries. The establishment of a human rights body is a development that could not have been anticipated even a few years ago, and illustrates the maturity with which ASEAN is confronting the challenges of our times. On the economic front and closer to the horizon of 2008 and 2009, growth will be modest at best for the Southeast Asian region because of the economic slowdown of the U.S. economy.

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PREFACE High oil prices remain worrisome, and this will be a negative factor for the growth prospects of ASEAN economies. The U.S. subprime mortgage market disrupted global financial markets in 2007, and though perceived by observers to be short-lived, has affected not only U.S. growth prospects in 2008, but is also likely to impact Southeast Asian economies. The economic outlook for ASEAN in 2008 and 2009 will, therefore, depend on how governments manage their domestic economic affairs given the policy instruments at their disposal to cope with the slowdown in the United States, Japan, and EU economies. The notable political trends that will be closely observed in 2008– 2009 include the outcome of the presidential elections in the United States and the policy and ideational shifts that may arise from either a Democratic or Republican administration. International pressure will remain strong on Myanmar. Nudging the military government into action and reform will be a major challenge for ASEAN in the coming year. The situation in Thailand will also be closely watched as the country holds its first national elections since the September 2006 coup. At the time of writing, it appears that the future government will be a coalition of different parties, and it is hoped that this will bring a measure of stability to the country. Regional Outlook 2008–2009 was written by a team from within and also outside the Institute. A few new writers have given fresh perspectives to forecasting developments in the region. I wish to thank the editors as well as all the writers for their hard work and their contributions. K. Kesavapany Director Institute of Southeast Asian Studies 7 December 2007

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INTRODUCTION

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arl Popper’s famous metaphors of “clouds” and “clocks” are often invoked to describe the nature of the social world, and the degree to which it lends itself to that much-celebrated goal of prediction. While some conceive the social world as clouds, implying contingency and unpredictability, others have attributed to it the properties of a clock, indicating the possibility of absolute regularity and predictability. Even though predicting for the social world has been a problematic exercise, it has nevertheless been possible to tease out trends, identify emerging phenomena, and make qualified analysis that consider both contingency and predictability. Regional Outlook, published since 1992, is an attempt at formulating nuanced assessments of complex political–economic processes that, in this case, are at work in Southeast Asia. The politics of this region is not only a product of domestic political processes but also of the international politics of its external environment, specifically that of East Asia. In the period ahead, a few external dynamics would be more noticeable than others. The presidential election in the United States is one among them. While a new Democratic administration in 2008 may seem a strong possibility, it is still far from being a foregone conclusion. Either way, the trenchant neo-conservatism that has clouded sections of the U.S. foreign policy elites under the Bush administration will come under increasing strain. While this may impact on U.S. policy towards Iraq and Iran, it is unlikely to have any radical impact on U.S. policy in East Asia, where America’s alliances will continue to strengthen with Japan, South Korea, Australia, and some Southeast Asian countries. Strategic concerns regarding China will also persist, and a new administration is likely to continue with a formula of engagement, pragmatism, caution, and the occasional rhetoric on rights and democracy.

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INTRODUCTION An increasingly important external dynamic that will occupy the attention of Southeast Asia in the coming years is the rising strategic presence of China and India in this region. Both powers have stepped up commercial and strategic initiatives. While China’s economic clout remains dominant, India’s “Look East” policy has led it to promote its naval power along with robust cultural “soft power” initiatives. This dynamic is explored in detail in the two thematic chapters in this year’s Regional Outlook. These trends, coupled with the promising turn of events on the Korean Peninsula and relative harmony in the South China Sea, indicate that the external security environment in East Asia is likely to remain stable. However, heightened polarization between the Democratic Progressive Party (DPP) and the Kuomintang in the buildup to presidential elections in Taiwan, and the latent possibility of changes in political identity, will test China’s sensitivities in the year it hosts the Olympics. Considering the profound bearing that the U.S.–Taiwan relationship has on Asia’s perception of America’s commitment to its alliances in the region, and the unpredictable pulse of Taiwanese democracy, the period around March 2008 is potentially one of pressure and strain in the international politics of East Asia. Besides the international, there is also a regional level of analysis that has to be considered in assessing Southeast Asia. The Association of Southeast Asian Nations (ASEAN) took the significant step of signing a charter in its fortieth year. The charter indubitably marks the organization’s transition to a rules-based legal entity from one that had hitherto operated primarily through consensus. Apart from setting out rules for economic integration, it also valorizes the cause of democracy, good governance, and human rights. While the setting up of a human rights body has been unprecedented, its terms of reference remain unsettled. Criticisms of ASEAN persist, but the new charter at the least indicates a greater sense of purpose among ASEAN elites over the future they seek to realize for the region. While the 14th ASEAN Summit in Singapore ended on a high note, there will be some major challenges over the coming year: ratification of the charter in individual countries, the pressing need to engender an ASEAN identity rooted

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in popular, grass-root discourses, and, of course, the formulation of a more effective policy towards Myanmar, especially since ASEAN’s international image and credibility had been tested by the persisting Myanmar problem. The threat posed by two of the principal regional security concerns — terrorism and maritime piracy — was mitigated in the course of 2007. The instances of piracy and armed robbery at sea in the Malacca Straits — of crucial import to commerce in Southeast Asia — fell from previous levels recorded in 2006, thanks in large measure to coordinated naval patrols by Indonesia, Singapore, and Malaysia over the past few years. Terrorism, especially the millenarian strand of Jemaah Islamiyah (JI), was constrained by police and law enforcement action, especially in Indonesia, in 2007. Continued crime enforcement, assisted by the emergent ideological and moral rifts within JI cadres, will further weaken the millenarian terrorist threat in the coming year, though the unpredictable nature of such violence precludes any definite forecasting. Separatism and insurgencies within states will pose, however, a greater challenge to security in the coming year. Violence in the three southern provinces of Thailand was persistent through 2007, and with the insurgency well entrenched, the security situation there is likely to remain unstable in 2008. Armed conflict will also continue in the southern Philippines in 2008, with the Armed Forces of the Philippines coming down especially hard on the Abu Sayyaf group and the New People’s Army. The year 2007 witnessed the dramatic securitization of climate change in international political and environmental discourses, and Southeast Asia was no exception to this trend. Linking resource scarcity, induced by changing climate patterns, with conflicts is causing rising concern, and climate change is set to grow as a major policy agenda. Indeed, at the 2007 ASEAN Summit, leaders issued a joint statement pledging support for the outcomes arising from the United Nations Framework Convention on Climate Change (UNFCCC), which will provide a blueprint that could replace the Kyoto Protocol that expires in 2012. Domestic politics, expectedly, is set to be tumultuous in some states of Southeast Asia and stable in others. The Regional Outlook in 2007

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INTRODUCTION forecasted the strengthening of the Cambodian People’s Party (CPP) and Prime Minister Hun Sen, and this was demonstrated in their success in the commune elections in April 2007. The CPP is set to further consolidate its power in the country with parliamentary elections in July 2008, which is very likely to result in a CPP government headed by Hun Sen. Preparations for national elections will gather pace in Indonesia and Malaysia, with the former holding parliamentary and presidential elections, and the latter parliamentary elections, in 2009. In Indonesia, political manoeuvring began in 2007, with PDI-Perjuangan seeking to draw Golkar into a future coalition, and with talk of new candidates for presidential elections, in particular, the current Vice-President Jusuf Kalla. Meanwhile, anti-establishment pressures have been on the rise in Malaysia, fuelled by the perception of rising corruption, weak leadership, racial polarization, among others. While some countries in the region, such as Brunei, Singapore, Laos, and Vietnam, are unlikely to experience anything dramatic, the situation is substantially different for other nations in Southeast Asia. Myanmar was at the centre of international attention with large anti-government protests that began in August. These were violently suppressed in September 2007. The junta has weathered the domestic unrest and international outcry, and will pursue national reconciliation through its seven-step “road map for democracy”, which has entered its third stage with a drafting commission beginning to write a constitution that will only further secure military power in the country. Elections that will mark Thailand’s hopeful transition from military to civilian rule will take place on 23 December 2007. While Thaksin loyalists, regrouped as the People’s Power Party, are likely to do well in the elections, they may not obtain a clear majority. Thailand is thus likely to see a reversion to the weak coalition governments of the past. This weakness will also stem from the new constitution that favours the ruling elite. With different factions of the powerful Bangkok elite — comprising royalists, the military, the bureaucracy, political parties and civil society — continuing to exercise influence, the political situation in the country may remain unpredictable in 2008–2009. Current trends suggest a complex outlook for the Philippines. Elections in May 2007 saw the Arroyo coalition obtaining a majority

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INTRODUCTION

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in the Lower House, thus making impeachment efforts against the administration untenable in the near future. That, however, does not preclude strong political challenges for President Arroyo, with her government facing a crisis of legitimacy and credibility, mainly on account of long-standing corruption charges and allegations of cheating in the 2004 elections. The seriousness of the latter is evidenced from the failed coup by rebel soldiers in Manila on 29 November 2007, making this the fourth attempted coup during Arroyo’s presidency since 2001. All these trends and much more are fleshed out in the ten country chapters that appear in the political section of this volume. Economic growth is likely to continue in the region, but with less robustness compared to what was enjoyed in 2007. Higher oil prices in 2007 are expected to persist throughout 2008, and will certainly put a dampener on the growth prospects of all ASEAN economies, with the exception of Brunei Darussalam’s economy, which is predominantly dependent on oil exports. The weakening U.S. currency is also a worrying factor that will affect growth prospects in Southeast Asian economies. A lower U.S. currency would also mean that the United States could not continue to rely on foreign currencies to finance its current account deficits. Other challenges in this region include the potential spread of bird flu which has not been much on the radar in recent months, but which potentially could be damaging on economies if an epidemic emerges in 2008 or 2009 and is not contained and managed. A slowdown in the U.S. economy in 2008 will affect the growth trajectory of Southeast Asian economies during the forecast period. The impending slowdown will be experienced because of persistently higher oil prices, and a general weakening of the confidence in the U.S. dollar. The impact of this slowdown will, however, get buffered by demand from the robust Chinese and Indian economies and also to a smaller extent by the Japanese and EU economies, which are expected to grow but at slower rates in 2008 and 2009. Although growth rates will be slower in the Asian economies, they will nevertheless continue to be in positive territory. The potential bursting of the bubble in the U.S. housing market which was discussed in last year’s Regional Outlook publication has

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INTRODUCTION manifested itself in the form of the sub-prime mortgage crisis this year which has had ramifications not only in the United States but in stock markets throughout the world. The sub-prime mortgage crisis, if not properly managed by the United States government, would have widespread ramifications on domestic U.S. consumer demand, one of the chief drivers of its economy. Weaker consumer demand could result in recessionary forces that would not bode well for ASEAN economies as well as other major economies dependent on the U.S. market. The real economy appears more resilient, but equity and financial markets in Southeast Asia will likely remain fuzzy if sub-prime woes continue in 2008, this ultimately impinging on the real economy. Exports will continue to play an important role for Southeast Asia. Current account surpluses are expected to remain in the positive domain, though it is likely to be lower in 2008 and 2009 due to more rapid imports of raw materials, and intermediate and capital goods into ASEAN economies. Inflation is expected to remain steady but is likely to edge up if governments in the region do not use the appropriate macroeconomic policies to manage price pressures, especially in view of the continuing high oil prices. On a positive note, the signing of the ASEAN Charter and the road map towards realizing the ASEAN economic community and a single ASEAN market by 2015 is promising and significant, though its benefits are not expected to immediately filter into the growth prospects during the forecast period. The prospect of the various FTAs to be signed between ASEAN and China, India, Japan, Korea, and various other nations looks promising, though once again, this is not likely to have an impact on regional economies during the forecast period. In the two years ahead, growth will remain positive for Brunei Darussalam with rates expected to be around the 2 per cent mark. Higher oil prices bode well for the Bruneian economy; however, the economic robustness of Brunei’s trading partners will be affected and this will in turn affect Brunei’s economy. Growth is Cambodia has been nothing short of spectacular with robust growth expected to continue in 2008 and 2009. Changes in the foreign direct investment policies of the country have improved

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its business climate but corruption, high electricity costs, and a poor infrastructure remain issues that will affect the growth prospects. Positive developments will likely continue to fuel Indonesia’s economic growth, with business and consumer confidence improving. Indonesia’s financial economy has shown resilience to the U.S. sub-prime mortgage crisis up to the third quarter of 2007. This is a promising development compared to the crisis that occurred in 1997. Indonesia has also had a strong current account surplus, because of remittances from Indonesian workers overseas and strong exports. Growth in 2008 and 2009 is expected to be better than that of 2006. Growth prospects in 2008 and 2009 in the Lao PDR is likely to continue to be driven by gold and copper mining (Sepond and Phoubia mining projects) and construction of large infrastructural projects like the Nam Theun 2 hydropower project. In addition, prudent fiscal and monetary policies, and SOE reforms will be factors providing for the positive growth forecast. Malaysia’s growth is likely to be underpinned by robust domestic demand, a strong services sector, and continued strong exports (although this will be less robust especially for electrical and electronics products). In addition, the development of the Iskandar Development Region will bode well. However, the downsides that will dampen growth are the U.S. sub-prime mortgage crisis and the record level high price of oil. Modest economic growth is expected to continue in Myanmar of around 4 to 5 per cent, with economic and political instability of the crackdown in 2007 affecting the economic outlook during the forecast period. The tourism sector especially has been badly affected by this recent crackdown with a severe downturn in hotel occupancy rates as well as the halting of flights from the national airline, the Myanmar Airways International. The downturn in the tourism sector is expected to continue into 2008. Overall, the negative climate is expected to pervade in 2008 and will impact negatively on growth. Growth forecasts remain positive for the Philippines, with macroeconomic conditions expected to remain favourable towards inducing growth. Real GDP growth in 2008 and 2009 will however be lower than that of 2007, with private consumption and electronic exports expected to remain the main drivers of the economy. The lack of private investments remains a sore point that would potentially be

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INTRODUCTION one of the factors preventing the economy from growing above the forecasted rates. Lower inflation and interest rates, however, are a plus for the economy. The Singapore economy has successfully diversified into several growth engines — pharmaceuticals, biomedical, financial services, construction, and tourism, sectors less sensitive to the U.S. business cycle, which is expected to be on a downturn in 2008. Nevertheless, high oil prices and their impact on manufacturing costs remain worrisome. Supply bottlenecks were also faced in certain sectors of the Singapore economy in 2007 resulting in increasing pressures on inflation, business costs, labour market costs, and high rental and property prices. This accelerating inflation rate, higher business and labour costs, and rising rentals and prices in property markets, which figured prominently in 2007, are factors that will affect growth in 2008 and 2009. Growth rates for the Thai economy in 2008 and 2009 will be largely determined by the formation of a stable coalition government, the government’s ability to jumpstart investments, and the global economic environment. Thailand’s economic growth has been largely export-driven and will continue to be so. Investments, both private and public, are expected to stage a meaningful recovery in 2008 and 2009, bringing healthy prospects for Thailand’s growth. Vietnam’s growth trajectory remains strong at over 8 per cent per annum in 2008 and 2009. Foreign investor interest have continued in the country. However, inflation and a stubborn trade deficit are the only worrying factors. The thematic boxes in the Economic Outlook section take a serious look at regional economic integration and the ASEAN Charter, energy and environment, the evolving regional financial architecture in East Asia, and the economic corridors in the Greater Mekong Subregion. Such developments potentially have implications when considering the medium and longer-term trends in regional development and growth. Deepak Nair Lee Poh Onn Editors 7 December 2007

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POLITICAL OUTLOOK

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Reproduced from Regional Outlook: Southeast Asia 2008-2009, edited by Deepak Nair and Lee Poh Onn (Singapore: Institute of Southeast Asian Studies, 2008). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

SOUTHEAST ASIAN SECURITY: AN OVERVIEW By Daljit Singh

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outheast Asian security is shaped both by its external Asian environment and by dynamics within Southeast Asia. This essay deals briefly with each dimension in turn. The region’s external security environment is becoming more complex with the rise of new powers like China and India, a more assertive Russia, and their geo-political aspirations and military modernizations. Hence, even with the increasing economic inter-dependence and the cooperative security endeavours in the various ASEAN (Association of Southeast Asian Nations) related forums, there is a degree of underlying fluidity and uncertainty about the longer term alignments of the major powers and their attitude towards Southeast Asia. However, looking ahead just the next few years, the positive trends of the recent past can be expected to continue. First, the U.S. military presence and certain key alliances that underpin East/Southeast Asian security will remain in place. The strengthening of America’s alliances with Japan and Australia in recent years and the growing trilateral cooperation among them suggest that the main maritime powers led by the United States will work more closely to balance a rising China, even as they, and others, engage and cooperate with China. Also noteworthy is the deepening strategic cooperation between India and the United States, but its future depends significantly on whether the U.S.-India nuclear deal gets through. Second, bilateral relations between the United States and Japan on one side and China on the other can be expected to remain generally stable. China will be preoccupied with its internal development and the United States with the Middle East and Afghanistan, while being dependent on Chinese cooperation on a number of regional and

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POLITICAL OUTLOOK international issues. The trend of improvement in Sino-Japanese relations set in motion by former Prime Minister Shinzo Abe is likely to be continued by Premier Fukuda. Sino-Indian relations have seen expanded dialogue and economic links but their future will depend in part upon how far U.S.-India strategic and defence cooperation advances. Third, two of the most dangerous potential flashpoints, the Korean nuclear crisis and the India-Pakistan confrontation, seem to have been defused, even if not permanently settled. Territorial disputes between China and Japan and between China and some Southeast Asian countries are unlikely to erupt into conflict in the near future because of improved political relations between the parties concerned. Some uncertainty remains over Taiwan but, more likely than not, the United States will be able to restrain President Chen Shui-bian if he is tempted to challenge the red lines that China has drawn. Among the most important negative security trends in Southeast Asia’s broader environment are the growth of Al-Qaeda and Taliban sanctuaries in the tribal regions of Pakistan, the increased instability in nuclear-armed Pakistan itself, and the deterioration of the security situation in Afghanistan. What happens in Iraq is also a matter of concern to many countries because of its implications for terrorism and for the stability of the Persian Gulf region which is a vital source of energy supplies. If Islamic radicalism and terrorism are seen to be winning propositions in the Middle East and Afghanistan, their jihadi brethren elsewhere, including in Southeast Asia, will be heartened and emboldened. However, for the near future, the main sources of Southeast Asia’s insecurities will continue to lie not in its external environment but within Southeast Asia itself. They are overwhelmingly of the nontraditional type of security problems and include violence associated with terrorism and ethnic, religious or separatist conflict. They often have their origin in or are exacerbated by legacies of colonialism, incomplete nation building, political and socio-economic marginalization of minorities, and poor governance. No early end is in sight to the conflicts in the southern Philippines. An uneasy ceasefire with the Moro Islamic Liberation Front (MILF) has barely held. Permanent peace still remains illusory despite some

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recent signs of progress in negotiations between the rebels and the government. The MILF leadership wants a homeland for the Muslims with significantly more autonomy than that accorded in 1996 to the Moro National Liberation Front (MNLF), something that the Manila government will find politically impossible to accede to, while anything less will be difficult for the MILF to sell to the entire spectrum of its factions and supporters. The vicious little war between the Abu Sayyaf Group (ASG) and U.S.-supported Armed Forces of the Philippines (AFP) will not end any time soon, despite some significant tactical successes scored by the AFP in the past few years. Also involved in this conflict are some hardline fugitives from the Jemaah Islamiyah (JI) in Indonesia and some of the more radical elements of the MILF. Meanwhile the longest running communist insurgency in Southeast Asia by the Maoist New People’s Army will also continue, feeding itself upon socio-economic grievances and poor governance. There is also no prospect of an early end to the ugly insurgency and deep insecurity in the southern, predominantly Muslim, provinces of Thailand. Violence escalated sharply in 2006 and 2007 and a further deterioration is possible, carrying with it the risk of adverse effects on Thailand’s relations with Malaysia if Thai politicians revive accusations that Malaysia’s Kelantan state is used as a refuge by the insurgents and if political groups in Malaysia take issue with Thai counter-insurgency methods. Also, a protracted conflict bears the risk of the JI or some other international jihadi group becoming actively involved in the insurgency. In Indonesia, the threat of terrorism from JI and its splinter groups will remain, even though the Jakarta authorities have made significant progress in containing the threat through arrests or elimination of key leaders and uncovering of arms caches. Certain hardline JI leaders, some presently in south Philippines, continue to pose a threat as they may return to Indonesia to stage attacks. The Poso region of central Sulawesi, where the local JI has sought to exploit Christian-Muslim tensions, will remain a sensitive area. Apart from JI terrorism, Papuan separatism will probably continue to simmer, though the 2006 security agreement between Indonesia and Australia may prevent it from gaining

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POLITICAL OUTLOOK major traction. The agreement commits each party to refrain from supporting activities or groups that threaten the stability or territorial integrity of the other party. Smoke pollution from fires in Indonesia returned in 2006, affecting the health and quality of life of many in neighbouring countries. It could recur in 2008–2009 unless Indonesia ratifies the 2002 ASEAN Agreement on Transboundary Haze Pollution and takes effective action to implement it. Indonesia also suffered a number of earthquakes in 2007, and experts have been predicting more, which, if they occur, would be further blows to the human security of the country’s people. Southeast Asia is no stranger to political instability and poor governance. Thailand is yet to recover its stability after the military coup of 19 September 2006, as the new leaders struggle to establish a legitimate political and constitutional order. Despite the appearance of progress towards normalcy, the divisions in society resulting from the ouster of populist former Prime Minister Thaksin Shinawatra, who still wields considerable influence in the country, and the apparently failing health of the King, who has been the source of ultimate strength and stability in the country, suggest some troubling undercurrents. In the Philippines, the legitimacy of President Gloria Macapagal’s Arroyo’s presidency remains contested amidst widespread perception that she stole the election of 2004. In Malaysia, issues of racial divisions, crime and corruption are looming larger even as the political leadership looks more feeble. In Indonesia, democracy has come before the proper institutions and the rule of law necessary to sustain it over the longer haul. They need to be built up systematically. Myanmar, ruled by a paranoid junta with little understanding of how to bring about economic progress, is a special case. Always a subject of concern, the events of 2007 have placed it high on the regional security agenda as a potential time bomb. Another uprising, if accompanied by massive repression, could lead to chaos, outflow of refugees and possible intervention by neighbouring powers anxious to protect their interests. In a broader sense, notwithstanding the litany of security problems, the seemingly intractable issue of Myanmar, and the longer term challenges posed by climate change, there are positive features of the region that

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SOUTHEAST ASIAN SECURITY: AN OVERVIEW

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should not to be ignored: the more resilient economies, the buoyancy created by the high growth rates of China and India (both from economic spillovers and positive example), and the courtship of the region by the major powers. More specifically, Southeast Asia has seen two significant security successes in recent years that will probably not be reversed. First, the settlement of the protracted Aceh conflict which required the good offices of outside third parties but could not have been achieved without the enlightened willingness to compromise on the part of the leaders of the Indonesian government and the Aceh Freedom Movement. Second, there has been a significant reduction of piracy in the Straits of Malacca through the coordinated naval patrols and “eyes in the sky” aerial surveillance undertaken by the littoral states, even though this cooperation was prompted by pressures from the international shipping and insurance community and the major maritime powers that have a great stake in the security of sea lanes in the region. As far as traditional security is concerned, physical conflict among Southeast Asian states is quite unlikely. Whether because of regional norms (as members of ASEAN like to believe) or plain good sense, war is seen as a disreputable way of dealing with problems and its cost to a country’s economic well being and international reputation is regarded as just too high. This does not mean that Southeast Asian states do not arm with each other in mind; only that such arms are unlikely to be used in anger. Bilateral relationships have seen improvements recently, but they still remain marked by some suspicion and mistrust. A number of Southeast Asian states retain close security relations with outside powers. The Philippines, Thailand, Singapore and Malaysia have bilateral security cooperation with the United States. So do Brunei and Indonesia, though in a more limited way. The Five Power Defence Arrangements among Malaysia, Singapore, Britain, Australia and New Zealand remain and regular naval and air force exercises continue to be held within its framework. Jakarta has been cooperating closely with Australia to deal with terrorism in Indonesia. In November 2006 the two countries signed an Agreement on the Framework for Security Cooperation. All these arrangements, in their different ways, contribute to confidence and security in the region.

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ASEAN AT FORTY: PERCEPTION AND REALITY By Tommy Koh

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SEAN is forty years old this year. Although ASEAN has often been praised as the second most successful regional organization in the world, after the European Union, the truth is that policy-makers in Washington and Brussels do not take it seriously and continue to disrespect the institution. Let me cite two recent examples. At the Williamsburg Conference, held in Mongolia in June 2007, I was distressed to hear a senior U.S. official say: “The ASEAN way is no way”. At the ASEAN-U.S. Symposium, held in October 2007 in Singapore, I was astonished to hear another senior U.S. official say that he had personally advised U.S. Secretary of State Condoleezza Rice, not once but twice, not to attend the annual ASEAN Regional Forum (ARF). I suspect that the same attitude prevails in Brussels. This could explain why ministerial meetings between ASEAN and the EU are often attended by full ministers on the ASEAN side, but not on the EU side. The tragedy is that the negative Western perception of ASEAN is sometimes echoed by our own researchers and scholars. ASEAN suffers from a serious perception problem and, as the saying goes, perception is sometimes more important than reality. Whenever I visited Washington, D.C., I found that American specialists on Asia, including those who specialize on Southeast Asia, held a generally negative view of ASEAN. I would therefore like to focus my essay on what I consider to be ASEAN’s most important achievements. I hope to persuade my sceptical friends in Washington and Brussels, as well as those in the ASEAN family, that their negative perception of ASEAN is mistaken. ASEAN’s first and indeed most important achievement is to keep Southeast Asia peaceful. This is similar to what I consider to be the EU’s most important achievement: to consolidate peace in Western Europe. When we compare Southeast Asia today with the region in 1967, we will then realize how dramatically it has changed. In 1967, Southeast Asia was in turmoil, with the flames of war in Vietnam threatening to engulf the whole region. Today, Southeast Asia is at peace with itself and with the world. To be sure, the region is not free of problems. Myanmar is a case in point, and there are low-level insurgencies in both the southern Philippines and southern Thailand. But, even in the case of Myanmar, I would argue that ASEAN has played, and is playing, a constructive role in encouraging the government and the opposition to move towards dialogue and reconciliation and to move together on Myanmar’s own roadmap towards democracy. The Western preference for isolating Myanmar and for imposing sanctions against her is counter-productive and will end up hurting the people the West wishes to help.

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ASEAN’s second notable achievement is its role in maintaining strategic sea lanes. Some of the most important sea lanes of the world pass through Southeast Asia. Fifty per cent of world trade and one-third of the world’s oil supply pass through the Straits of Malacca and Singapore. These two straits are classified as “straits used for international navigation” under the 1982 UN Convention on the Law of the Sea. Indonesia is an archipelagic state and hosts important archipelagic sea lanes, such as Sunda and Lombok. Indonesia, Malaysia and Singapore, like the rest of the ASEAN family, respect international law. They cooperate with one another, and with the International Maritime Organization (IMO), in keeping the straits used for international navigation and the archipelagic sea lanes safe, secure and clean. At an IMO meeting held in Singapore in September 2007, Indonesia, Malaysia and Singapore became the first littoral states in the world to agree to implement Article 43 of the UN Convention. They agreed to establish a cooperative mechanism, open to user-States and to other stakeholders, to promote and maintain the safety of navigation in the Straits of Malacca and Singapore and to protect their marine environment from pollution by ships. ASEAN’s third major achievement is the creation of a single market and production base. When the West views Asia, its eyes are drawn to the two rising giant economies of China and India, and to Japan, which remains the second largest economy in the world. Western eyes seldom turn to Southeast Asia even though the region has a combined population of 550 million people. It is already the fifth-largest trading partner of the United States, after Canada, China, Mexico and Japan. By the year 2015, the ten economies of ASEAN will become a single market and production base, with the free flow of goods, services, investment, business, professional people and skilled labour, and the freer flow of capital. Not only will Southeast Asia become one integrated economy but it will also be linked, through free trade agreements and comprehensive economic partnership agreements, to the economies of China, Japan, South Korea, India, Australia, New Zealand and the European Union. Southeast Asia will also have a trade and investment framework agreement with the United States. At the same time, seven of the ASEAN countries are members of APEC. It was at Bogor, Indonesia, that APEC’s leaders committed themselves to the vision of free trade and investment in the Pacific in terms of two specific deadlines. The other good news is that while the Asian economies are integrating and producing new patterns of intra-Asian trade and production, they continue to be outward looking and are integrated into the global economy.

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ASEAN AT FORTY: PERCEPTION AND REALITY (continued)

ASEAN’s fourth achievement is that it offers an important paradigm of multiculturalism. ASEAN is, culturally, a microcosm of the world. Southeast Asia is the home of many ethnic and tribal groups, many languages and cultures, and all the great religions of the world. I suspect that most policy-makers in Washington and Brussels do not know that there are more Muslims in Southeast Asia than there are in the Middle-East, or that the Islam practised in this region has historically been moderate and tolerant. One of ASEAN’s most impressive achievements is the success of its multiculturalism. We have been able to forge unity in diversity. In this troubled world where there are many conflicts and misunderstandings involving ethnicity, tribalism, languages, cultures and religions, ASEAN is a shining example of success. The world should pay more attention to ASEAN’s paradigm of successful multiculturalism. Another of ASEAN’s achievement has been its crucial role as a convenor, facilitator and regional architect. Asia and the world are in the midst of change, of a long transition from a bipolar world, to a unipolar world and now to a multipolar world. When the Cold War ended, ASEAN took the initiative to launch the ARF, bringing together all the regional and extra-regional powers with a stake in the security of the Asia-Pacific. This inspiration is similar to the inspiration that led to the founding of the Conference on Security and Cooperation in Europe (CSCE), which has now become the Organization for Security and Cooperation in Europe (OSCE). It is true that progress in the ARF has been slow and it was stuck in confidence-building for too long. The ARF has recently decided to move to preventive diplomacy. It is, however, the only security forum of the Asia-Pacific, just as APEC is the only economic forum which links the two sides of the Pacific. After the 1997 Asian financial crisis, when the fall of the Thai baht ricocheted to Northeast Asia and brought down the Korean won, it was clear to all Asians that Northeast Asia and Southeast Asia are interlinked. This was the rationale for launching the ASEAN+3 (China, Japan, South Korea) process. With the rise of India and the growing connectivity between India, Australia and New Zealand, and Northeast and Southeast Asia, it was logical for ASEAN to launch the East Asia Summit (EAS) which brings together ASEAN and what is effectively a +6: China, Japan, Korea and Australia, India and New Zealand. Apart from its economic logic, the EAS forum has great strategic significance because Asia’s peace will depend on the ability of China, Japan and India to live at peace with one another. ASEAN, being neutral and acceptable to all, has therefore played the vital role of convenor, facilitator and the architect of the evolving regional architecture. I suspect that there is very little understanding in Washington and Brussels of the critical role that ASEAN plays. I also suspect that some people in those capitals continue to view ASEAN as a pawn rather than as a player.

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Sixth, and finally, is ASEAN’s achievement in drafting a charter to shape its future. In November 2007, at the fortieth anniversary ASEAN Summit in Singapore, ASEAN’s leaders signed the ASEAN Charter, which was two years in the making. This is a historic event. The Charter has the potential to transform ASEAN. What will the ASEAN Charter do for ASEAN? It will, inter alia: (i) (ii) (iii) (iv)

(v)

(vi) (vii) (viii)

(ix) (x)

transform ASEAN from a loose association into a rules-based organization; compel ASEAN to take its agreements and commitments seriously, with a procedure for monitoring compliance and a system of dispute settlement; establish an ASEAN human rights body; integrate ASEAN economically into a single market and production base, and promote integration in the ASEAN security community and the ASEAN socio-cultural community; commit ASEAN to certain principles such as democracy, human rights and fundamental freedoms, rule of law, good governance and constitutional government; empower the ASEAN Secretary-General and the ASEAN Secretariat; create new institutions, such as the three Community Councils and the Committee of Permanent Representatives; streamline ASEAN’s structure and decision-making process, preserving the Economic Ministers’ wish to retain their practice of taking some of their decisions, not by consensus, but by such methods as “ASEAN minus X”; make ASEAN a more cohesive, efficient and effective organization; and make ASEAN a more people-oriented organization, with stronger engagement with parliamentarians, business organizations, scholars and think-tanks, and civil society.

In conclusion, I believe that ASEAN has a record of achievements, over the past forty years, which the peoples and governments of ASEAN can be proud of. ASEAN has kept the peace in Southeast Asia. Our ten economies are progressively being integrated into a single economy which will enable us to compete more effectively with China and India. At the same time, ASEAN is also evolving into a security community and a socio-cultural community. Through forty years of frequent meetings, networking, consultations, negotiations and working together, we have developed a high comfort level with one another and a culture of mutual respect and mutual accommodation in order to achieve consensus. We are creating a sense of ASEAN identity, of shared values and a common vision. At the same time, ASEAN is helping to shape the evolving architecture of the region. With the adoption of the Charter, ASEAN could reinvent itself into a more rational, coherent and dynamic organization.

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CHINA’S RELATIONS WITH SOUTHEAST ASIA By Ian Storey

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elations between the People’s Republic of China (PRC) and the ten members of the Association of Southeast Asian Nations (ASEAN) have entered into a higher gear since the dawn of the new century. The key factors behind this acceleration of relations are booming economic ties, regular high-level exchanges and summits, sophisticated Chinese diplomacy which seeks to assuage Southeast Asian concerns, and a relaxation in tensions over contentious territorial disputes. Indeed at the 2006 ASEAN-China Summit, which celebrated fifteen years of dialogue relations, Chinese Premier Wen Jiabao declared that Sino-ASEAN relations were at their “historic best”. The outlook for China’s relations with Southeast Asia in 2008–2009 is relatively bright, though there are one or two potential storm clouds on the horizon. Economics will remain the primary driver of the relationship, and it is quite likely that during this timeframe China will overtake the United States and Japan to become ASEAN’s largest single trade partner. China will be keen to maintain stable and friendly ties with all the ASEAN countries during 2008, especially as it does not want to be distracted from a number of important domestic and international events, including presidential elections in Taiwan and the United States, the Korean nuclear issue and the much anticipated Beijing Olympic Games when the eyes of the world will be on China and its emergence as a major power. Sino-ASEAN relations have come a long way since the early 1990s when countries in Southeast Asia were concerned about China’s rising power and its implications for regional stability. These security concerns have dissipated somewhat since then and the ASEAN countries now perceive China to be a more constructive and responsible actor in regional affairs. This change in perception is partly the result of China’s so-called “charm offensive”. Since the early 2000s Chinese leaders have tried to reassure their ASEAN counterparts that China’s rising power presents their countries with valuable economic opportunities rather than strategic threats. China’s leaders have underscored this message by taking a number of concrete actions. In 2001 Beijing suggested the creation of a China-ASEAN Free Trade Area (CAFTA) by 2010 that would give Southeast Asian economies greater access to China’s domestic economy, an initiative ASEAN leaders readily accepted. In 2002 China and ASEAN signed the Declaration on the Conduct of Parties in the South China Sea, an agreement designed to freeze the status quo and encourage cooperative confidence-building measures among the disputants. In 2003 the PRC took the symbolically important step of becoming the first major power to accede to the 1976 Treaty of Amity and Cooperation, which is a code of conduct among ASEAN countries. China has invested a lot of political capital in its relations with Southeast Asia over the past decade because it has significant and expanding economic, political and strategic interests in the region. Economically, Southeast Asia is an important source of raw materials and other commodities necessary to fuel China’s economic growth; it also represents a market of over 500 million consumers for Chinese manufactured goods. China is particularly keen to gain access to the region’s energy resources too. Politically, China values its relationship with ASEAN as a corporate entity because it speaks for the whole region and is in the driver’s seat of a number of multilateral forums including the ASEAN

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Regional Forum (ARF) and the East Asia Summit (EAS) process. Close ties with the ASEAN countries also help China limit Taiwan’s international space, as over the past decade all the ASEAN countries have tightened their One-China policies. At the strategic level China has always placed a premium on friendly ties with countries on its periphery, particularly those in mainland Southeast Asia such as Myanmar, Thailand, Vietnam, Cambodia and Laos. Maritime Southeast Asia has also become strategically important to China because of sea lane security: 70–80 per cent of the PRC’s vital energy imports pass through the Straits of Malacca, the narrow and congested waterway between Indonesia and Malaysia that Chinese security analysts see as a strategic vulnerability. In 2008–2009 China will continue to court ASEAN as an organization and the individual members on a bilateral basis in order to advance its economic, political and strategic interests in the region. Economics will remain the primary driver of the relationship. According to the Asian Development Bank (ADB) the value of two-way trade increased from US$65 billion in 2003 to US$160 billion in 2006, making China ASEAN’s third largest trade partner behind the United States (US$179 billion) and Japan (US$163 billion). However, China’s trade with the ASEAN countries has been growing at a much faster pace than either America’s or Japan’s: in 2004–2006 Sino-ASEAN trade grew by a healthy 34 per cent, compared with 13 per cent for America and just 7 per cent for Japan. If present trends continue, China is likely to emerge as ASEAN’s primary trading partner in 2007 or 2008 at the latest. Some estimates predict the volume of Sino-ASEAN trade will rise to US$200 billion by the end of 2008. The prospect of China as ASEAN’s number one trade partner will be greeted with mixed feelings in Southeast Asia. Overall, ASEAN enjoys a trade surplus with the PRC — but the gap is narrowing quickly, and already a number of countries such as Thailand, Vietnam and Malaysia run significant trade deficits with China. In 2008, therefore, China is likely to come under increasing pressure to ameliorate this trend by importing more goods from Southeast Asia and by investing more of its hard currency in the ASEAN economies. To date, China’s investment in Southeast Asia has been tiny, certainly compared with the United States, Japan and European countries. Between 1991 and 2005 China invested only US$1 billion in the ASEAN countries, compared with ASEAN’s US$38.5 billion in the PRC. If China is to assuage ASEAN countries’ concerns that they will be flattened by the Chinese economic juggernaut, it will have to address these imbalances in trade and investment. At the political level, China will be keen to keep the atmospherics with ASEAN warm and friendly. China will continue, therefore, to send high-level delegations to Southeast Asian countries and ASEAN meetings such as the annual ASEAN-China Summit, which will take place in Thailand in November or December 2008. Such events provide the PRC leadership with opportunities to push its “peaceful rise” thesis and conclude bilateral agreements with individual countries. China will continue to monitor events in Myanmar, its closest ally in Southeast Asia, very closely. During anti-government protests in Yangon in September 2007 China expressed

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POLITICAL OUTLOOK CHINA’S RELATIONS WITH SOUTHEAST ASIA (continued) CHINA’S RELATIONS WITH SOUTHEAST ASIA (continued)

concern at events but refused to condemn the junta or support UN sanctions against the regime. Above all else, China wants to see stability in Myanmar so that it can reap long-term returns from its considerable investments in that country. As far as Beijing is concerned, stability in Myanmar requires limited political reform — specifically the civilianization of the junta — and economic development to raise living standards: the Chinese government will continue to put pressure on the regime behind the scenes to move forward on these two issues. Another issue to watch in 2008 is the South China Sea dispute. Here there is both cause for optimism and concern. In March 2005 the state-owned energy companies of China, the Philippines and Vietnam agreed to explore for oil and gas in the disputed waters of the South China Sea. At the time, the deal — known as the Joint Marine Seismic Undertaking (JMSU) — was seen as a potential breakthrough in the dispute. The three-year JMSU expires in March 2008 and it will be interesting to see, based on the results of the survey, whether the three countries will decide to shelve the sovereignty dispute in favour of joint exploitation of resources, and, if so, how this will be received by the other disputants. Over the past two years the South China Sea dispute has been the focus of renewed interest as global oil prices have hit new highs. Of particular concern in Southeast Asia is the often testy relationship between China and Vietnam over overlapping sovereignty claims in waters containing large oil and gas reserves. China’s overriding priorities in Asia are in Northeast Asia: Taiwan, the Korean Peninsula, and Japan. In 2008 Taiwan will be uppermost in the minds of the Chinese leadership as presidential elections are conducted in March, and President Chen Shui-bian hands over the reins of power to his successor in May. Beijing will be watching closely Chen’s policy pronouncements in the run-up to the election, and whether the pro-independence Democratic Progressive Party (DPP) or the more status quo oriented Kuomintang (KMT) will win the presidential race. ASEAN states will also be keeping a close eye on crossstraits relations in the first half of the year and they will be hoping to see stability and a smooth transfer of power. The ASEAN countries’ worst strategic nightmare is a military confrontation between China and Taiwan, especially one involving the United States In conclusion, the period 2008–2009 is likely to see expansion in Sino-ASEAN economic ties and further consolidation of political ties at both the corporate and bilateral levels. China will be keen to nurture stability in the relationship as it will have its plate full with events in Northeast Asia and in the United States, and will not want anything to mar the Olympics. Nevertheless, Beijing will continue to keep a close tab on developments in Myanmar and in the South China Sea.

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POLITICAL OUTLOOK

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INDIA’S GROWING PROFILE IN SOUTHEAST ASIA By Vijay Sakhuja

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he constants of geography, traditional trade relations, and cross-cultural linkages have been instrumental in forging harmonious relations between India and Southeast Asia. Significantly, Southeast Asia had figured in the strategic thinking of ancient Indian ruling elites and today, in the twenty-first century, the region continues to be an important player in Indian geopolitical and geostrategic calculations. In that context, India remains committed to strengthening its “Look East Policy” and is hopeful of building a long-term and robust relationship with Southeast Asian countries. It seeks intensification of its economic linkages with Southeast Asia, partnerships in the field of science and technology, exploration of newer vistas for sharing knowledge, enhanced people to people contacts and believes that these efforts would accrue several benefits to both and provide the desired impetus to building relationships among India and Southeast Asian countries. At the political level, India shares ASEAN’s vision and its principles of harmonious and good neighbourly relations. It remains committed to the ASEAN Treaty of Amity and Cooperation (TAC) and is appreciative of Southeast Asian efforts that led to its inclusion in the East Asia Summit (EAS). Also of significance is India’s continued participation and active contribution to several Track II initiatives such as the Council for Security Cooperation in the Asia Pacific (CSCAP), the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), Mekong Ganga Cooperation (MGC) Project, and several other multilateral initiatives, which have been acknowledged by Southeast Asian states. Although political and economic issues lie at the heart of the IndiaASEAN relationship, strategic and security issues too have come to find a prominent place in bilateral interactions, particularly the common concerns relating to transnational crimes and maritime security. It is pertinent to mention that geographically India is linked to Southeast Asia by its land borders with Myanmar while it shares maritime boundaries with three ASEAN countries: Myanmar, Thailand, and Indonesia — one of the littoral states of the Straits of Malacca. Thus New Delhi remains committed to challenging inimical forces that have the potential to destabilize the region or disrupt mercantile traffic transiting the Straits of Malacca. Consequently, strategic cooperation between India and Southeast Asia has diversified to include joint efforts to protect

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INDIA’S GROWING PROFILE IN SOUTHEAST ASIA (continued)

sea lanes to secure energy supply lines and coordination on counter-terrorism activities. Perhaps what is more significant is that in the last decade strategic issues have gained currency in India-ASEAN bilateral interactions. At the geostrategic level, India has consistently supported Southeast Asian efforts and initiatives at achieving stability and security in the region. As a result, ASEAN has been appreciative of New Delhi’s accession to the TAC and endorsement of the Southeast Asia Nuclear Weapons Free Zone (SEANWFZ). Also, as part of the ASEAN-India Partnership for Peace, Progress and Shared Prosperity, ASEAN has welcomed India’s willingness to cooperate in combating international terrorism and transnational crimes and acknowledged its cooperation in capacity building. In the geostrategic-maritime construct, ASEAN states acknowledge the fact that India is committed to providing necessary assistance to safeguard the mercantile traffic transiting through the Straits of Malacca. Keeping in mind that nearly 55 per cent of India’s sea borne trade passes through the Straits of Malacca, successive political leaderships have noted that India was ready to provide security assistance in the Straits of Malacca and stressed that it was in India’s national interest to ensure that this maritime gateway remained a crimefree sea lane. For India, the Straits of Malacca has gained further significance in the light of the fact that a part of India’s energy needs are sourced from Russia’s far east and these shipments must transit through the Straits of Malacca. In that context, at the 14th annual ASEAN Regional Forum (ARF) meeting, Pranab Mukherjee, India’s current external affairs minister announced that India will design and conduct a training module on maritime security, specifically for the ARF member-states, with themes of anti-piracy, search-and-rescue, offshore and port security, anti-smuggling and narcotics control and anti-poaching operations under a “capacity-building” module. At the functional-operational levels, the Indian navy is keen to undertake antipiracy patrols in the Straits of Malacca. In that regard, India remains sensitive to the issue of sovereignty and would like to provide assistance to the Straits of Malacca littorals provided a specific request was received from these countries. Meanwhile, India has been engaged in bilateral naval cooperation with several Southeast Asian countries with the primary objective of addressing problems related to maritime disorder. This has resulted in naval exercises, common operating procedures, search and rescue at sea and protection of marine environment. For instance, the Indian navy and Singapore navy have a highly developed maritime cooperation agreement that includes joint naval

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exercises, submarine training and bilateral exchanges. India and Singapore have been holding joint exercises for the past fifteen years and these have provided a platform for exchange of information, interoperability and, above all, contributed to regional stability. Similarly, India has bilateral arrangements with several Bay of Bengal ASEAN littorals and hopes to take these initiative forward and would like similar arrangements with other ASEAN countries. ASEAN states also acknowledge India’s participation in the Regional Cooperation Agreement on Combating Piracy and Armed Robbery against Ships in Asia (ReCAAP), the first government-to-government agreement to enhance security of regional waters. Also, the Indian navy’s commitment to render assistance during the 2004 Indian Ocean tsunami relief operations too has been acknowledged and is a pointer towards the growing relevance and importance of India–Southeast Asia multinational naval cooperation. Although maritime cooperation has been the thrust area between the two sides, India is exploring newer vistas to broaden the scope of strategic cooperation. These include initiatives such as joint training and exercises by the armies and the air forces. Also, the police and para-military forces of India and ASEAN countries are actively engaged in countering transnational crime and low-level threats posed by non-state actors such as pirates and terrorists. At the military technology level, India would like to offer repair and service facilities/expertise of military equipment particularly of Russian origin, currently in the inventory of several ASEAN states. New Delhi believes that these initiatives and interactions among the militaries would provide a sound basis for building cooperative mechanisms and would reinforce bilateral and multilateral relationships. Space technology is yet another area where India and Southeast Asia can find common interests. India has made significant progress in space programmes and has launched several satellites into orbit both for domestic and international customers. It can play a meaningful role in Southeast Asian satellite programmes by way of training and even launching satellites for these countries. It can help Southeast Asian nations develop space programmes for capacity building in weather forecasting, environmental research and disaster management. The above developments clearly showcase that New Delhi’s Look East Policy is steadily maturing both in the political and strategic dimensions and India’s relations with Southeast Asian countries are now built around robust multi-faceted arrangements. Significantly, New Delhi actively seeks all-round development of

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INDIA’S GROWING PROFILE IN SOUTHEAST ASIA (continued)

its ties with Southeast Asian countries and also hopes to explore newer areas of cooperation to further consolidate this relationship. It should be pointed out that India will have to consistently demonstrate its commitment to the Southeast Asian region with which it has civilizational and historical connections, and it will have to reinforce its ties with ASEAN that have developed over the last decade and a half. New Delhi does understand that strong and robust linkages with Southeast Asia will lead to better integration with the Asia-Pacific region, and this could act as a catalyst for its entry into the Asia Pacific Economic Cooperation (APEC). On their part, Southeast Asian countries see several opportunities in a prosperous India and believe that as its economy grows, it can offer them several openings to consolidate their relations. The basic paradigm of the Southeast Asian approach is to engage the two Asian rising powers of China and India at equal levels but the engagement with the former has advanced to a much higher level partly due to the exceptional economic growth in China as also the rising status of China in the international arena. Besides, several ASEAN states have boundary disputes with China and would like to resolve these peacefully. ASEAN countries also see that the rising profiles of China and India can pose a major challenge to them in terms of choosing either or both. China and India are not rivals and, if current trends are any indicators, are willing to complement each other rather than compete in Southeast Asia. But the challenge for Southeast Asia will reach a critical point when the two Asian giants embark on fully utilizing their economic potential and begin to balance each other. For India, the biggest challenge will be how to manage its improving relations with the United States — which now pivot on nuclear and high technology cooperation and enhanced trade — and its Look East Policy which is also on an upward trajectory.

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Reproduced from Regional Outlook: Southeast Asia 2008-2009, edited by Deepak Nair and Lee Poh Onn (Singapore: Institute of Southeast Asian Studies, 2008). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

THE ASEAN-10 Pushpa Thambipillai • Milton Osbourne • Leonard C. Sebastian • Martin Stuart-Fox • Ooi Kee Beng • Tin Maung Maung Than • Lorraine Carlos Salazar • Terence Chong • Nirmal Ghosh • David W.H. Koh

Brunei Darussalam There is no indication of any change in Brunei’s political direction and outlook for the coming year. In the short term (one to three years) it will be “business” as usual. The Head of State and Government, Sultan Hassanal Bolkiah, at sixty-one, is still as much the revered monarch as he was forty years ago when he was installed as the young sultan. The Crown Prince, Al-Muhtadee Billah, continues to deputize for his father on several occasions while discharging his portfolio of Senior Minister in the Prime Minister’s office and also taking an active interest in government affairs. There seems to be no apparent reason to alter the status quo in the short term, if not in the medium term (three to five years). It is the mid-way stage for the current Cabinet that is appointed for a five-year term — an innovative plan in a political system that sees no change in the government. It has spurred more dynamism into the various ministries led by committed ministers who will soon face their evaluation. In the short term, there will be no change in the Cabinet size or composition. A couple of older Cabinet ministers may leave at the end of their tenure and are likely to be succeeded by their deputies or the permanent secretaries.

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BRUNEI DARUSSALAM Land area:

5,770 sq. km.

Population:

383,000

Capital:

Bandar Seri Begawan

Type of Government:

Monarchy

Head of State and Prime Minister:

Sultan Haji Hassanal Bolkiah Muizzaddin Waddaulah

Currency Used:

Brunei dollar

US$ exchange rate on 11 December 2007:

US$1 = B$1.45

The governmental system will continue to be highly centralized even though the district and village level councils have been given some semblance of participatory politics. The kampong (village) and mukim (sub-district) councils regularly elect their heads. However, the eligible candidates will continue to be pre-selected by the Ministry of Home Affairs, which exercises authority over the District Office. Usually there is only a single candidate and at the most two, to give the process a semblance of competition. As such, the local level election (the only one of its kind in the country) does not seem to attract much attention beyond the cluster of villages and the District Office. Village level elections may be in for some revision and revival in the next two years if the new provisions for the legislature go into effect. As announced in 2005, the expanded legislature of fortyfive members will comprise ex-officio, appointed and elected members; however, no preparations are yet in sight for the election of local district level representatives. The election structure will be similar to that which has already been in place. It is unclear if the slate of candidates would be of a different calibre if they were to be part of the legislative council. The new, impressive legislative building

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THE ASEAN-10 has recently been completed and is awaiting the formal opening ceremony. The functions of the legislative process, going by the previous two sessions, is not in law making per se, but is more symbolic by exposing government responsibility and accountability when ministers, as members of the legislature, answer queries from the floor. As for gender representation in the legislature, there is no indication that there will be any female member soon as there is no female Cabinet minister currently. There is always the possibility that the Sultan may appoint a leading female personality from the public or private sector. Political culture and political participation in its common usage are unknown in this hereditary monarchy. Local level politics as mentioned above is carefully orchestrated. In the medium term there might be some change to the electoral process. The local expectation of the “political process” is seen as a source for articulating requests for certain facilities from the government since the small population of Brunei has been provided a great deal of free amenities. Of the three political parties, only one — Parti Pembangunan Negara (National Development Party) — appears to have a better organizational structure and objectives and boasts a wider base than the other two. It is in a position to participate in local elections should the need arise. Again, it cannot attract high quality members since the law does not permit those in the public sector to join political parties. The main function of the political parties is not to be contentious but to be public supporters of the government. Also, unlike neighbouring countries, civil society activities in the political sphere are not present in Brunei. Yet there are several social groups and organizations that are active in social oriented activities in health (AIDS awareness), welfare (support of orphans, paraplegics) and others. The domestic environment will be stable as the population continues to enjoy social and economic benefits arising from a generous government spending policy on free services and subsidies. Although energy has become a centre of focus in the light of the heavy consumption of per-capita oil and gas, there has been no indication to

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POLITICAL OUTLOOK increase the price of petroleum at the pump. However, the Minister for Energy has alluded to the fact that the price of electricity was cheap, accounting for the high usage, and perhaps he may suggest an increase in the tariffs in an effort to conserve hydrocarbon fuels. Bruneians, unused to the payment of personal tax, have been introduced to the workers savings scheme in lieu of a pensions programme of the past. It will not come as a surprise if they are also asked to support a health plan to pay for their services which is now absolutely free for citizens. Education is still free; in fact reversing earlier trends, the government has increased scholarship allocations for overseas studies, under various national schemes. The number of students at local and overseas institutions has increased. Islam and religious emphasis will continue to be the foundation of a united and stable state as part of its philosophy of Malay Islamic Monarchy. The establishment of two new Islamic universities will ensure the availability of Islamic scholars and officials in the propagation and safeguarding of mainstream Islamic beliefs. The government takes a serious view of deviationist teachings on Islam, including those coming from outside the country, and will continue to take stern action against such threats. Brunei maintains a small but strong and ready national force. However, recognizing that national security and defence is indivisible from regional peace and security, Brunei will cooperate with other states in intelligence exchange and in the monitoring of illegal trans-national movements of people and products. Externally, Brunei will continue its political, security, and economic ties with its traditional partners within and outside the region. It is quite happy to take a quiet approach to international issues, while giving its support to ASEAN initiatives. There is no significant change anticipated in its foreign policy orientation where the Sultan himself represents the strong bilateral and multilateral linkages through frequent official travels and attendance in summits. A noticeable difference is the larger number of meetings hosted within the sultanate, be it with respect to ASEAN or any other forum.

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THE ASEAN-10

Cambodia The ruling Cambodian People’s Party (CPP) and Hun Sen, its parliamentary leader, are facing the future in their strongest position ever, especially with the promise of dramatic change to Cambodia’s economic prospects when oil begins to flow from its wells in the Gulf of Thailand, at the latest by 2011. They will approach the July 2008 elections, knowing that events since late 2006 have dealt a probably mortal blow to Prince Norodom Ranariddh’s political ambitions and to the possibility of FUNCINPEC (the National United Front for an Independent, Neutral and Cooperative Cambodia) existing as other than a junior partner to the CPP. With the power of the Sam Rainsy Party (SRP), which terms itself the official opposition, severely limited, the CPP appears set to dominate the political process for the next five years. Well before Ranariddh’s final humiliation, first of being deposed from the leadership of FUNCINPEC in October 2006, followed by the subsequent loss of his National Assembly seat as a result of his decision to found a new Norodom Ranariddh Party, Hun Sen had achieved the vitally important change to Cambodia’s Constitution in March 2006. This change allowed the Constitution to be amended on the basis of a parliamentary vote of 50 per cent plus one, rather than the previously required two-thirds of assembly members. This development coupled with the CPP’s later overwhelming success in the Commune elections, held in April 2007, and its domination of the indirectly elected Cambodian Senate, capped Hun Sen’s achievements. Central to the developments just described have been three major factors which will continue to be important over the next two years. First and foremost is Hun Sen’s personal success as a wily, hardworking and, on occasion, ruthless politician. Justified criticism of his authoritarian tendencies has too often blinded both foreign commentators and domestic critics to his very real talents. This is particularly true of Ranariddh and other members of the royal family who have had difficulty in accepting that a man of Hun Sen’s peasant background has the capacity to lead the country. The

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POLITICAL OUTLOOK

CAMBODIA Land area:

181,040 sq. km.

Population:

14 million

Capital:

Phnom Penh

Type of Government:

Parliamentary democracy with constitutional monarch

Head of State:

King Norodom Sihamoni

Prime Minister:

Hun Sen

Next Election:

July 2008 (National Assembly)

Currency Used:

Riel

US$ exchange rate

US$1 = 4,024 riel

on 11 December 2007:

obverse of Hun Sen’s formula for success has been Ranariddh’s dilettante approach to politics and the readiness of princes like Sisowath Thomico to suggest that Cambodia should revert to royal rule. Indeed, Ranariddh’s political eclipse reflects the broader erosion of royal power in Cambodia. Hun Sen has never made any secret of his feeling that membership of the royal family does not carry with it a right to exercise power within Cambodia. This was apparent in his past determination to sideline Sihanouk, now “King Father”, and he clearly welcomes current King Norodom Sihanomi’s strict acceptance of his role as a powerless constitutional monarch. Secondly, Hun Sen and the CPP have recognized that to maintain their dominant position it is essential to play an active role at the grass roots level of politics. This understanding is reflected in the unparalleled network of branches the CPP maintains throughout the country. The contrast most notably with FUNCINPEC, but also for the SRP, is immediately apparent to an observer, whether in Phnom Penh or in the provinces. The Commune election

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THE ASEAN-10 results already mentioned reflect the success of this branch-level strategy. Thirdly, and far from exhaustively, Hun Sen understands the importance of foreign relations and of moving well beyond the close earlier identification of his party’s interests with those of Vietnam. In embracing China as Cambodia’s “most trusted friend”, as long ago as 2003, Hun Sen has shown he is capable of having good relations with both China and Vietnam. At the same time he has put the difficulties of the anti-Thai riots of 2003 well behind him and his government. The importance of Cambodia’s close relationship with China cannot be overemphasized. It has enabled the Hun Sen government to disregard the criticism of other donor countries, to the point where the members of the Cambodia Consultative Group — composed of bilateral and multilateral donors — have increasingly tempered their complaints in relation to corruption and impunity in recognition of the fact that China stands ready to provide “aid without strings”, as Hun Sen himself has pointed out. The strong likelihood that Hun Sen will be leading a CPP-dominated Cambodian government following the 2008 elections does not mean that the country is without problems, nor that Hun Sen himself will face no challenges. Such problems and challenges are unlikely to be directed at Hun Sen personally, and are not strictly political in character. Rather they reflect the fact that Cambodia confronts deep, and possibly intractable social problems. In a population of around 14 million, 70 per cent of Cambodians are under 30 years of age, with an estimated 50 per cent under 18 years of age. This demographic profile poses fundamental challenges in terms of the need to find jobs for those who have completed school and tertiary education. In relation to the latter group it has been calculated that barely 1 in 9 of the 9,000 students completing tertiary study are successful in finding work in their field of studies. The presence of a large pool of unemployed and underemployed youth has already spawned social problems in the form of youth gangs, drug abuse, and domestic violence. Complicating these

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POLITICAL OUTLOOK social problems is the growing number of disputes relating to land ownership. Within Phnom Penh, long-established squatter communities are being disbanded with their reluctant former occupants being transported to rural locations lacking in basic services as urban areas are increasingly given over to commercial development. At the same time there are repeated instances of agricultural land being seized from peasant farmers in dubious circumstances for use by large-scale agribusinesses. These developments form part of the basis for continuing criticism of Cambodia’s lack of commitment to upholding human rights. The government continues to come under sharp criticism from the United Nations Special Rapporteur of the Secretary General for Human Rights. But in the face of the government’s disregard for his strictures it may be expected that human rights problems will remain an issue in the years to come. With the formal inauguration of the Extraordinary Chambers of the Courts of Cambodia (ECCC) in July 2006, and the announcement of the indictment, first of Duch and then of Nuon Chea in July and September 2007, respectively, the long-awaited trials of Khmer Rouge leaders will begin in 2008. Given the pace at which the ECCC has functioned so far, it seems probable that no more than four or five cases will be completed before the end of 2009. Whether these cases will have the positive cathartic effect that some observers expect is difficult to predict, as is the extent to which the trials might prove an embarrassment for current CPP leaders, and for China in its role as Democratic Kampuchea’s strongest supporter. Overall it seems unlikely that the hearings at the ECCC will finally remove the lingering shadow of the Khmer Rouge period from contemporary Cambodia. Whether the projected income from oil will be enough to overcome the daunting challenges that will face a future Phnom Penh government is another uncertainty, not least because of the ever-present concern that Cambodia, too, might succumb to the “oil curse” of increased conflict and corruption that has accompanied the discovery of oil in other developing countries.

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THE ASEAN-10

Indonesia The third year of the presidency of Susilo Bambang Yudhoyono began in the context of the successful completion of direct gubernatorial elections in Aceh, an important benchmark of the peace settlement signed between the Indonesian government and the Free Aceh Movement (Gerakan Aceh Merdeka, or GAM). The year marked the first year of peace in that troubled province after thirty years of conflict. Changed conditions in Aceh mirrored similar improvements around the archipelago where large-scale incidents of social disturbances and politically or racially motivated violence (kerusuhan) were few. Indonesia’s “multi-dimensional approach” to terrorism combining hard and soft measures also paid dividends. Threat levels are significantly lower today due to the successful detention of a majority of the key figures in the Jemaah Islamiyah (JI) network with the police rounding up hundreds of sympathizers and lesser figures. The few terrorist leaders at large are still dangerous and believed to be attempting more attacks but they lack skilled accomplices and are unable to mobilize the funds necessary to prepare and undertake attacks. The successful development of a web of paid informants and former militants working to persuade hardliners to change sides is also bearing fruit. Militants have been engaged in discussions and have been rewarded with shorter sentences, cash payments, and medical care for themselves or relatives. Furthermore, through engaging the terrorists, the Indonesian authorities have been able to exploit a long-standing rift in the militant movement over the morality and strategic benefit of bombing soft targets such as the Bali nightclubs. There were many events affecting political conditions in Indonesia in 2007. Arguably the most significant event was the reshuffle of the Cabinet in May. Seven ministers were part of a reshuffle that stirred significant political controversy due to the coalition nature of the Cabinet. The reshuffle allowed the president the opportunity to remove ministers for poor performance or those facing corruption allegations; refresh his Cabinet for possibly his last opportunity to gain a few domestic policy successes before the 2009 presidential election;

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POLITICAL OUTLOOK

INDONESIA Land area:

1,919,443 sq. km.

Population:

245.45 million

Capital:

Jakarta

Type of Government:

Presidential Republic

Head of State:

Dr Susilo Bambang Yudhoyono

Next Election:

2009

Currency Used:

Rupiah (IDR)

US$ exchange rate on 11 December 2007:

US$1 = 9,269 rupiah

and further cement alliances that would be beneficial to him as he strategizes for a second term of office. Both the draft bills on National Security and the Package of Draft Political Laws (Paket RUU Politik) were mired in controversy. The debates relating to the National Security Law first began in 2006 when the Ministry of Defence addressed the necessity for a legal umbrella to cover the national security activities of the state. The most controversial issue was the debate over the chapter in the draft law, making the Ministry of Defence responsible for supervising the National Police. This has exacerbated the TNI-Police rivalry leading to a stand-off between the TNI and the Ministry of Defence on one side and the National Police on the other. With acrimonious debates on the issue highlighted in the media, President Yudhoyono stepped in to halt further debate by ordering each institution to prepare its own draft with the view of combining them in a remodelled draft that could be agreed upon by both institutions. Issues relating to territorial integrity remain on the national agenda owing to the Government’s fears over separatism and matters concerning sovereignty. While the Package of Draft Political Laws was being debated, two local parties were established in Aceh, one of

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THE ASEAN-10 which was named GAM possessing similar attributes and donning a similar flag. Although the Government Decree No. 20/2007 on Local Political Parties in Aceh makes allowance for the formation of local political parties, the successful cessation of Timor Leste, the loss of Sipadan and Ligatan islands to Malaysia due to an ICJ ruling and ongoing separatist agendas in Aceh, Papua, Riau, and Maluku has led to a certain degree of weariness over Indonesia’s territorial integrity. Nothing encompassed such insecurities more than the national debate over the Defence Cooperation Agreement (DCA) between Indonesia and Singapore. The DCA was negotiated as a package deal after an agreement was reached by Singapore’s Prime Minister Lee Hsien Loong and President Yudhoyono in October 2005. The package deal was then signed by the two leaders in Bali on 27 April and slowly began to unravel in July when Indonesia asked for substantive changes to the DCA. Singapore maintained that the introduction of new elements would effectively undermine the whole package. Members of Parliament, the House of Regional Representatives (Dewan Perwakilan Daerah, or DPD) and the local assembly of the Riau Archipelago were vociferous in their objections to the DCA although all weighed into the debate for a variety of reasons. However, the crux of the debate centred on the content of Article 3, specifically the details over the use of Area Bravo training zone in the South China Sea and the frequency of exercises held there. With nine out of ten of the DPR’s factions unwilling to support the DCA in its current form, the Foreign Affairs Minister Hassan Wirayuda was forced to concede on 8 October that the implementation of the defence pact would be put on hold indefinitely. More interestingly, the acrimonious debates surrounding the DCA together with spats between Jakarta and Kuala Lumpur over a raft of bilateral controversies between August and October 2007 provide useful insights into the state of post-Soeharto parliamentary politics. Essentially, there are three political streams dominating politics. First, the erstadz capitalists, namely the Soeharto era business people who participate in political parties as financiers and utilize their political

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POLITICAL OUTLOOK positions to gain access to government tenders and contracts; second, the victims of the Soeharto era, who tend to be either ultranationalists or belong to the radical Muslim camp; and third, academics and social activists needed by the political parties to boost their image. The first two categories of actors are the most dominant players in the political process and will be key orchestrators for the variety of political manoeuvres that will take place in the run-up to the general and presidential elections. Prominent in this regard were the meetings initiated by Taufik Kiemas of PDI-Perjuangan and Surya Paloh of Golkar Party. They initiated meetings in June and July 2007 in Medan and Palembang, which included leaders of both parties and thousands of cadres. Considering that both are the largest parties in Parliament, these meetings raised the national political temperature and talk was rife that the PDI-Perjuangan was making tentative overtures to Golkar over the possibility of building a future permanent governing coalition. While a startled President Yudhoyono sought clarifications from Vice-President Jusuf Kalla, Golkar’s leader, over the purpose of the meetings, these activities signalled the beginning of wheeling and dealing by political parties as they plan for the 2009 elections. For the future, three trends are discernable. First, there may be another Cabinet reshuffle in 2008. The reshuffle relates to potential political splits between the parties that supported the YudhoyonoKalla presidential ticket in 2004. It is likely that the Star and Crescent Party (Partai Bintang Bulan, or PBB) will begin a political campaign to undermine Dr Yudhoyono. The United Development Party (Partai Persatuan Pembangunan, or PPP) will be working out the best possible time to introduce its candidate, possibly Bachtiar Chamsyah or Suryadharma Ali. Sutanto, the current National Police Chief is being wooed by the National Mandate Party (Partai Amanat Nasional, or PAN) and the Justice Prosperous Party (Partai Keadilan Sejahtera, or PKS). Golkar is making quiet preparations for Vice-President Kalla and hoping to interest former Yogyakarta governor Sultan Hamengkubuwono X to be his running mate. Wiranto has formed the Hanura Party as his party vehicle. Both former presidents, Megawati Sukarnoputri and

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THE ASEAN-10 Abdurrahman Wahid, have stated their intentions to become presidential candidates. Second, the PDI-Perjuangan-Golkar “initiatives” may become stronger or weaker. Both parties seem to indicate by their desire to cooperate that they want to create a payung besar or big umbrella for nationalist politicians. In debates relating to the Election Reform Bill, the PDI-P want Golkar to support a motion to raise the electoral threshold to 7 per cent or even as high as 10 per cent from the current 5 per cent making it difficult for small parties without national reach to nominate presidential candidates. However, the formation of such a coalition could lead to a counter coalition to oppose them. Third, towards the latter part of 2008 there is a possibility that a dark horse candidate may appear having similar appeal to the electorate as Dr Yudhoyono in 2004. These include Jakarta Governor Sutiyoso who wants to contest as an independent candidate or others yet to declare their candidacy like Hamengkubuwono X. With President Yudhoyono’s approval rating dropping to a low of 54 per cent on October 2007 after three years in office and in sharp contrast to his rating after one month in office where 80 per cent of the public approved of the job he was doing, his presidency remains vulnerable unless he is able to shore up the performance of his government. Failing which, he has to work out a viable strategy to split the proposed “permanent” coalition spearheaded by the PDI-P which it hopes will include Golkar, PPP, and PAN.

Laos When General Khamtay Siphandone resigned as President of both the Lao People’s Revolutionary Party (LPRP) and the Lao People’s Democratic Republic (LPDR) in 2006, it was hoped that other ageing generals would leave with him, and that power would pass to the next generation of younger and better educated party leaders. But Khamtay was succeeded in both positions by his close comrade and fellow southerner, Lt-Gen Choummaly Sayasone, and four of the next

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POLITICAL OUTLOOK

LAOS Land area:

236,800 sq. km.

Population:

6.368 million

Capital:

Vientiane (Viang Chan)

Type of Government:

Communist People’s Democratic Republic

Head of State:

Lt. Gen. Choummaly Sayasone

Prime Minister:

Bouason Bouphavanh

Next Election:

2011

Currency Used:

Kip

US$ exchange rate on 11 December 2007:

US$1 = 9,604 kip

five positions in the Politburo were assigned to former military officers in their seventies. The Prime Minister, Bouason Bouphavanh, comes in only at number seven, with Deputy Prime Minister and Foreign Minister, Dr. Thongloun Sisoulith, at number eight. Effectively this means that power is divided: the party remains under the control of the old generals, while their younger colleagues run the government. The new government line-up announced in mid-2006 was both better educated and more experienced than the previous one. Many had served as departmental heads and deputy ministers since Laos joined ASEAN in 1997, and so have had more contact with their ASEAN counterparts. They are more aware than are the old generals of what is happening in Southeast Asia and the world. And they know what needs to be done to reform and stimulate the Lao economy, by introducing greater transparency in government and easing some of the stultifying controls on public discussion and participation. Why then have reforms been so slow in coming? The answer lies in the prevailing political culture and the competition for power that characterizes Laos today. Government ministers rarely take decisions on their own, without first referring them to the party hierarchy.

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THE ASEAN-10 This applies even to the prime minister. Moreover, because power is exercised through competing patronage networks, which depend on having access to the necessary resources, there is reluctance to undertake reforms that might reduce such opportunities. The National Assembly has passed laws to limit corruption (in addition to the anticorruption law, these deal with the police, state auditing, and state inspection), but implementation is another matter, since to indict senior officials and enforce transparency would have a ripple effect throughout the party. While in power, Khamtay made all important decisions. Since both President Choummaly and Prime Minister Bouason (who is also from southern Laos) are protégés of Khamtay, it was expected that Khamtay would continue to exercise a decisive influence on decision making. But Khamtay now spends most of his time on his estates in southern Laos, and it is more difficult for party and government leaders to drop in informally, in the Lao way, to enlist his support. In Khamtay’s absence, other senior figures have been competing to expand their own patronage networks. The result is partial paralysis just when tough decisions need to be made on matters such as resource allocation. Laos spends too little on education, even by ASEAN standards, and too little on health, agricultural extension, and other social services. Yet the future of the country rests on building its human resources and improving living standards for the majority of the population. This requires a shift in financial priorities and greater resources than Laos has had available to date. But in this regard, the future is brighter. Four economic sectors in particular hold considerable promise: tourism, commercial agriculture, hydro-power and mining. Tourist numbers have been steadily increasing, drawn by the World Heritage sites of Luang Phrabang in the north and Wat Phu in the south. Eco-tourism and ethno-tourism are developing niche markets that will spread tourist wealth into rural areas with demands for accommodation, handicrafts, and guides. Commercial agriculture has been developing rapidly for crops including coffee, rubber, sugar cane, maize, agarwood, and quick-growing

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POLITICAL OUTLOOK timber. Much of the running has been made by Chinese companies, seeking cheap, long-term leases of productive agricultural land, but Thai, Vietnamese and even Indian interests are also involved. Concessions to date have been plagued by irregularities and corruption, but there is great future potential. The hydro-power potential of Laos is also immense, especially compared with its power-hungry neighbours. The Nam Theun II dam alone will generate more power than all hydro-electric projects in Thailand combined when it comes on-stream in 2009. Almost all the major tributaries of the Mekong drain the mountainous areas of eastern Laos. Most of these are fast flowing rivers, with great hydro potential, which means that there will be no need to dam the Mekong itself. Mining is the current boom industry, with dozens of companies from more than half-a-dozen nations eagerly prospecting, lured by the success of a large Australian-owned and managed copper and gold mine near Sepone in south-central Laos, increasing global demand, and soaring metal prices. Major mineral deposits have already been located, but there have been delays in getting the go-ahead to mine. This brings us back to the Lao government. A new enterprise law is designed to expedite investment procedures, but Laos still ranks 159 out of 175 economies when it comes to ease of doing business, according to the report “Doing Business in 2007”, published by the International Finance Corporation and the World Bank. Small-scale investment procedures have been streamlined but large projects are being delayed. This is partly because the technically competent head of the Planning and Investment Committee, Soulivong Daravong, does not have the political clout of his predecessor (Dr Thongloun); but it is also because Lao leaders are concerned over the pace and direction of development. They worry about not getting a fair deal from smart operators; how to balance the demands of different patronage networks; and how to get the balance right between powerful competitors — all of which contribute to a reluctance to make hard decisions. Take bauxite for example. There are rich bauxite deposits in southern Laos; but there are also extensive deposits in Vietnam and

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THE ASEAN-10 Cambodia. All three would like to develop an aluminium industry, but Laos is in the best position to do so, because smelting aluminium involves large amounts of electricity, and only Laos has the hydro-power potential to create a clean, green aluminium industry. Chinese mining interests want to be involved, but Hanoi is already worried about growing Chinese influence in Laos. For Vietnam to develop its own bauxite deposits, it would have to purchase electricity from Laos, which it would like to do at a very low price. If the Lao prefer to develop their own industry with Chinese investment, this could weaken the close Lao-Vietnamese “special relationship”, which provides powerful support for the regime. There is a long lead-time for hydro-power and mining projects, especially for aluminium where the latter depends upon the former. Only if such projects go ahead, however, will Laos be able to drag itself out of poverty. So decisions have to be made. The problem is that in Laos today there does not seem to be anyone with the power and courage and foresight to make them. Since Politburos and governments are elected/appointed only every five years, the prospect is for indecision to continue into 2011. Laos cannot afford to wait that long.

Malaysia A great perception gap now exists between what Prime Minister Abdullah Badawi says he is doing to fight corruption and the growing popular view that graft and its attendant incompetence have persistently spread. Throughout last year, while he continued to claim that progress was being made, court and police cases revealing a lack of professionalism among civil servants continued to grab the limelight. Criticisms of the four-year-old administration have congealed around the issue of corruption. Be it rising prices, the avoiding of contracts for mega-projects or key cases being thrown out of court, suspicion remains strong that cronyism and bribery play a decisive role in the outcome.

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POLITICAL OUTLOOK

MALAYSIA Land area:

330,434 sq. km.

Population:

24.821 million (July 2007 estimate)

Capital:

Kuala Lumpur (Administrative capital: Putrajaya)

Type of Government:

Federated parliamentary democracy with constitutional monarch

Head of State:

Yang Di-Pertuan Agong Tuanku Mizan Zainal Abidin

Prime Minister:

Datuk Seri Abdullah Ahmad Badawi

Next Election:

By July 2009

Currency Used:

Ringgit (RM)

US$ exchange rate on 11 December 2007:

US$1 = RM3.32

Abdullah is therefore facing a crisis of confidence in his government as he moves towards the next general elections, due to be called before April 2009. While few believe that the ruling Barisan Nasional will be challenged in any serious way at the polls, there are strong signs that the opposition will nevertheless manage an impressive performance. The celebration of the country’s fiftieth anniversary of independence has also given occasion for Malaysians to ponder over the state of the nation, its political economy, and its future. Judging from the 40,000 demonstrators calling for electoral reforms on 10 November 2007, 30,000 workers in June 2007 demanding minimum wage legislation, concerted union actions against price hikes, and a march by 2,000 lawyers and supporters asking for a royal commission to investigate what they called “the rot within the judiciary”, public support for the administration is at an all-time low. Incessant talk throughout the year that Abdullah would call for early elections, partly to disallow former Deputy Prime Minister

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THE ASEAN-10 Anwar Ibrahim from running for office, which he is banned from doing before the middle of April 2008 due to his conviction for abuse of power, has quietened down. The fact that Abdullah’s party, the United Malays National Organization (UMNO), cancelled 2007 party polls froze potential struggles for power until after the general elections. The general assembly held on 5–9 November was therefore a relatively calm affair. Anwar has been hoping to make a strong impression on Malaysian voters since returning to active politics in May 2006. Setbacks for the opposition in recent by-elections had cast doubt on Anwar’s ability to become a major player again in Malaysian politics. However, in September 2007, he sprang a surprise by releasing a video clip purportedly showing a senior lawyer in the act of brokering the appointment of judges through the phone in 2002. This applied further pressure on the government to act against “the culture of corruption” that many claimed had spread to most sectors of the administration. The after-effects of Anwar’s revelation are expected to echo throughout the coming months, making general elections more likely to be called later rather than earlier. In the meantime, Anwar’s relevance to Malaysian politics has been given a much-needed boost. On 10 November, a huge demonstration in Kuala Lumpur called by an umbrella organization titling itself “Bersih” (Clean), reportedly drew from 10,000 to 50,000 in protest against the electoral system. Despite being disallowed a police permit, the parade managed to propel Anwar on its crest to hand over a memorandum to the Agong (the paramount king), urging the latter to initiate electoral reforms. More such protests are expected in the months ahead, with Anwar taking the lead. Two weeks later, on 25 November, 10,000 to 30,000 ethnic Indians rallied to a call by the Hindu Rights Action Force (Hindraf) to a public march that sought international attention for alleged historical and systematic discrimination against Hindus in Malaysia. The demonstration was also in defiance of a government ban, and led to conflicts with the police. Dozens of marchers were later charged with attempted

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POLITICAL OUTLOOK murder on a police officer. The Hindu revolt caused immediate ripples internationally, and domestically is seen as proof of failure on the part of the Malayan India Congress, which is supposedly representing Indians in the ruling coalition. Damage control measures by the ruling coalition are expected in the coming months. Fear that rising prices will lead to further protests in the coming months is also keeping the Abdullah administration on its toes. The government has denied that toll charges will be raised by 10 per cent in the coming months, and it has had to reiterate its promise that subsidies on petrol, diesel, and other basic items will not be further reduced before 2008. Given contractual terms, the government can only put off toll hikes at the risk of paying compensation to toll operators. Federal subsidies amount to a heavy burden on the national economy, making up as much as 10 per cent of the budget. The growing lack of confidence in the Abdullah administration stems not only from a series of scandals and administrative foul-ups and disappointment over his many promises but also from the launching in quick succession of three enormous “corridors” of development throughout West Malaysia. Picking up from former premier Dr Mahathir Mohamad’s launch on 29 August 1995 of the Multimedia Super Corridor (MSC), which covered a wide strip of land between Kuala Lumpur and the new Kuala Lumpur International Airport, Abdullah revealed three regional master-plans under the umbrella of the Ninth Malaysia Plan (2006–2010) launched in March 2006. On 4 November 2006, he launched the Iskandar Development Region (IDR) in southern Johor covering an area three times the size of Singapore, with projected costs of US$105 billion over two decades. Its many programmes include an education hub, a medical hub, and a new administrative centre for Johor state. Khazanah Nasional, the government’s investment arm, was put in charge. Five weeks after that launch, Abdullah expanded Mahathir’s MSC to cover the whole of the Klang Valley. He continued to ignore his earlier aversion to mega projects on 30 July 2007 by launching the Northern Corridor Economic Region

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THE ASEAN-10 (NCER) that encompasses the states of Perlis, Kedah, Penang, and parts of Perak. The plan — drawn up by the government-linked company Sime Darby — is to attract investments of about US$50 billion by 2025, two-thirds of which are to come from the private sector. Where the oil-rich north-eastern states are concerned, the government has committed Petronas, the money-spinning national petroleum company, to spearhead development of Kelantan, western Trengganu and western Pahang. This is to take place under the Eastern Corridor Economic Region (ECER), involving about US$33 billion. Significantly, since the oppositional Parti Islam SeMalaysia (PAS) is strongest in Kelantan and Trengganu, the timing of the ECER launch in late October 2007 carries strong electoral implications. After regaining Trengganu for the ruling coalition in 2004, Abdullah may be aiming to complement the legacy of his time in power by winning back Kelantan into the Barisan Nasional fold. Such broad and rapid strokes of the pen in developmental planning, and covering practically the whole peninsula, beg the question where the financing is to come from. The country’s share of the regional flow of foreign direct investment has been discouragingly low recently. Abdullah’s main challenge over the coming months is to increase public trust in his administration’s ability, not only to have big plans, but to finance them and to do so with as much procedural transparency as possible. Foreign relations over the coming year are not expected to differ substantially from the last three years. Ties have remained largely peaceful, and Abdullah is expected to continue travelling extensively to promote Malaysia’s business reputation as a country where moderate Islam is practised. The country’s attempts at being a model for developing nations to follow continued with the holding of the Eighth Langkawi International Dialogue (LID) in August 2007. The LID, started in 1995 to foster economic ties between Southeast Asian nations and resource-rich African nations, did not take place in 2005 and 2006. ASEAN will continue to be the main vehicle through which Malaysia’s foreign policies are formulated. Pressure has been mounting

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POLITICAL OUTLOOK on its member countries to act effectively against the military regime in Myanmar, and political events there, especially after the Monk Revolt of September 2007, will continue to be critical to how the regional body is perceived globally, and how it will retain relevance. The successful space trip by Dr Sheikh Muszaphar Shukor Sheikh Mustapha to the International Space Station on board a Russian Soyuz spacecraft on 10–21 September was cheered by his fellows as a highly significant event in the nation’s history. He became the first Muslim to observe the fast and to celebrate the end of the fasting month in space. The Russians agreed to pay the cost of sending a Malaysian into space as part of a US$1 billion weapons deal. Malaysia had bought eighteen Sukhoi 30MKM fighter jets. While critics saw it as a waste of money, others hoped that the spectacle would spur the country to look to the future at a time when optimism is waning. Incomprehensibly, the Malaysian flag that Muszaphar had taken on his spaceflight was presented to UMNO at its general assembly, with Abdullah receiving it, not as the country’s prime minister but as the party’s president.

Myanmar After the United States’ attempt, in January 2007, to put the Myanmar issue on the agenda of the United Nations Security Council (UNSC) was vetoed by Russia and China, Myanmar’s ruling State Peace and Development Council (SPDC) appeared to emerge stronger in its confrontation with Western critics. Moreover, the SPDC managed to conclude the fourteen-year-long National Convention (NC) in early September producing detailed fundamental principles of a new constitution that would institutionalize the military’s influence over constitutional governance. On the economic front, prospects seemed the best ever, boosted by a US$2 billion trade surplus and an all-time high level of foreign exchange reserves (worth eight months of imports). The recent discovery of a large offshore gas field has raised prospects for the energy sector.

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THE ASEAN-10

MYANMAR Land area:

678,675 sq. km.

Population:

55.4 million (end 2006)

Capital:

Nay Pyi Taw

Type of Government:

Military

Head of State:

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

Prime Minister:

General Thein Sein

Next Election:

Not known

Currency Used:

Kyat

US$ exchange rate:

US$1 = 1,285 kyat (parallel market rate; 12 November 2007) US$1 = 6.53 kyat (official rate; 11 December 2007)

In domestic politics, the SPDC’s seven-step road map appeared on track with the conclusion of the NC. Deprived of guidance by the incarcerated leader Daw Aung San Suu Kyi (DASSK) the opposition National League for Democracy appeared increasingly irrelevant in Myanmar’s political transition as the enfeebled headquarters seemed to be unable to take the lead in mounting an effective strategy to secure her release or exercise the mandate of the decisive electoral victory in the 1990 elections. The restive NLD grassroots in the countryside were apparently frustrated with the timidity of the headquarters which appeared to be fixated at avoiding dissolution by the government. The ceasefires with seventeen major and several minor armed ethnic groups remained intact, with their representatives taking part in the NC in its last leg, thereby endorsing the detailed principles for establishing a “genuine discipline-flourishing democracy” in Myanmar.

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POLITICAL OUTLOOK The sustainability of the three prominent armed ethnic groups still fighting the government had become increasingly doubtful with time as the government put relentless pressure on them by undercutting their logistical, financial, and human resources. Even the sporadic protests mounted in Yangon and a few cities by small groups of dissidents prompted by the doubling of gasoline and diesel prices and quintupling of compressed natural gas prices in mid-August were probably seen by the government as manageable minor irritants. However, suddenly a crisis erupted with a spark of defiance on 18 August in Yangon, when a handful of demonstrators led by former student activists who called themselves “88-Generation Students” protested against rising transport charges. These protests refused to die down and indeed grew in numbers and intensity with the entry of the Buddhist monks into the fray ten days later. After the arrests of student activists within a few days, processions of young student monks appeared in several towns, chanting religious verses in a symbolic gesture of support for the earlier protests. After a violent skirmish with security forces in central Myanmar on 5 September some irate monks resorted to burning government vehicles destroying private properties and temporarily holding officials hostage. Monks demanded an apology from the authorities for the use of excessive force against their brethrens and, prompted by a clandestine monk organization, issued an ultimatum to that effect while threatening to excommunicate the authorities by refusing alms and refraining from giving religious services. Subsequently, the junta faced a series of protests that progressed from isolated expressions highlighting economic hardship to a mass movement with political overtones. At the same time, hostile foreign media (both print and broadcast) seized the opportunity to widely publicize the events, thereby drawing the attention of the international community to whom the protests became a cause célèbre. As demands escalated to those calling for the release of DASSK and all “political” prisoners, the protests, occurring in dozens of cities and towns involving large crowds (up to thousands

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THE ASEAN-10 of monks and tens of thousands of demonstrators), increasingly came to resemble the 1988 “uprising” that prompted the military to stage a coup in the first place. The authorities initially refrained from intervening against the monks, only resorting to taking videos and pictures of those involved. However, concerns that the peaceful marches would snowball into a mass uprising rose to the fore when acts of religious excommunication began to manifest and the marches drew increasingly bolder and larger crowds in Yangon and major cities, culminating in the breach of the security cordon blocking access to the house of DASSK on 22 September. Meanwhile, as streams of video and still images of demonstrations spread through the Internet, strident calls for the government to allow peaceful protests and release those arrested gained momentum as the U.S. First Lady Laura Bush and American celebrities stepped up the pressure on the regime as well as the UN, with the latter being urged to take action. This led to a statement on 24 September regarding Myanmar’s unrest by the Secretary-General himself. As domestic and external pressures built up and the government’s efforts to pacify and control the monks through the elder monks of the state-sponsored Sangha hierarchy failed to stop the protests, on 25 September, an ordinance prohibiting public gatherings of more than five persons and a night curfew in Yangon and Mandalay were imposed. However, the undeterred demonstrators came out in force in Yangon leading to clashes with security forces in which tear gas and baton charges were employed. Shots were also fired in central Yangon and in over two days of confrontation at least fifteen persons (including one Japanese photojournalist) were killed and scores wounded while thousands were arrested. Internet postings of photos, videos and audio on the protests and the subsequent crackdown continued for several days until the Internet was shut down towards the weekend. The government-controlled media countered with revelations about bogus monks, violent protests, stashed weapons, and hoarded cash. It also blamed foreign media, Western politicians, anti-regime lobbies,

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POLITICAL OUTLOOK insurgents, the NLD as well as “opportunists”, “neocolonialists”, “destructionists”, “traitors”, and “stooges” for instigating the unrest. But the damage was already done. Screaming headlines and graphic videos, photos, and sound bites depicting violence, interviews with dissidents, and sympathetic demonstrations abroad were reproduced on the worldwide web. Prominent individuals, the European Union (EU), the UN Permanent Five with the exception of China and most Western states deplored the use of force, demanded the cessation of arrests and called for the release of all political prisoners including DASSK as well as a dialogue with the political opposition and ethnic groups. Even, the ever-friendly ASEAN (Association of Southeast Asian Nations) came up with an unusually strong statement expressing “revulsion” over the violent crackdown though it later reaffirmed its commitment to engagement and ruled out sanctions. The UN hastily dispatched Professor Gambari, the Secretary-General’s special envoy to Myanmar, to meet both the junta leadership and DASSK in a bid to facilitate dialogue between the protagonists. Myanmar’s military rulers quickly responded by promising to Gambari, during his visit, that the junta chairman Senior General Than Shwe would meet DASSK provided she gave up her acts of confrontation and calls for total and economic sanctions against Myanmar. Again, on 8 October, the government appointed retired Major General Aung Kyi (Deputy Minister for Labour who was later promoted to full minister) as “Minister for Relations” to facilitate “smooth relations” with DASSK as recommended by Gambari. The junta also promised to implement the political Road Map and formed a constitution drafting committee on 18 October. Meanwhile, the authorities convened many public rallies involving tens of thousands of citizens in major towns to support its Road Map and condemn the protests, their instigators and foreign interference. Nevertheless international pressure remained unabated as additional sanctions were imposed by the United States and EU while Japan cut back its aid and Australia imposed financial restrictions on regimerelated individuals. The UNSC also issued an unprecedented nonbinding Presidential Statement deploring the use of force and calling for national reconciliation.

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THE ASEAN-10 As it stands, the junta appears determined to follow its own pace in implementing the Road Map leading to new elections by way of a constitutional referendum after completing the drafting process. International pressures to have a dialogue with DASSK and establish national reconciliation through an inclusive process brokered by Gambari would remain strong for the near future but with the looming Presidential elections the United States might succumb to the attention deficit disorder and international attention may attenuate as other pressing issues surged to the fore. The junta may yet again ride out the storm by garnering continued support from China, India, and Russia and by playing its cards right. Moreover, DASSK may refuse to accept the preconditions set by the junta and the talks might be stalled on that score. On the other hand, the enmity of the polity against the junta could persist. The economy remains vulnerable to problems of economic depravation in general and food insecurity and high inflation in particular. Finally, the issue of demobilizing armed troops of the ceasefire groups could be further complicated by the current situation. Nevertheless, in the second week of November, DASSK issued a conciliatory and optimistic statement after Gambari’s second visit to Myanmar and the government also allowed her to meet top executives of her party for the first time since her incarceration in 2004. Thus, it is likely that the UN-initiated dialogue process for national reconciliation will continue on track despite misgivings by the United States and many observers, thereby leading to some advances in due course. As such, the year 2008 may well become a watershed year for both the regime and its opposition. All in all, issues of legitimacy, justice and equity as well as the political astuteness of the military, ethnic groups and political opposition led by DASSK will largely influence the political outcome. The UN and the international community can only do so much; it is up to the stakeholders of Myanmar to find ways and means to achieve reconciliation and fashion a desirable outcome.

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POLITICAL OUTLOOK

Philippines Going by the events of the first half of 2007, the outlook for the Philippines in 2008–2009 is one of relative stability compared with the past seven years under the Arroyo administration. However, developments during the latter half of the year indicate an increased risk of political insecurity during the last two years of Arroyo’s term. On 14 May 2007, over 42 million Filipinos went to the polls to elect half of the Senate’s 24 seats, all 250 seats in the Lower House, and over 17,000 local government positions. After a snail-paced manual count, the opposition won eight Senate seats, Arroyo’s coalition received three, and an independent, former coup plotter Gregorio Honasan, won one seat. The biggest indicator of growing disaffection at the national level was the senatorial victory of former navy lieutenant Antonio Trillanes, who is in jail awaiting trial for leading the 2003 Oakwood Mutiny. Given the dominance of opposition politicians in the Senate, Arroyo will continue to face intense scrutiny and difficulties in passing reform measures. However, at least five Senators are eyeing the presidency, which means that they will be more likely to support reform efforts to demonstrate that they are not merely opposing the Executive without providing concrete alternatives. Meanwhile, in the Lower House, Arroyo’s coalition won a bigger majority, obtaining 190 of the 250 seats. At the local government level, Arroyo’s coalition won 72 of the 81 provincial governor posts and 102 of 119 city mayors’ seats. The overwhelming victory of the government coalition at the congressional and local government levels is testament to the importance of access to resources and control of infrastructure projects as key to electoral success at the local level. The dominance of President Arroyo’s allies in the Lower House means that any attempts to impeach her will not prosper. This bodes well for political stability until presidential elections in 2010, although this does not preclude the opposition from challenging her presidency through other channels. In an atmosphere of relative political tranquillity and an improving fiscal situation, Arroyo’s seventh State of the Nation Address in July

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THE ASEAN-10

PHILIPPINES Land area:

300,000 sq. km.

Population:

91.077 million (July 2007 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 11 December 2007:

US$1 = 41.66 peso

2007 unveiled her administration’s priorities. She promised to focus on investment in infrastructure, both human and capital. This is sorely needed as the Philippines investment to GDP ratio averaged 15 per cent over the past five years compared with about 25 per cent in other Southeast Asian countries. The president, by choosing to emphasize an economic and social development agenda, sought to depoliticize her speech and articulated a vision of a Philippines ready to attain developed nation status within 20 years. In September, the hope of relative political stability was shattered when Miguel Arroyo, the president’s controversial husband, was alleged to have been involved in an overpriced contract to build a national broadband network funded by Chinese soft loans. The contract was awarded to ZTE Corp, a Chinese telecommunications equipment supplier. Whistleblower Jose De Venecia III, son of House Speaker Jose de Venecia, claimed that the US$329 million deal was overpriced by at least US$120 million to cover various bribes and pay-offs. As the scandal unfolded, the Chairman of the Commission of Elections Benjamin Abalos, a purported intermediary of the contract, resigned. The First Gentleman, meanwhile, denied any involvement. In the face of growing public protest, Arroyo suspended the deal. In a visit

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POLITICAL OUTLOOK to China in October, Arroyo explained the decision to President Hu Jintao and received assurances that the suspension of the ZTE contract would not dampen Chinese interest in the Philippines. While relations with China were easier to mend, the domestic repercussions from this scandal have yet to unfold and are likely to be a major source of uncertainties in 2008–2009. On 5 October, a third impeachment case was filed against Arroyo, accusing her of betraying the public trust by failing to act against the ZTE deal. Opposition politicians denounced the filing of this weak impeachment case, apparently by an ally of the president, as a ploy by the Arroyo camp to ensure that she receives immunity from impeachment for one year, given the Lower House rule of entertaining only one impeachment case each year against an impeachable official. The opposition’s suspicion was further fuelled by reports of cash, amounting to between 200,000 peso to 500,000 peso (US$4,545–US$11,363), being handed out to congressmen and provincial governors after a meeting with President Arroyo in the Malacanang Palace in October. Investigations by the Presidential Anti-Graft Commission are underway but the source of the funds as well as Arroyo’s direct involvement are unclear. Given these topsy-turvy political developments, there are six key issues to watch in 2008–2009: First, President Arroyo can be expected to face new street protests calling for her resignation and attempts to impeach her. While this does not bode well for political stability, Arroyo is highly unlikely to resign or be impeached despite challenges to her legitimacy. Mud-slinging and exposés will probably increase in magnitude as the presidential election in 2010 approaches. Second, discussions on revising the 1987 Constitution are likely to reappear during 2008–2009. However, given the failure of the 2006 people’s initiative and the botched attempt by the Lower House to convene a constitutional assembly, a publicly supported and credible attempt to revise the constitution cannot be expected to happen before 2010. Any effort by Arroyo to initiate changes to the charter will be viewed with suspicion and opposed widely, even by supporters of the said reform.

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THE ASEAN-10 Third, in September 2006, after a six-year trial, the Philippines made history when the Sandiganbayan (anti-graft court) declared former President Joseph Estrada guilty of plunder and sentenced him to life imprisonment. On 22 October, his lawyers withdrew their motion challenging the court decision and applied for a “full, free, and unconditional pardon” from President Arroyo. Within a week, Arroyo granted the pardon as a way of “healing divisive political wounds”. Progressives and civil society groups vehemently opposed pardoning Estrada, even though such power is constitutionally vested in the hands of the president. This decision is likely to diminish Estrada’s vocal criticism of Arroyo but could backfire against the president and further increase her unpopularity. Fourth, military operations against the Abu Sayyaf Group (ASG) and “rogue” Moro National Liberation Front (MNLF) and Moro Islamic Liberation Front (MILF) can be expected to continue throughout 2008–2009. While the government has vowed to destroy the ASG with support from the United States, Australia, and Britain, the stalled peace negotiations with the MILF are likely to resume before the end of the year. The government is trying its best to keep peace with the MILF and the MNLF, with whom it signed a peace accord in 1996. However, due to family ties, there are close links between the ASG, MNLF, and MILF, which make it problematic for the government to distinguish between the various armed groups. While the military operations do not pose a serious threat to the country’s overall security, they have led to civilian displacements and over a hundred deaths. Fifth, in contrast to extending a hand of peace to the MILF, the government has declared that it will pursue the Communist Party of the Philippines — New People’s Army militarily while offering amnesty to those willing to lay down their arms. While the army has set the goal of eliminating the communist threat by 2010, meeting this goal is highly unlikely as the NPA is well entrenched in parts of the country. Finally, as these political developments happen, overseas Filipino workers (OFWs) will continue to play their central role of propping up

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POLITICAL OUTLOOK the economy by sending home remittances that support their families’ needs, drive consumption, strengthen the peso, and fuel the economy. In 2006, the Philippines emerged as the fourth largest remittancereceiving country in the world with remittances totalling US$14.5 billion. Remittances can be expected to grow during 2008–2009, acting as one of the major insulators of the economy from the raging, destructive fire of partisan politics. In conclusion, the political scenario contrasts starkly with the more positive economic picture. Arroyo is looking more politically stable compared with the past couple of years but challenges to her legitimacy are set to continue in 2008–2009. There is considerable potential for progress in the final years of her administration if it does not get sidetracked with fire-fighting, focuses on putting the government’s house in order, and makes investments in much-needed physical and human infrastructure.

Singapore Lee Hsien Loong’s first few years as prime minister were about big visions. Political slogans like “Open and Inclusive Society”, “A Vibrant Global City Called Home”, and “Singapore: Our Home, Our Future” were designed to lay down the blueprints for a Singaporean global city. To this end, major policy changes like economic restructuring, the integrated resorts, five-day work weeks, and Workfare have been implemented since 2004. With the major pieces in place, PM Lee’s 2007 National Day Rally Speech took the opportunity to announce the fine-tuning of policies. Chief among the issues addressed were the widening income gap, the ageing population and Central Provident Funds (CPF) reforms. While proposed solutions to the widening wage gap were not new — raising the productivity of low-income workers, Workfare, and emphasizing training and skills upgrading — the government made it clear that it would not levy higher income tax on top earners for fear of this group taking flight. This could be interpreted to mean that the government has accepted the widening wage gap as a permanent

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THE ASEAN-10

SINGAPORE Land area:

692 sq. km.

Population:

4.68 million (June 2007)

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 11 December 2007:

US$1 = S$1.44

feature of the Singapore global city as well as the politics of envy that will surely accompany it. There is already clear evidence of this class envy on Internet forums and blogs where the complex debate between the “haves” and the “have-nots” is sometimes reduced simplistically to the tension between locals and foreign talent. And although the government has pledged to help the bottom 20 per cent of the population, there are signs that class envy and politics will mature in Singapore in the coming years from mere coffee-shop murmurings to firm identity cleavages from which citizens will derive meaning and worldviews. In keeping with the government’s hard-headed approach to challenges, the culturally tricky issue of ageing and death was also squarely addressed at the Rally Speech. According to the prime minister, the average life expectancy in 1957 was 61 years. Today, average life expectancy is 80, with many living beyond 90. By profiling several active senior citizens and exhorting their active and productive lifestyle in his speech, the prime minister was in fact addressing criticism that his earlier Rally Speeches and campaign slogans were youth-centred, with nary a glance at older Singaporeans. We can expect

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POLITICAL OUTLOOK to see more senior citizen-friendly public policies to be rolled out in the coming year, with the government bulking up incentives for the private sector to retain and upgrade older workers. Perhaps the most controversial topic of the PM’s speech, and certainly an issue that has caused a lot of split ink in the press is the CPF reforms. In order to address the needs of Singaporeans who may not have enough to retire on, the government has proposed to increase the interest rate to one percentage point for all accounts below S$60,000. And to confront the fact that Singaporeans are living longer, there are plans to provide life-long income in the form of a compulsory annuity for all CPF members with the cash in age of eighty-five. Criticisms include why the interest rate hike was just one percentage point and why there is not an opt-out clause for the annuity. On the one hand, the government’s well-known anti-welfare stance is that it will only help out those in dire need but not offer Singaporeans a comfortable retirement. On the other, many Singaporeans are sceptical of how many actually do live past eighty-five and lament that the government does not do more to help care for this small group of old and frail citizens. Many point to the fact that as many as seven in ten Singaporeans have below $60,000 in their combined CPF accounts, and that they have to now wait longer than expected to enjoy their retirement savings because the draw-down age on the Minimum Sum has been pushed back. This issue has been so divisive that even PAP backbenchers are questioning the policy. The nub of the CPF debate is about what Singaporeans want and think is rightfully theirs, and what the government is willing to give. And if the debate is allowed to continue, it will be a matter of time before the broader issue of social contract between government and citizens, and the need for it to evolve along with the challenges of globalization, will crop up. Should this happen, then the grand visions above will be questioned: a global city for whom? Another slogan — open and inclusive society — is already under the microscope. Two separate incidents in parliament in August suggest that the open and inclusive society that PM Lee promised has boundaries. The first concerned the opposition Workers’ Party’s rejected application

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THE ASEAN-10 to organize a mass cycling event at East Coast Park to celebrate their 50th anniversary. When asked in Parliament why the permit was not granted, Senior Minister of State for Law, Professor Ho Peng Kee replied that while the organizers of the event may be “well-behaving”, there could be other members of the public who may want to gather and debate, thus resulting in a crowd, which the police wanted to discourage. The message was that debates in public and impromptu crowds demand police attention and must therefore be avoided. Professor Ho’s curious reply set Internet forums and blogs alight. The second incident was the parliamentary petition to repeal section 377A, which criminalizes “gross indecency” between two men. The petition was submitted by Nominated MP, Siew Kum Hong, provoking an intense public debate between pro-repeal and anti-repeal camps respectively. The debate was significant in that three People’s Action Party MPs — Baey Yam Keng, Hri Kumar, and Charles Chong — spoke in support of the repeal. The debate included rationalist, legalist, and moralist arguments but was ultimately futile because the government had already announced its decision to retain section 377A. Interestingly, when PM Lee spoke on the subject, he noted that section 377A was probably not a burning issue with many heartlanders, and that it was a religious conservative minority that was particularly vocal. If so, this begs the question as to which constituency is setting the tone for the rest of society. These two incidents have put the open and inclusive society slogan under the spotlight. Critics have argued that the slogan is just that: a slogan, designed to suggest a climate of change with the entrance of a new PM, and nothing else. Optimists, on the other hand, urge patience, believing that it will take some time for the message to filter down to government institutions. Whatever the case, the road to an open and inclusive society may not be as wide and smooth as thought to be. Meanwhile relations between Singapore and Indonesia took a bump when the latter announced its decision to put the Defence Cooperation Agreement (DCA) on hold. Indonesia’s decision was the culmination of a domestic political struggle between the government and opposition parties over issues of sovereignty and the Extradition Treaty. Although bilateral ties between the two countries remain generally good, this

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POLITICAL OUTLOOK bump exposes the variety of stress-points in the relations between a wealthy Singapore and its less well off neighbours. On a regional level, Singapore took over the chair of the ASEAN standing committee from the Philippines in August 2007. Almost immediately, trouble in Myanmar erupted when monks began protesting peacefully in Yangon against rising fuel prices. Civilians and activists latched on to the protests, prompting the military junta to crack down on the protesters. International condemnation came thick and fast as the death toll rose. Speaking for ASEAN, Foreign Minister George Yeo expressed “revulsion” over the junta’s violent suppression of its people. ASEAN’s robust response won much international praise. Meanwhile, the unveiling of the ASEAN Charter will strengthen the ASEAN regional architecture and signal a clear move towards a rules-based approach. This institutionalization process offers Singapore the unique opportunity to steer ASEAN to higher ground.

Thailand Thailand’s return to a version of democracy is unlikely to be either smooth or swift. At the time of writing, despite several charges against ousted premier Thaksin Shinawatra, warrants for his arrest, and the freezing of a chunk of his cash in Thailand, his popularity among voters remains significant. The new constitution is heavily biased towards the ruling elite, and elections will most probably produce a coalition government which will be inherently unstable as well as vulnerable to the continuing machinations of political sectors, the army, and elements in the palace who are jockeying for pole position with two critical factors in mind — a possible return by the former premier, and a looming transition in the monarchy. The Bangkok elites who facilitated and cheered on the 19 September 2006 coup d’etat fear the eventual return of Thaksin Shinawatra if his loyalists manage to muster enough votes to lead or decisively broker a coalition government.

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THE ASEAN-10

THAILAND Land area:

514,000 sq. km.

Population:

65 million

Capital:

Bangkok

Type of Government:

Parliamentary democracy, with constitutional monarch

Head of State:

King Bhumibol Adulyadej

Prime Minister:

General Surayud Chulanont (October 2006 to December 2007)

Next Election:

23 December 2007, subsequently after 4 years i.e. December 2011

Currency Used:

Baht

US$ exchange rate on 11 December 2007:

US$1 = 30.51 baht

The example of the 19 August 2007 referendum on the new constitution showed they may well do so; while approved nationally, it was rejected by a wide margin in the northeast and only narrowly passed in the north — both Thaksin’s power bases. The fear of Thaksin’s return has been enough to make some associated with the People’s Alliance for Democracy (PAD, which campaigned in the streets to oust him in 2005–2006 laying the ground for the military’s intervention) try to bring down the Surayud Chulanont government, with a view to installing hardliners who would delay the election and redouble efforts at destroying Thaksin’s legitimacy. But Prime Minister General Surayud is holding out at the time of writing, seemingly determined to have elections on schedule so he can retire from public office with his reputation and credibility intact. Deal-making will keep Thailand’s politicians busy for a year or more, in what some analysts are calling a return to “normalcy’’ in Thai politics.

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POLITICAL OUTLOOK Meanwhile an old art of Thai politics — compromise and accommodation — may be in evidence both in pure self-interest and to avoid the bitterness that would surround Thaksin’s return before the ousted premier’s enemies are ready for it, or before any guarantees are given that retribution will be eschewed. Party ideology — with the exception of the Democrat Party and some individuals — is usually cosmetic, and loyalties shift. The ban for five years, on 111 top politicians of the erstwhile Thai Rak Thai (TRT) has created a vacuum in the electoral field, which in some cases is being filled by their younger proxies but has more interestingly brought old-guard politicians and power brokers marginalized by Thaksin and the TRT, to the fore again. It also seems certain that key military figures will remain in positions of influence, either directly through joining politics and being elected to parliament, or from the shadows by holding key cards enabled by the new constitution and new legislation on national security which will subtly but significantly enhance the army’s role in domestic “security” issues at the grass roots level. But the role of the army is also not a new phenomenon; after all both Prem Tinsulanonda, president of the Privy Council, and former Privy Councillor Surayud Chulanont, are former generals. Indeed if TRT loyalists come to power, the government can still be easily destabilized by the opposition in alliance with the royalist-military elite; the constitution makes it much easier to censure a government. The constitution is clearly aimed at a return to weak government. As the Thaksin episode showed, in Thailand a powerful prime minister in too much for other power blocs to stomach. Despite this reversion to type in the political landscape, there is a qualitative change in the way parties are positioning themselves, the lack of genuine political ideology notwithstanding. Thaksin Shinawatra’s TRT significantly moved the goalposts in terms of democracy as it is understood by the electorate at large. None of the other parties in the fray at the moment — unless one infers that the People’s Power Party, the TRT’s new incarnation, has inherited some of it — have any track record of having provided

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THE ASEAN-10 the kind of services the electorate got in return for voting for the TRT. The parties know they have to learn from the TRT’s example and copy and try to improve on it, but they also know they will not have the luxury of the TRT’s thumping majority to railroad policy through parliament. Another new factor is a heightened sensitivity to the monarchy. The past year has seen a contemporary taboo of sorts broken with General Prem — as the King’s closest advisor in effect also his proxy — being attacked on the streets and on the Internet for allegedly having orchestrated the coup. This vulnerability has come at a period of significance for the monarchy and its role in Thai society. King Bhumibol Adulyadej’s 60th anniversary on the throne came in 2006, and his 80th birthday fell on December 2007. Both events strike emotional chords in a population in which the majority have known no other king. Since late 2005, the bandying about of the monarchy’s role in national life and politics has ironically served to enlarge the space for a discussion that is still verboten. In a reflex action, conservatives in the appointed National Legislative Assembly have been trying to strengthen the legal ring-fence around the monarchy. King Bhumibol Adulyadej’s shaky health (he was hospitalized in October 2007 with symptoms of minimal ischemia — a mild stroke — and the initially envisaged three-day stay was extended to more than three weeks) cannot but sharpen concerns mostly expressed in private, about monarchic succession. To put it mildly, King Bhumibol’s shoes will be difficult to fill. Historian Thongchai Winichakul points out that with only two exceptions, succession in the Chakri dynasty has always involved highstakes manoeuvring by factions in the elite establishment, usually in a managed process behind palace walls, and often featuring powerful “kingmakers” in the aristocracy. Managing any transition that may occur in the monarchic institution will be a top priority for the royalistbureaucracy-military combine in Bangkok, and for the government in power at the time.

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POLITICAL OUTLOOK The uncertainties come at a time when Thailand’s economic competitiveness is losing some of its edge. Managing the currency exchange rate will continue to be a challenge against the backdrop of an export sector that contributes some 60 per cent of GDP. The country needs policy continuity and stability rather than the swing towards economic nationalism that has been seen in the past twelve months — although it must be said that pragmatism usually carries the day, so in that respect, periodic fears of economic crises and a flight of capital and investors are often an overblown reaction to carefully choreographed theatrics for public consumption. The insurgency in the south is likely to rumble on, with both sides in a deadlock. While the military has claimed some progress in recent months, and it could be argued that large-scale concerted attacks by insurgents have not taken place for some months at the time of writing, even that progress has been unable to prevent the unpredictable day-to-day killings and bombings. The insurgents seem prepared to continue their struggle for another three to five years. A new government especially with the Democrats (with their strength in the south) at the helm — may be well placed to begin work on a political solution. But right wing and conservative elements in the establishment at large and specifically in any ruling coalition, may well scupper such efforts. Given these factors the political temperature is likely therefore to stay rather hot through 2008. In Thailand, the development of a true liberal democracy which is favoured by a sizeable constituency, has been delayed; whether it arrives through a managed process or through a meltdown is the question.

Vietnam The dust has settled after the elections in May 2007, with the new National Assembly appointing a new and leaner government in July 2007. In a similar streamlining initiative, the communist party merged a number of commissions of the Central Committee, the power behind the government of this one-party state. After the important elections

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THE ASEAN-10

VIETNAM Land area:

330,000 sq. km.

Population:

85 million

Capital:

Hanoi

Type of Government:

Socialist Republic

Head of State:

President Nguyen Minh Triet

Prime Minister:

Nguyen Tan Dung

Next Election:

2011 (for both National Assembly and Communist Party)

Currency Used:

Vietnamese Dong

US$ exchange rate on 11 December 2007:

US$1 = 16,309 dong

in 2006 (Party) and 2007, elected officials can now pause in the safety of their positions, and ponder and pursue their agenda. The political issues for 2008 to 2011, the year of the 11th Communist Party National Congress, belong to two categories. The first category includes grievances arising from long-standing flaws of the political system. The second category concerns preparation for the next stage of political development, especially leadership succession and renewal. Some political turbulence not amounting to fundamental instability could come at the end of 2008. Corruption in government, both high-level and petty types, remains the root cause for oppositional challenges to and dissatisfaction with the political regime today. According to Transparency International rankings, Vietnam ranked 123/180 in 2007 on the Corruption Perceptions Index. Vietnam has dropped a few notches in ranking, although the actual index for Vietnam has remained constant at 2.6 throughout 2004–2007. The year 2007 witnessed many groups of civilians, from dissidents to peasants, staging protests in Hanoi, Ho Chi Minh City, and a few other provincial capitals against corruption by officials.

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POLITICAL OUTLOOK There has been discontent over unfair compensation paid by corrupt officials for requisitioned land, wrongful decisions in courts and police matters, and with incompetence in educational, health, cadastral, and other areas of public administration. In September 2007, the Deputy Prime Minister Truong Vinh Trong, who held a special portfolio to fight corruption, said corruption could not be mitigated in haste, even as the government went after officials for mangling a project to computerize public administration and for corruption charges in a project worth more than US$60 million. Charges were pressed only more than three years after the project came under strong suspicions. Officials have been caught in wasteful and profligate ways, gambling with millions of dollars of public funds and ill-gotten riches, and this has registered strongly with common people. It is therefore with haste, arguably, that Vietnam needs to forestall higher levels of discontent from snowballing into action. The political regime is worried that dissidents could utilize such genuine grievances to convincingly argue about the corruptibility and therefore the great harm of oneparty political systems and rally people for political action. The sense among ethnic minorities is that top officials in Hanoi may not have an in-depth and realistic knowledge of the situation because of false reporting from local officials who, feeding into the vicious cycle of corruption, bribe their superiors. While it is not a crisis situation as yet, the income inequality, especially between urban and rural areas, has become very stark and could feed into the festering resentment that could spark a massive social movement against one-party rule. Protests by ethnic minorities who have arguably benefited least from Vietnam’s achievements in eradicating poverty is a nightmarish prospect for Vietnam’s leaders. In September 2007, Vi Duc Hoi, a Tay minority party member in Lang Son Province who held important party leadership positions in the province spoke out against corruption and was dismissed. Enforcers of party discipline were surprised that he — as a party member holding the position of propaganda chief for the party at the province — could support an alternate political system that was against the interest of the party. A leading official from the Ministry of Public Security had

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THE ASEAN-10 also gone to participate in the investigations. It shows, indeed, that the communist party is worried about the confluence of ethnic and governance tensions, especially if they appear at provinces away from the seat of central power. Another sign of the lack of confidence of the communist party is President Nguyen Minh Triet’s declaration on 27 August 2007 to the General Political Bureau of the armed forces that the communist party would be committing suicide if it were to abolish Article 4 of the Constitution of the country (which gives the communist party monopoly over political power). He was responding perhaps to the clamour among members of the intelligentsia and dissidents for constitutional change to create checks on the government to fight corruption. To forestall such challenges from becoming too big to handle, haste in tackling corruption is therefore of utmost importance to the longevity of the one-party system. Since the end of 2006 and throughout 2007, Vietnam’s industrial areas have also witnessed many strikes by workers, especially those working in Foreign Direct Investment enterprises. Artificially low wages and the redundancy of unions, in the absence of a strong and direct government role in wage negotiations and arbitration, are the key issues. Unionists in companies have no independent voice and in fact their job safety often depends on agreement with the employer. As part of the state bureaucracy, union employees are also underpaid and have no motivation to improve members’ lot. Employers often get away from fulfilling certain labour requirements in law, as eager provincial government officials compete to locate investments in their province. In the short term, industrial turbulence is likely to continue until the government installs a new industrial regime that can arbitrate contradictions between capital and labour better than the present framework. Political turbulence at the elite level can be expected by the end of 2008, when the current tenure of office holders reaches mid-point. While the economy continues to hum along, there remains a group of senior party members that wish to see more rapid change, and they see that as possible only if a strong visionary leader rather than a consensus maker — like the incumbent — occupies the position of

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POLITICAL OUTLOOK General Secretary. Nong Duc Manh, the incumbent, by the statutes of the communist party cannot go for a third term beyond 2011 but the dissatisfied people mentioned above would like to see him retire before then. Another dimension to this coming titanic struggle is competition among the next line of leaders who are likely to succeed Nong Duc Manh. The front-runners at the moment are Prime Minister Nguyen Tan Dung and Party Standing Secretary Truong Tan Sang. When competition heats up, perhaps before the holding of the Central Committee Plenum at the thirty-month mark of the five-year tenure, we are likely to see proxy battles in the mass media in the fight against corruption as well as in ideological arguments carried in party meetings and party newspapers. The last area of contest — ideology of the Party — could be tempered by a consensus within the Party to revise the manifesto of the communist party. Further down the line, the appointment in July 2007 of two new Deputy Prime Ministers (DPMs) — Hoang Trung Hai and Nguyen Thien Nhan — is good news because other than their relative young age, they are also known to be western-trained technocrats. If they continue with their current track, they are likely to form the core of the new leadership that will succeed the previous generation. Whether they will enter the Political Bureau at the 2011 Party National Congress will be keenly watched. By then, we should expect more younger people like the two DPMs appointed to ministerial positions, as quite a number of them are now in Vice-Minister and Department Director positions. By itself, such upward movement of better-trained people does not necessarily mean corruption and incompetence will end immediately. Political acumen and specialist knowledge do not always go hand-inhand. But the hope is the technocrats, politically supported by ex-leaders of the Party who can still pull some strings behind the curtains, could realize more creative solutions for the very urgent governance problems affecting the political legitimacy of the communist party, especially the problems of corruption, and the ills of the education, the public health and the legal systems. The imperative for the communist party in the next few years is to eradicate as much as possible the injustice and rot in these few sectors to ease the political tensions that have erupted in society in protest against these ills.

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Reproduced from Regional Outlook: Southeast Asia 2008-2009, edited by Deepak Nair and Lee Poh Onn (Singapore: Institute of Southeast Asian Studies, 2008). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

REGIONAL ECONOMIC TRENDS By Sanchita Basu Das and Denis Hew

E

conomic growth in Southeast Asia is estimated to be at 6.1 per cent y/y (year-on-year) in 2007 (vis-à-vis 6 per cent y/y in 2006), maintaining around the same for 2008 as well (ADB 2007). Exceptional performance in both Singapore and the Philippines is propelling the growth in the region. The region is likely to experience a more favourable growth going into 2009, given a more stable outlook both in the domestic and global economy. The year 2007 started on a good footing until the deterioration in the U.S. sub-prime mortgage market and a tightening in corporate credit conditions disrupted the global financial markets. This created fuzziness in the U.S. growth outlook, though most observers

REGIONAL ECONOMIC TRENDS • With growth of around 6 per cent, 2007 appears to be another reasonably good year for Southeast Asian economies. Meanwhile, monetary and fiscal policies are expected to remain accommodative, balancing growth and inflation objectives. • The ASEAN Charter will not only give ASEAN a legal personality but will strengthen its institutional structure and strategically set out the longer term direction for the region. • Regional economies appear quite resilient over the next two years. But there are economic risks that need to be taken into account, e.g., a possible downturn in the United States and persistently high oil prices that could lead to an economic slowdown in the industrial world.

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ECONOMIC OUTLOOK believe that the downturn in the United States is likely to be modest and short-lived. As for others, China and India remain Asia’s main economic drivers with growth close to 8–10 per cent y/y in 2007–2008. While Japan may loose some of its recovery momentum next year, Eurozone, after growing steadily in last few quarters, may start feeling the impact on domestic demand of previous monetary tightening. Given this, 2007 GDP growth projection for Southeast Asia is heavily influenced by better performance of four major economies — Singapore, Philippines, Indonesia, and Vietnam. Stronger than expected domestic demand reflecting rising income, lower interest rates. and higher remittances accounts for most of these expansion. Countrywise, while Indonesia’s growth was supported by lower inflation and interest rates, the Philippines growth was propelled by net exports and consumption spending. Vietnam expanded on higher private sector confidence on its accession to World Trade Organization (WTO) in 2006. In Thailand, business and consumer confidence continue to falter on political and policy uncertainty. Going into 2008–2009, things may improve for Southeast Asia provided new elections in Thailand give more stability to economic policies, and Malaysia’s and Indonesia’s growth may pick up on better exports and investors confidence respectively. Cambodia and Vietnam will continue to grow briskly. The region, in general, may benefit from accommodative monetary and fiscal policies. Exports continue to be an important part of Southeast Asia’s growth story. Though the growth of semiconductor sales fell during 2007, exports remain on the upside. This, coupled with moderate imports, contributed to the region maintaining its current account surplus position. According to World Economic Outlook (IMF), ASEAN5 is expected to come off its peak for the current account surplus. It is likely to fall from a high of 4.7 per cent of GDP in 2006 to 4.1 per cent in 2007 and 3.2 per cent of GDP in 2008. Surpluses are expected to shrink due to rapid growth in imports of raw materials and intermediate and capital goods and, at the same time, a decline in oil exports by oil-exporting countries.

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In 2007, inflation is expected to be lower around 3.8 per cent y/y compared with 7.1 per cent y/y in 2006 (ADB 2007). Indonesia led the pack in Southeast Asia as it followed aggressive monetary tightening measures in 2006 to combat inflationary pressure due to rise in fuel prices. Singapore, Malaysia, Thailand, and the Philippines also contained the inflation during the year. As for 2008–2009, inflation is expected to remain steady or edge up on higher commodity prices. In the past six months, crude oil prices already moved up from an average of US$60 per barrel to US$93 per barrel in late October on the back of robust demand (from China, India, and strong global economy) and renewed supply concerns (lower than expected U.S. inventory, bad weather, and non-OPEC production delays). The futures market is already indicating a price level of around US$70–75 per barrel in months to come. So far, with the sub-prime mortgage anxieties, equity market in Southeast Asia fell by an average of 5.5 per cent in August 2007. In the coming months, though the real economy may appear to be more resilient, the sentiment in credit market is likely to remain fuzzy, suggesting that equity market would remain choppy. On foreign exchange market, besides the broad U.S. dollar weakness, Chinese policy-makers are more willing to appreciate the renminbi, and this should translate to more currency gains in Southeast Asia. Exchange rate movements would also be directed by the current account surpluses and flows of fund into the region. Again, with regard to the policy rates, the uneven economic condition among the major economies has compelled most major central banks to adopt a “wait-and-see” approach till this yearend. At its end-October meeting, the U.S. Federal Reserve lowered the federal funds rate by 25 basis points to 4.5 per cent, and the analysts are in consensus that Fed would now keep the rates on hold at least until the end of the year. Though, in the coming months, the ASEAN Central Banks will remain wary of the financial systems, their key decisions for monetary policy is most likely to be driven by inflation and output. In addition, 2007 is likely to be a landmark year for ASEAN as a regional grouping. Leaders of the ten member countries have met

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ECONOMIC OUTLOOK in November 2007 to sign the ASEAN Charter. The Charter will not only provide ASEAN with a legal personality but will also put in place the necessary arrangements to realize the ASEAN Economic Community (AEC). The AEC initiative will involve faster and deeper regional economic integration to create a single market and production base by 2015. To facilitate this initiative, the ASEAN Charter provides a more rule-based structure for ASEAN including defining the institutions, mechanisms and processes in dealing with transnational issues (Severino 2005). ASEAN policy-makers have also adopted a blueprint with clear action plans and milestones leading up to 2015. In this regard, the AEC blueprint along with the ASEAN Charter will be the two most important deliverables at the Singapore ASEAN Summit.

Figure 1: Real GDP Growth in the ASEAN-5 Countries, 2003–2008

9 8

(% y/y)

7 6 5 4 3 2

2003

2004 Singapore Philippines

2005

2006 Malaysia Indonesia

2007*

2008*

Thailand

NOTE: * 2007 and 2008 are estimated GDP growth rates. SOURCE: Asian Development Bank.

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Over the next two years, Southeast Asia’s economic growth prospects appear quite resilient. But a lot will also depend on how these countries manage their domestic economies, given the policy instruments at their disposal. Nevertheless, risks remain that may undermine the economic outlook of the region. It may be a bit premature to argue that Southeast Asia may escape the fallout from a possible U.S. economic recession. Moreover, persistent high oil prices are likely to slow down the industrialized economies of the United States, the Eurozone, and Japan. This in turn could lead to a regional economic downturn in Southeast Asia. The uncertain outcome of upcoming elections in few Southeast Asian countries plus higher geopolitical and security risks in some parts of the region are potential risks that need to be taken into account in growth projections.

Figure 2: Real GDP Growth in Cambodia, Laos, Vietnam and Southeast Asia, 2003–2008

14 12

(% y/y)

10 8 6 4 2 0

2003

2004

2005

2006

Southeast Asia Lao People's Dem. Rep.

2007*

2008*

Cambodia Viet Nam

NOTE: * 2007 and 2008 are estimated GDP growth rates. SOURCE: Asian Development Bank.

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ECONOMIC OUTLOOK

Figure 3: Inflation Rate in Southeast Asian Economies, 2006–2008 14 12

(% y/y)

10

2006

2007*

2008*

8 6 4 2

et Na m Vi

ay sia Ph ilip pi ne s Si ng ap or e Th ai la nd

M

al

La

So

ut

he

as

tA

os

sia Ca m bo di a In do ne sia

0

NOTE: * 2007 and 2008 numbers are estimated inflation rate. SOURCE: Asian Development Bank.

Figure 4: Relative Performance of ASEAN-5 Currencies to the US Dollar, 1997–2007

January 1997=100

100 80 60 40

MYR/USD PHP/USD

Sep-07

Jan-07

May-06

Jan-05

Sep-05

May-04

Sep-03

Jan-03

Sep-01

May-02

Jan-01

Sep-99

SGD/USD IDR/USD

May-00

Jan-99

May-98

Sep-97

0

Jan-97

20

THB/USD

SOURCE: Bloomberg.

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Figure 5: Relative Performance of ASEAN-5 Main Stockmarket Indices, 1997–2007

350 January 1997=100

300 250 200 150 100

Sep-07

Jan-07

May-06

Jan-05

Sep-05

May-04

Sep-03

Jan-03

Sep-01

Singapore STI Bangkok SET Manila PSE Composite

May-02

Jan-01

May-00

Sep-99

Jan-99

May-98

Sep-97

0

Jan-97

50

KLSE Composite Jakarta Composite

SOURCE: Bloomberg.

REFERENCE Asian Development Bank. Asian Development Outlook Update 2007. International Monetary Fund. Regional Economic Outlook, Asia and Pacific, October 2007. Severino, R.C., compiler. Framing the ASEAN Charter: An ISEAS Perspective. Singapore: Institute of Southeast Asian Studies, 2005.

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REGIONAL ECONOMIC INTEGRATION AND THE ASEAN CHARTER By Rodolfo C. Severino

T

he extent of ASEAN economic integration is most conveniently measured by the share of intra-ASEAN trade in total ASEAN trade. Regarding the glass as half-empty, ASEAN critics harp on the fact that that share has never amounted to more than 25 per cent, much lower than in the European Union or in the North American Free Trade Agreement. On the other hand, one could look at the glass as half-full and point out that intra-ASEAN trade takes up the largest share of total ASEAN trade, with Japan, the United States, and the European Union a far second, third, and fourth at slightly less that 12 per cent each in 2006. The critics could then respond by noting that a significant portion of intra-ASEAN trade is accounted for by Singapore’s commerce with its neighbours, particularly Indonesia and Malaysia. In any case, contrary to the impression in otherwise knowing circles and the conceit of officials, whatever economic integration is taking place in ASEAN is so far more due to market forces than to the actions of governments. To be sure, much of intra-ASEAN trade is now free of duty — by formal agreement, by law and on paper. However, the rate of usage by traders of the tariff preferences accorded by the ASEAN Free Trade Area (AFTA) agreement is extremely low. The accepted rate among academics is a dismal 5 per cent. There are several reasons for this. One is that the gap between the AFTA and the most-favoured-nation tariff rates is closing, so that traders do not see the savings on duties as sufficiently offsetting the administrative cost of seeking AFTA treatment. Another reason is simply that the AFTA scheme is not widely known in the trading community. A third reason is that much of intra-ASEAN trade is made up of electronics, which are largely duty-free anyway. At the same time, the ASEAN Secretariat suspects that the usage of the AFTA preferential tariff is actually higher than the common estimate of 5 per cent, since the member states often neglect to file the necessary reports. Tariff-cutting is only one means of market integration. The AFTA agreement also calls for the elimination of non-tariff barriers. However, such barriers are left to governments rather than traders to identify, and they have been dragging their feet in doing so.

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Over the past decade, ASEAN states have agreed to take further measures for integrating the regional economy. These include customs reform and coordination, product standardization, harmonized tariff nomenclatures, mutual recognition arrangements, the liberalization of trade in services, the facilitation of transportation, and the facilitation of tourism. The implementation of these measures is making progress, but progress is quite slow. Accordingly, ASEAN has adopted “roadmaps” for the fast-track integration of trade in twelve priority sectors. How these are actually carried out remains to be seen. With more than half a billion people and a gross regional product that is close to that of China, ASEAN could regain its former ascendancy as an investment destination and production platform, able to compete effectively with the fast-rising continent-sized economies of China and India. With this in mind, at their November 2007 summit meeting in Singapore, the ASEAN leaders issued a “blueprint” for achieving the ASEAN Economic Community by 2015, with “strategic schedules” and “clear roadmaps”. Again, the key is implementation and compliance. One problem is that ASEAN business people do not seem to see regional market integration as being in their interest and thus do not apply pressure on their governments to take the necessary measures to integrate the regional market. ASEAN corporations seem to be more interested in their own national or developed-country markets than in the regional one. The pressures for regional integration come from multinational corporations, mainly Japanese and American, which do not carry enough political weight in the ASEAN countries. On the other hand, the benefits of integration — increased competition, lower costs, expanded investments, more jobs — are largely economy-wide, diffused, and long-term. ASEAN leaders and governments thus have to look beyond the immediate interests of specific companies or individual economic sectors and view things from a long-term and comprehensive perspective. Ultimately, regional economic integration will require a greater identification of the interests of the regime, those of a critical mass of business people, and those of the nation with the integration and progress of the region as a whole. The new ASEAN Charter could help, directly, by encouraging and tightening compliance with ASEAN agreements, but mostly indirectly, by promoting a deeper sense of region among the governments and business sectors of Southeast Asia.

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ENERGY AND THE ENVIRONMENT By Joergen Oerstroem Moeller

T

he figures are crystal clear. The same goes for the message they convey. Over the next twenty-five years — to 2030 — world consumption of energy will rise by approximately 55 per cent. Most of the rise will come from Asia excluding Japan, with an annual increase of 3.2 per cent, equal to a doubling of energy consumption by 2030. China and India are in the forefront. Recalling an estimated annual economic growth rate of 5.89 per cent for this part of the world, these figures do not come as a surprise. The price of oil reached more than US$90 per barrel in November 2007. Irrespective of how one looks at it, the conclusion seems inevitable that future rising demand will continue to boost oil prices. A switch to other energy sources is possible depending on price and demand structure, but this takes time, requires large sum of investment, and will sometimes be under political scrutiny as in the case of utilizing nuclear energy. A forecast by the U.S. government with two scenarios for the oil price in 2030 — one at US$100 and another at US$34 per barrel — concludes that the total world energy consumption in 2030 will not differ much, but the composition of energy sources will. (See http://www.eia.doe.gov/oiaf/ieo/world.html.) With a lower oil price, the incentive to switch from oil to other sources will be feeble. The world continues to be heavily dependent on oil, which is a major source of greenhouse gas emissions. If the price of oil goes up, substitution will take place, but to a considerable extent to coal (coal will then overtake oil as the most important source of energy), which produces even more green gas emissions. In the context of energy and environment, this is discouraging. A substantial reduction of emission levels would require a major switch into more sustainable energy sources, but that will not take place irrespective of the level of oil prices. Fossil fuels will continue to be the dominant source of energy by far. This leads to the next conclusion that even with a continued drive to switch to clean energy sources, reduction of greenhouse gases must primarily come from higher energy efficiency and better anti-pollution technology. Looking at energy efficiency, 2004 was a decisive year. Prior to that, economic growth rates surpassed the rise in energy consumption only for the OECD countries. After that year, non-OECD countries moved from equality between economic growth and rise in energy consumption to much higher energy efficiency — economic growth clearly surpassing rise in energy consumption. This augurs more production per unit of energy used for the world as a whole.

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It can be expected that energy efficiency will continue to improve until 2030 for both OECD and non-OECD countries. New equipment will be much more energy efficient than existing ones, not the least because of the growing environmental awareness of greenhouse gas emissions and climate change opening the door for economic incentives and possibly regulatory measures to that effect. Human activities are almost universally acknowledged as a driver of global warming, but scientists have not totally agreed upon the proportion generated by human activity and by other causes. The same vocabulary applies to climate change. Scientists agree that there will be climate change, but not totally on how much and how this will affect the globe. These differences or uncertainties are used and misused in political debate by some players to pursue their own agenda; not surprising in view of the economic and political interests at stake. Nation-states and enterprises have intervened in the debate to defend vested interests. For most of the twentieth century, the annual rise in sea level was between 1 and 2 mm but it has accelerated at the end of the century to approximately 3 mm. A number of prognoses for the end of the twenty-first century are at hand. They vary from small changes to rises of over 1 metre or more in worst-case scenarios. Suffice to mention, a rise of 1 metre would submerge the Maldives and make parts of Bangladesh uninhabitable; hence these figures are of major economic and political significance. Under tha same scenario in Southeast Asia, parts of capitals, major cities and important geographical areas may be threatened. Instability in weather conditions (El Niño, typhoons) could also be added. If some of the worst-case scenarios materialize, Southeast Asia may face unprecedented challenges. This cannot be overlooked by policy planners in Southeast Asia. If the U.S. government study is correct, high oil prices will not in itself change relative prices sufficiently to solve the problem. We cannot count upon the market mechanism to combat global warming. A deliberate policy primarily based on a combination of fiscal measures, subsidies and restrictions seems to be what is needed to bring about higher energy efficiency and introduce incentives to switch into renewable energy sources where sun energy, wind power and bioetanol are on top of the agenda. The difficult item, however, is bioethanol, where a drive to convert areas to produce bioethenol could create a scenario of a jump from the frying pan into

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ENERGY AND THE ENVIRONMENT (continued)

the fire. A sharp reduction in forests will cut into what is called the world’s lungs and further diminish the global capacity to deal with greenhouse gases. It will also produce pollution in the form of haze as has been seen several times. The ethical perspective of using farmland to produce energy springs to mind with the observation voiced in a hearing in the U.S. Congress that 800 million people behind the wheel of their car competes for land with 2 billion undernourished people in the developing world. If managed incorrectly, bioethanol may not be the blessing it has promised to be. Meeting after meeting — for example the 2007 APEC summit in Sydney — have announced the imperative of doing something about the emission of greenhouse gases and global warming. These are often accompanied by objectives and goals normally measured by a quantitative reduction of emissions within a certain time scale or period. The same meetings are conspicuously more silent about how to go about achieving this. Behind this hides one of the most brutal battles about burden sharing that the world has seen for a long time. The industrialized countries are ready to take the lion’s share of cutting greenhouse gas emissions, but not to the extent wished by the newly industrialized and developing countries. These countries are willing to do something, but at the same time display suspicion — not that the issue is invented to keep them in check — but that the rich countries see it as an opportunity for doing so. In the years to come this battle unfold before our eyes. Southeast Asian countries are at a crossroad. They have a leg in both camps. ASEAN has oil exporters and oil importers. It will not be easy to sketch a common position, but it will be even more difficult not to do so. After all, this is going to dominate the agenda in the years to come.

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EVOLVING REGIONAL FINANCIAL ARCHITECTURE IN EAST ASIA By Masahiro Kawai* 1. Introduction: Key Issues Ten years have passed since the Asian financial crisis devastated not only the currency values and the financial systems of Indonesia, Korea, Malaysia, and Thailand, but also their overall economic activity, social conditions and, in some countries, political systems. Since the crisis, these economies have restored financial resilience through (i) financial sector restructuring and reforms aided by corporate debt resolution and the introduction of more effective insolvency procedures, (ii) reductions of short-term external debt and accumulation of foreign exchange reserves, and (iii) adoption of greater flexibility of exchange rates among the crisis-affected economies. The financial crisis and contagion revealed how closely financial systems and economic conditions were inter-connected across East Asia. Reflecting this, East Asian governments and central banks have embarked on several new initiatives for regional financial cooperation. 1 This paper explores the background and progress of recent financial cooperation initiatives in the region, the new opportunities provided, and possible evolution of a new regional financial architecture. 2. Factors behind Regional Financial Cooperation in East Asia There are several factors behind recent financial cooperation in East Asia.2 Deepening regional economic and financial interdependence. The most important reason behind recent moves towards regional financial cooperation is the deepening regional economic and financial interdependence. Over the

* The findings, interpretations, and conclusions expressed in the paper are entirely those of the author alone and do not necessarily represent the views of the Asian Development Bank, the Asian Development Bank Institute, their executive directors, or the countries they represent. 1 East Asia in this paper refers to Japan, China, the Asian newly industrialized economies (NIEs; Hong Kong, Korea, Singapore, and Taipei, China), and ASEAN member countries (Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singpaore, Thailand, Vietnam). 2 See Kawai (2005, 2007c).

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past twenty-five years, East Asia has witnessed rapid market-driven economic integration through trade, foreign direct investment (FDI), and finance. Japan, the Asian NIEs, and the middle-income Association of Southeast Asian Nations (ASEAN) countries were early drivers of this process and, more recently, China has been an active participant in the region’s trade and FDI activities. In the past few years, India has also been trying to strengthen linkages with East Asia. As a result, macroeconomic interdependence has been rising, with more synchronized business cycles among major economies in the region. Deepening interdependence has raised awareness among the region’s national authorities that they cannot achieve economic and financial stability by themselves and that some collective action is essential for this purpose. Response to the Asian financial crisis of 1997–98. The Asian financial crisis was the result of a combination of financial globalization and weak national financial systems. Crisis-affected economies have learned several hard lessons from the crisis. First, to strengthen national financial systems there is a need to share information within the region about common issues and concerns, and ways to address them at the national level. Second, in the face of rising financial globalization, there is a need to create regional self-help mechanisms for effective prevention, management, and resolution of financial crises particularly given the revealed shortcomings of the existing global financial architecture and the limited Asian voice in, and for, global financial management. Third, because regional financial stability is a basis for global financial stability, effective regional financial cooperation is complementary to the role of global financial institutions such as the International Monetary Fund (IMF). European monetary integration. The overall success of European monetary and exchange rate policy coordination, which culminated in the introduction of the euro as a single currency in 1999, has also prompted the East Asian authorities to consider regional financial cooperation as a viable tool of regional self-help mechanisms for financial stability. As in the case of Europe, regional cooperation — rather than a regional hegemonic arrangement — is important in East Asia as Japan, China, Korea, and ASEAN countries are equally important partners in the region. As the Japanese yen or the Chinese yuan alone cannot fulfil the role of a regional key currency, a basket of regional currencies can potentially play an important role.

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3. Recent Progress on Regional Financial Cooperation in East Asia There are three regional groups for East Asian financial cooperation: ASEAN, ASEAN+3, and East Asia Summit (EAS). ASEAN financial integration. Ten ASEAN members are now striving towards economic and financial integration. In 1977 the original five ASEAN monetary authorities created an ASEAN Swap Arrangement with the initial facility of US$100 million, which has grown in size and country coverage over the years. The ASEAN finance ministers, who met for the first time in 1997, introduced the ASEAN Surveillance Process in 1998. Following the adoption of ASEAN Vision 2020, the Initiative for ASEAN Integration (2000), and the Roadmap for Integration of ASEAN (2001), the ASEAN leaders declared the ASEAN Concord II (or Bali Concord II) and agreed to establish an ASEAN Economic Community by 2020, a goal that was recently brought forward to 2015. In this context, the finance ministers agreed in 2002 on the Roadmap for Financial and Monetary Integration of ASEAN by focusing on capital market development, capital account liberalization, financial services liberalization, and ASEAN currency cooperation. The Vientiane Action Programme signed at the 2004 ASEAN Summit identified three financial cooperation initiatives: (i) strengthen surveillance mechanisms including the setting up of an early warning system; (ii) enhance domestic financial systems through capacity building; and (iii) develop and integrate financial markets. ASEAN+3 financial cooperation. ASEAN+3 finance ministers from ten ASEAN countries, China, Japan, and Korea, who met for the first time in 1999, have pursued regional financial cooperation in three areas: (i) regional economic surveillance; (ii) regional reserve pooling; and (iii) regional bond market development.3 First, the Economic Review and Policy Dialogue (ERPD), introduced in May 2000, is a regional economic surveillance process, intended for information exchange, policy discussions, and peer reviews which are the basis for enhancing regional monetary and financial cooperation. It facilitates analysis of economic and financial conditions of the global, regional, and individual national economies; monitoring of regional capital flows and financial market developments; assessment and management of vulnerabilities and risks; and undertaking of

3

See Kuroda and Kawai (2002).

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joint actions on issues affecting the region. This process is expected to induce better macroeconomic policy-making and implementation of desired financial sector policy and institutional reforms through peer pressure. Second, the Chiang Mai Initiative (CMI), also introduced in May 2000, is a liquidity support facility intended to reduce the risk of currency crises and manage speculative attacks or contagion against currencies. It comprises (i) bilateral swap agreements (BSAs) among China, Japan, Korea, and between any of these plus-3 countries and a core ASEAN member and (ii) the ASEAN Swap Arrangement (ASA). The total bilateral swap size reached US$83 billion with sixteen BSAs and the total ASA at US$2 billion as of July 2007. Continuous progress has been made to strengthen ERPD and CMI. Some of the major developments over the last few years include (i) integration and enhancement of ERPD into the CMI framework (May 2005); (ii) raising the ceiling for withdrawal without an IMF programme in place from 10 per cent to 20 per cent of the total (May 2005); (iii) adoption of the collective decision-making procedure for CMI swap activation, as a step towards multilateralizing the CMI (May 2006); and (iv) agreement in principle on a “self-managed reserve pooling” arrangement governed by a single contractual agreement as an appropriate form of CMI multilateralization (May 2007). Currently, ASEAN+3 finance and central bank deputies are studying some key elements of CMI multilateralization (self-managed reserve pooling) — including surveillance, reserve eligibility, commitment size, borrowing quota, and activation mechanisms. Finally, ASEAN+3 policy-makers are promoting local-currency bond markets through the Asian Bond Markets Initiative (ABMI). The region’s central banks are also making efforts through the Asian Bond Funds — particularly ABF2. These are expected to help make the Asian financial system more balanced so as to promote efficient allocation of financial resources and risks, and facilitate the recycling of regional savings for regional investment — particularly for physical infrastructure, SME businesses, and housing. It is estimated that there is a potential need for infrastructure investment, amounting to US$300–US$400 billion per year in Asia over the next ten years. At the same time there is a need to promote an efficient asset management industry given the rapid pace of ageing in several economies. EAS financial cooperation. The EAS was launched by thirteen ASEAN+3 members, Australia, India, and New Zealand in 2005. This group is expected to focus on financial cooperation as one of the five priority areas for cooperation

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(the other four being energy, education, combating avian influenza, and natural disaster mitigation) but its exact nature has yet to be identified. EAS financial cooperation needs to complement and support the existing cooperation arrangements under ASEAN and ASEAN+3. Some of the suggested functions of EAS financial cooperation may include (i) playing the role of an Asian voice caucus in larger international forums like IMF, G20, etc.; (ii) establishing an East Asian forum for capital market regulators which may evolve into the Asian version of the Financial Stability Forum involving the region’s finance ministry and central bank officials; and (iii) providing capacity building support for weaker countries. 4. Policy Challenges for East Asia’s Finance There are several key policy challenges for East Asian finance. Strengthening regional reserve pooling and economic surveillance. As the size of the CMI further expands, its IMF linkage is further reduced, and swap arrangements are multilateralized, the quality of economic surveillance (ERPD) needs to improve so that independent lending conditionalities can be formulated in the event of CMI activation. For this purpose, the following recommendations may be made:4 • •

• •

Clarify rules for activating a multilateralized CMI; Move beyond the simple “information sharing” stage to a more rigorous “peer review and peer pressure” stage to improve the quality of economic surveillance; Establish a joint forum for East Asian finance ministers and central bank governors to intensify policy dialogue; and Set up a professional secretariat that supports regional economic surveillance (ERPD), CMI activation, and independent conditionality formulation.

Development of sound, resilient financial systems. The lack of sound, resilient financial systems was one of the most important factors behind the Asian financial crisis. Establishing resilient financial systems at the national level is essential to ensure national and regional financial stability. In addition, financial systems must play key roles in channelling the pool of regional savings for

4

See Kawai and Houser (2007).

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regional investment needs. For these purposes it is crucial to accomplish the following: • •

•

Make further progress on ABMI and ABF to deepen the size and liquidity of local-currency bond markets; Strengthen the risk management capacity of financial institutions, particularly deposit-taking banks, through better regulatory and supervisory frameworks (including early implementation of Basel II) and greater competition; and Improve corporate governance of both financial institutions and their clients — corporate borrowers.

Exchange rate policy coordination. Currently no consensus exists, even within ASEAN or ASEAN+3, on a regional exchange rate arrangement. Given the deepening economic interdependence within East Asia, however, a certain degree of intra-regional exchange rate stability is increasingly desirable. In a possible unwinding process of global payments imbalances, or in the face of large capital inflows to East Asia, there is a risk of sharp and disorderly depreciation of the U.S. dollar against East Asian (and other major) currencies. If East Asian economies must accept currency appreciation vis-à-vis the U.S. dollar, they had better do so collectively, while maintaining intraregional exchange rate stability. To prepare for this type of policy coordination, East Asian economies may consider adopting policies to stabilize their exchange rates against a common basket of external and internal currencies — comprising the U.S. dollar, the euro, and the Asian Currency Unit (ACU) — to achieve relative stability of their effective exchange rates and intra-regional exchange rates. An ACU index can measure the degree of joint movement of East Asian currencies and the divergence of individual component currencies from the regional average given by the ACU rate.5 Once China moves to a more flexible exchange rate regime, ACU movements and divergence indicators may provide more meaningful information. 5. Conclusion East Asia can contribute to the stability of global finance by achieving sustainable economic growth and financial stability (and by not repeating financial crises)

5 Developing an Asian Currency Unit (ACU) — a composite index of regional currencies — is potentially useful for exchange rate management in the region. See Kawai (2007a, b) for the concept of ACU and its possible roles.

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through (i) establishment of resilient national financial systems; (ii) mobilization of regional savings for regional investment; (iii) strengthening of regional liquidity (CMI) and surveillance (ERPD) arrangements; and (iv) adoption of formal or informal exchange rate policy coordination. What is the most appropriate regional grouping that can deliver these results? ASEAN has the longest history of regional economic and financial cooperation in East Asia and is now on its way towards building an ASEAN Economic Community (EAEC) by 2015. ASEAN+3, created in the aftermath of the Asian financial crisis, has been focusing on regional surveillance and liquidity arrangements. EAS is the most recent grouping; its role in regional financial cooperation has yet to be identified. Among the leaders of these groupings, there is an emerging consensus that ASEAN is the “driving force” for the full realization of an EAEC, ASEAN+3 is the “vehicle” for this purpose, and EAS is an “integral part” of the overall evolving regional architecture. Though it is difficult to predict the future shape of the regional financial architecture, ASEAN and ASEAN+3 will focus on all issues (i)–(iv) above while EAS as a supporting group can focus on (i) and (ii). References Kawai, Masahiro. “East Asian Economic Regionalism: Progress and Challenges”. Journal of Asian Economics 16, no. 1 (2005): 29–55. ———. “Toward a Regional Exchange Rate Regime in East Asia”. ADBI Discussion Paper No. 68, Asian Development Bank Institute, Tokyo, 2007a. ———. “An Asian Currency Unit for Regional Exchange Rate Policy Coordination”. Mimeographed. Asian Development Bank Institute, Tokyo, August 2007b. ———. “Evolving Economic Architecture in East Asia”. Mimeographed. Asian Development Bank Institute, Tokyo, September 2007c. ———. and Cindy Houser. “Evolving ASEAN+3 ERPD: Towards Peer Reviews or Due Diligence?”. ADBI Discussion Paper No. 79. Asian Development Bank Institute, Tokyo, September 2007. Kuroda, Haruhiko and Masahiro Kawai. “Strengthening Regional Financial Cooperation in East Asia”. Pacific Economic Papers 51 (October 2002).

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THE GMS ECONOMIC CORRIDORS By Carol S. Guina

T

he development of economic corridors is becoming an important strategy for accelerating economic growth and integration in the GMS. Transport routes, which provide the backbone for such corridors, are effectively connecting production units and markets, thus stimulating economic activity, and creating a more conducive environment for growth. Over the years, several industrial clusters have emerged along the corridors to take advantage of strategically located transport routes as well as access to important seaports. Economic corridors have helped GMS countries to position itself as important players in the global markets. Economic corridors are geographic spaces that traverse national boundaries and where production and trade activities converge along well-defined transport routes. The clustering of economic activities occur generally through a combination of planned interventions in infrastructure as well as market forces that drive private investments to locate along strategic transport routes. Infrastructure development links products and markets and helps to accelerate economic growth and promote social benefits through increased employment and incomes. Economic corridor development has been a core strategy for countries in the Greater Mekong Subregion (GMS) taking into account its strategic location at the centre of trade routes with China and India. Economic cooperation among the GMS countries has made it possible for the development of economic corridors to proceed in a more systematic manner through joint planning of infrastructure, cross-border trade facilitation, and other cooperation activities. Three major corridors running through the north-south and east-west axis are in an advance stage of development and implementation: the North-South Corridor which runs from Kunming in Yunnan Province (PRC) to Bangkok; the East-West Economic Corridor which connects the port cities of Da Nang and Mawlamnyine in Vietnam and Myanmar respectively; and the Southern Corridor stretching from Bangkok to Ho Chih Minh City. Six more corridors have been recently identified. The three economic corridors will connect key centres of economic activity in the GMS, among them Bangkok, Ho Chi Minh, Kunming, Hanoi, Phnom Penh. The development of the East West Economic Corridor (EWEC) is the most advanced among the GMS corridors. The EWEC covers a stretch of road 1,450km long running from the east end point of Da Nang City (Vietnam) to the west end point of Mawlamnyine (Myanmar). EWEC will serve as a bridge connecting the Pacific Ocean and the Andaman Sea and is expected to boost cross-border

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trade as well as trade between the GMS and its trading partners outside the region like Japan and South Korea. When all the routes will have been fully upgraded by 2008, coast-to-coast travel along the EWEC will take only two days instead of five.1 The economic potentials of EWEC have propelled investments in related infrastructure: these include the construction of a bridge across the Mekong River linking Mukdahan (Thailand) and Savannakhet in Lao PDR, the Hai Van Tunnel linking Hue and Da Nang (Vietnam) and the improvement of the deep sea port in Da Nang. Single window inspection and single-stop customs inspection are in place in selected border crossing points along EWEC (e.g. Lao Bao (Vietnam)–Dansavanh (Lao PDR), Mukdahan (Thailand)– Savannakhet (Lao PDR) to facilitate the flow of goods. For the Lao-Bao Dasavanh border, trade facilitation measures have resulted in the reduction of time required to release cargo from 240 minutes to 70 minutes or a time savings of about 70 per cent. The GMS governments and the private sector are working closely together to realize the many economic opportunities along the EWEC. Enterprise zones and trade service hubs are being set up in at various locations in Lao PDR, Thailand and Vietnam. The GMS Business Forum has sponsored many activities to make the private sector aware of the infrastructure developments along the EWEC and the business opportunities that they bring. Development plans are defining specific economic roles for provinces along the corridor: Khon Kaen in northeastern Thailand is positioning itself to be a distribution centre and logistics hub for the EWEC, while Laos has plans to build the Savan-Seno Special Economic Zone in Savannakhet to be a trade and service hub for the subregion. The North–South Corridor (NSC) involves two routes (i) the Kunming–Chiang Rai–Bangkok via Lao PDR and Myanmar route, and (ii) Kunming–Hanoi–Haiphong. These major routes, together with the Southern Economic Corridor that links Bangkok to Ho Chi Minh City, form a large “loop” or “ring road” that covers the major cities and towns of the GMS. The corridor is also envisaged to extend its reach to the more developed markets of Malaysia and Singapore through the Kunming–Singapore Rail Link which is one of the major components of

1 Report on the Study of the GMS North-South and East West Economic Corridors, prepared by the International Trade Institute of Singapore, August 2005, p. 64.

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the corridor. The NSC intersects the East-West Corridor at key junction points in Thailand and Vietnam and further feeds into the transport routes along the EWEC. It plays a critical role in providing land-locked Yunnan Province and Lao PDR with important access to the sea ports. Several industry clusters have developed along the NSC. In resource-rich Yunnan Province, several firms engaged in vegetable and fruit processing, as well as in the processing of chemicals and non-ferrous metals, have set up along the NSC routes. Among them is KISCO, one of PRC’s largest steel companies, which utilizes the NSC transport routes to import raw materials from Vietnam. The Kunming Economic and Technological Development Zone is also an important industrial area with strategic transport linkages along the NSC. Similar industrial areas are also being developed in the northern Lao Cai region of Vietnam and in Lao PDR. The Southern Economic Corridor covers the route from Bangkok to Ho Chi Minh City via Phnom Penh while another route runs along the coastal road starting from the area in the gulf of Thailand near Bangkok, passing along the coastal lines of Cambodia to the southern-most part of Vietnam, and along the coast of the South China Sea to Ho Chi Minh City and Vung Tau. The railway component (Thailand–Cambodia–Vietnam railway development) involves extensive rehabilitation and/or new construction of the link from Poipet at the Thai-Cambodian border to Ho Chi Minh City, with a line from Phnom Penh to Sihanoukville and is part of the Singapore–Kunming Rail Link project. The development of secondary airports in the Southern Economic Corridor will also complement the road transport component; this includes the upgrading of the Pakse airport in southern Lao PDR to support the promotion of a subregional tourism loop consisting of UNESCO World Heritage sites; and the upgrading of Rattanakiri and Stung Treng airports in Cambodia. The Southern corridor area involves two capitals (Bangkok and Phnom Penh) and one commercial centre (Ho Chi Minh City). These three areas are highly developed and conduct a significant amount of foreign trade. The eastern coastal part of the corridor (area of South China Sea beside Vung Tau) contains a lot of petroleum and natural gas resources. At present, Vietnam has entered into partnerships with many foreign companies in exploration activities that will likely increase the demand for transport along the corridor.

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Reproduced from Regional Outlook: Southeast Asia 2008-2009, edited by Deepak Nair and Lee Poh Onn (Singapore: Institute of Southeast Asian Studies, 2008). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

THE ASEAN-10 Lee Poh Onn • Jayant Menon • Aris Ananta • Kyophilavong Phouphet • Kian-Teng Kwek • Mya Than • Aladdin D. Rillo • Chua Hak Bin • Supavud Saicheua • Nick J. Freeman

Brunei Darussalam The Brunei economy has been recording positive growth rates for the last few years. The labour force participation rate has also been increasing from 69.9 per cent in 2004 to 71.7 per cent in 2006. Unemployment fell to 4 per cent as at end 2006 compared with 4.3 per cent in 2005.1 Brunei’s literacy rates are among the highest in ASEAN. Literacy rates have increased from 80.3 per cent in 1981 to 84.7 per cent in 1991 and 93.7 per cent in 2001.2 Real GDP was 5.1 per cent in 2006 and estimated to be around 1.9 per cent in 2007,3 after hovering about 0.5 per cent in 2004 and 2005.4 The production of oil (barrels/day) has increased from 201,000 barrels in 2005 to 219,000 barrels in 2006.5 Gas production has increased from

BRUNEI DARUSSALAM • The outlook remains positive for Brunei with growth expected to hover above the 2 per cent mark. • The economy continues to be dependent mainly on buoyancy of the oil market but there are signs of diversification with an improvement of contribution to GDP by the services sector. • Fish processing has been one of the fastest growing sectors in recent years.

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ECONOMIC OUTLOOK 1,185 MMscf/day in 2005 to 1,239 MMscf/day in 2006. Production levels of oil and gas are expected to be more or less the same during the forecast period of 2008 and 2009, with only marginal increases expected. Inflation has also been under control, expected to average around 1.2 per cent in the forecast period.6 Based on the IMF World Economic Outlook Database in October 2007,7 and the author’s own estimates, the growth forecast in Brunei Darussalam will range between 2 to 2.5 per cent for 2008 and 2009. The positives continue to outweigh the negative although factors outside the countries may act as an unexpected dampener to growth. Of course, high petroleum prices throughout 2007 has served as a positive booster to growth, and this is expected to continue to fuel growth during the forecast period with oil prices hitting more than US$90 per barrel mark in late 2007. Nearly 90 per cent of government revenue came from the oil and gas sector, making up 55 per cent of real GDP. The higher oil and gas prices in the first two quarters of 2007 would continue to maintain the revenue base and fiscal surplus balance as well as the overall trade balance surplus of the country. The current account balance is estimated to be around 55 per cent of GDP in 2007 and 2008. Brunei’s major export markets of crude petroleum include Australia (15 per cent), Indonesia (30 per cent), Japan (13 per cent), the Republic of Korea (16 per cent), and the United States (8 per cent). In terms of gas, Japan is the largest importer (about 92 per cent of Brunei’s total output). Brunei is also planning to develop its petrochemical and energy-intensive industries in its long-term development strategy. However, high oil prices will also serve as a double edged sword. Notably, the United States and other major economies’ growth rates have been negatively impacted by high oil prices. High oil prices, together with the sub-prime market debacle, have impacted the U.S. economy negatively, and this is expected to have ramifications on the Bruneian economy. The devaluation of the U.S. dollar in 2007 has also reduced Brunei’s income in terms of its local currency value. What are the positive developments in 2007 that will bode well for Brunei during the forecast period?

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THE ASEAN-10 In July 2007, Brunei began drilling for oil 50 km away off the Borneo island with the French energy company Total. Diversification from the oil and gas sectors, to cushion the impact when oil supplies eventually tapers off, is also beginning to show its fruit. From the latest figures available, the services sector has helped to boost year-on-year GDP with double digit growth rates in the second quarter of 2007 of about 15.3 per cent.8 Government services recorded the highest growth rate (20.3 per cent increase), followed by trade (20 per cent increase), transport and communications (14.6 per cent increase), private services (12.4 per cent increase), finance (10.6 per cent increase), and real estate and ownership of dwellings (2.3 per cent increase).9 Brunei has another draw card for diversification in that it can also build on its ecotourism industry, which is still at its infancy stages. So far, the Heart of Borneo initiative has done much to generate publicity about the vast biologically diverse nature and wildlife present in the three countries that have signed the declaration, namely Brunei Darussalam, Indonesia, and Malaysia. Brunei has a unique advantage in that visitors coming to visit Borneo can use its international airport as the gateway to access this area. Also, Brunei has a range of hotels well capable of serving the needs of the budget-conscious traveller as well as the luxury travellers segment. The Brunei International Airport at Bandar Seri Begawan is designed to handle 1.5 million passengers and 50,000 tonnes of cargo per year. The Heart of Borneo (HoB) Declaration was signed on 12 February 2007 by the Governments of Brunei Darussalam, Indonesia, and Malaysia. This declaration involves the conservation and sustainable management of one of the most important areas of biological diversity, covering approximately 220,000 km2 of equatorial rainforests. Brunei also hosted the International Halal Products Expo in August 2007. Brunei intends to capture part of the international market in halal food that is worth around US$500 billion. In June 2007, the local Brunei Methanol company signed a project-financing agreement with the Japan Bank of International Cooperation providing a loan of US$250 million. The financing will be used to build a methanol plant in the Sungai Liang Industrial Park.10

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ECONOMIC OUTLOOK Potential investors have also been recently briefed on the Pulau Muara Besar Mega Port in October 2007, with the Brunei Government stating that foreign investors, shipping liners, and port operators are welcome to invest in the port.11 The port will cover an area of six by three kilometres and will initially have a 700-metre berth, 16-metre alongside draft, and 800,000 TEUs capacity. Eventually, the berth will be expanded to 5 kilometres with a 20-metre wide alongside draft. The Brunei Government is planning to establish an international shipping affiliate to form a consortium, which could include a major shipping line and a port operator.12 The Pulau Muara Besar Mega Port will include an export processing zone (accommodating industries such as aluminium smelting, halal food distribution, petrochemical, oil refinery, logistics, and warehousing) which would in turn potentially turn Brunei into a transhipment port for a wide range of manufacturing and re-export of products. Hence the potential for activities to support port operation and employment opportunities will bode well for the forecast period in 2008, 2009, and beyond. The local fisheries sector has continued to grow from strength to strength. Local production increased from 16,858.7 metric tonnes in 2004 to 17,258 metric tonnes in 2005. In the first six months of 2006, production was already 10,139.4 metric tonnes.13 Overall, local production is expected to surpass that in 2005. The processing industry for fishery has also grown. In 2004, 478.9 metric tonnes were processed. This increased to 657.5 metric tonnes in 2005. In the first six months of 2006, 508.7 metric tonnes have been processed.14 Such rates are expected to be maintained and increased in the forecast period of 2008 and 2009. On another positive note, Brunei also signed a free trade agreement with Japan on 18 June 2007. Although higher oil prices may work to Brunei’s advantage in the short run, the longer-term growth prospects of Brunei would be negatively impacted, as oil-dependent countries in the region and around the world will be affected by the oil price hike, keeping in mind that Brunei’s economic health is dependent on Japan (44 per cent), ASEAN

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THE ASEAN-10 (23 per cent), South Korea (11 per cent), and the United States (8 per cent), four of its major destination markets. These countries have been able to stave off price increases in oil but the recent record high prices is beginning to affect major economies around the world. To the extent that there is a slowdown in these economies because of the price hike in oil, so will the Bruneian economy be affected. The diversification efforts of Brunei must certainly be maintained or even increased in the light of decreasing supplies of domestic oil and also the possibility of a downturn in oil prices in the long run. It is vital that Brunei Darussalam must plan for this eventuality. NOTES 1. Brunei Darussalam, Key Indicators 2006. Department of Statistics, Department of Economic Planning and Development (JPKE), Prime Minister’s Office, 8 November 2006. 2. Ibid. 3. Quarterly Gross Domestic Product, Second Quarter 2007. Negara Brunei Darussalam, Department of Statistics, Department of Economic Planning and Development (JPKE), Prime Minister’s Office, 2007, p. 10; International Monetary Fund (IMF), World Economic Outlook Database: October 2007 Edition. http://www.imf.org. Accessed on 21 October 2007. 4. Brunei Darussalam, Key Indicators 2006. 5. Ibid. The lower production of oil prior to 2006 occurred because some oil fields were in disrepair, which limited Brunei’s capability in taking full advantage of the high oil prices prevailing then. 6. International Monetary Fund (IMF), World Economic Outlook Database: October 2007 Edition. http://www.imf.org. Accessed on 21 October 2007. 7. Ibid. 8. “Brunei Economy Ticks Up”, BruneiDirect.Com, 7 October 2007, Accessed on 19 October 2007; and Quarterly Gross Domestic Product, Second Quarter 2007. 9. Quarterly Gross Domestic Product, Second Quarter 2007. 10. Economist Intelligence Unit, “Country Report: Brunei”. United Kingdom: The Economist Intelligence Unit, September 2007, p. 12. 11. “Potential Investors Briefed on Pulau Muara Besar”, Borneo Bulletin, 29 October 2007. 12. Ibid. 13. Brunei Darussalam, Key Indicators 2006. 14. Ibid.

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Cambodia GDP growth of 10.4 per cent in 2006 marked the third year of doubledigit growth in Cambodia. The trend of strong growth continued in 2007, with GDP projected to have increased by between 8.5–9.5 per cent. Indeed, growth has averaged above 9 per cent since 2000. This outcome represents the most sustained and robust economic growth performance in Cambodia’s history. Growth in 2006 was underpinned by strong performance in the agriculture, construction, tourism and garment sectors, and these sectors continued to contribute to the robust growth in 2007. Despite the record levels reached in 2005, agricultural production grew by a stronger than expected 4.4 per cent in 2006, reflecting increases in yields and cultivated land. Exports of garments and tourism grew by around 20 per cent in 2006, and continued growing rapidly in early 2007. Garment exports received a fillip from temporary safeguard measures imposed against exports from China by the United States and the EU. Construction activity remained strong due to a boom in residential and commercial buildings in the two main cities, Phnom Penh and Siem Reap. Growth is expected to continue to be robust in 2008 and 2009. The forecasts for growth in 2008 range from a low of 7 per cent (EIU) to 7.75 per cent (IMF) to 9 per cent (ADB). Surprisingly, the government

CAMBODIA • Recent growth performance represents the most spectacular in Cambodia’s history. • Robust growth is likely to continue in 2008 and 2009, although at a slower pace than recent double-digit levels. • FDI policy changes have improved the investment climate, but corruption, high electricity costs and poor infrastructure remain hurdles. • Only time will tell if the discovery of oil and gas is a boon, or a bane, for Cambodia.

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Cambodia: Selected Economic Indicators, 2007–2009F

2007E

ADB-ADO 2008F

2009F

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

9.5 9.0 8.5

9.0 7.75 7.0

n.a. n.a. 6.4

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

12 9.4 3.5

10 7.4 3

8 7 3.5

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

20,368 21,983 –1,615 0.8

21,767 24,043 –2,276 –2.5

23,180 25,964 –2,784 –1.8

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

4.2 29.8

3.5 16.9

3.5 15.2

Fiscal balance (as % of GDP) (EIU)

–2.2

–2.1

–1.9

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

3,980 0.111

4,206 0.111

4,310 0.110

Foreign exchange reserves (US$ million) (EIU) Exchange rate at year-end (CR:US$1) (EIU)

1,662 4,131

1,914 4,206

2,103 4,257

SOURCES: ADB, Asian Development Outlook 2007, (Manila, ADB: 2007). EIU, Cambodia Country Report, EIU (5 October 2007). IMF, Cambodia: 2007, Article IV Consultation — Staff Report; Staff Supplement; and Public Information Notice on the Executive Board Discussion, IMF, Washington, D.C., 2007.

forecasts are quite conservative for 2008 and 2009, expecting only 7 per cent growth. The EIU expects that growth for 2009 will be lower at 6.4 per cent. Most forecasts point to a slowing in the speed of growth of garment exports in 2008–2009 as a major factor in the slowing of growth as well. The recent accession of neighbouring Vietnam to the WTO, the prospect of safeguards measures on China being lifted, and a reduction in demand from major markets like the United

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ECONOMIC OUTLOOK States, account for this projected slowing in the growth rate of garment exports in Cambodia. This slowdown is expected to overwhelm continued improvements in agriculture, through productivity improvements and increased area under irrigation, construction activity, and tourism. There was a sharp narrowing of the fiscal deficit to 2.4 per cent of GDP in 2006, and the IMF expects this trend to continue in 2007 and beyond as long as the Government remains committed to implementing its public financial management reform programme. Forecasts from the EIU sees it falling to 2.1 per cent in 2008 and 1.9 per cent in 2009. This would be quite a remarkable achievement on the fiscal front if these forecasts are realized. Due to an increase in tax collection, government revenue grew strongly to 11.6 per cent of GDP from 10.4 per cent in 2005. The IMF estimates that revenue collection in 2007 is again exceeding expectations, with tax department revenues in the year to April up by around 60 per cent and customs department revenues also performing strongly. Government expenditure is estimated at 13.1 per cent of GDP in 2006, but rising less rapidly than receipts. Expenditure restraint in 2006 and slow spending in early 2007 has led to further increases in government bank deposits and significant reductions in domestic arrears — from 471 billion riel at end-2004 to 77 billion riel at end-March 2007. The overall deficit continues to be financed by concessional loans and grants. Inflation slowed in 2006, averaging about 4.7 per cent, mainly as a result of a drop in food prices. Inflation is expected to fall further in 2007, by both the ADB (4.2 per cent) and the IMF (3.5 per cent). Both institutions expect this trend to continue into 2008, with inflation anticipated at 3.5 per cent, as long as the world price of oil and rice remain stable.

Strong Growth but Rising Inequality The impressive growth performance in the 2000s has been associated with a marked increase in income inequality. Comparing data for 2004 with 1994, the World Bank (2006) finds that although poverty incidence has fallen by about 1 per cent per annum over the past decade, much of this reduction has taken place in the urban rather than rural sector.

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THE ASEAN-10 This has contributed to a significant rise in inequality, with the Gini coefficient rising from 0.35 to 0.40 over the same period. The poverty assessment also finds that while standards of living for the poorest 20 per cent had risen by only 8 per cent over this period, that of the richest 20 per cent had risen by 45 per cent.

FDI Attracting FDI has been a key focus of market-oriented policy reforms in Cambodia. Indeed, some of the major drivers of growth, such as garments and tourism, are linked to FDI flows. Thus, continued strong growth in the future will require increasing amounts of FDI inflow. How can Cambodia improve its investment climate and thereby improve its attractiveness to FDI? A number of recent firm-level surveys by the World Bank (2005) have identified the key constraints to be overcome. Corruption is rated as the biggest hurdle, followed by the high cost of electricity due to a lack of generating capacity. These factors, together with poor physical infrastructure, increase the cost of doing business in Cambodia, and are the main hurdles to be overcome. FDI policy is a key factor in determining the investment climate and competitiveness in attracting FDI. Although the foreign investment regime in Cambodia underwent an overhaul in 2003, the revised Law on Investment only came into force on 27 September 2005. This was a major reform effort that attempted to equalize incentives for foreign and local investors, to achieve greater transparency in incentives provided, and to minimize distortions and delays arising from policy maker discretion. The eight-year blanket tax holiday for foreign investors was replaced with a “3 years + n” tax holiday, where “n” is conditional on annual certification of compliance. When the tax holiday expires, all investment projects are subject to the standard corporate tax rate (currently 20 per cent) and all previously approved projects currently subject to the 9 per cent concessionary corporate tax are to be brought under the standard corporate tax rate within five years. In place of the provision of tax-free reinvestment of profits, a generous accelerated depreciation allowance was introduced.

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ECONOMIC OUTLOOK Profit that is repatriated is now subject to a 1 per cent withholding tax. As part of the new reforms, a fast track procedure has been introduced with the aim of approving investment applications within a fourteen-day period under the “one-stop service” at CBI. Seven working groups, which involve both private and public sector participation, have been set up in key sectors to work in collaboration with CBI to facilitate speedy investment approval, monitoring and promotion. An investor forum, headed by the Prime Minister, is held twice a year as part of the new investment regime. In December 2005, a Sub-Decree was passed to provide the legal framework for setting up Special Economic Zones (SEZs) [which may include General Industrial Zones and/or Export Processing Zones]. As of March 2007, proposals for setting up SEZs had been approved with one (Bavet Zone near the Vietnam border) already accepting investors (ADB 2006). FDI has played an important role in promoting GDP growth, export expansion and employment generation in Cambodia. There is a host of anecdotal evidence that it has also contributed to productivity growth (ADB 2006). The rapid expansion of FDI-driven clothing exports has become a major vehicle for the empowerment of women, reducing poverty and helping narrow the urban-rural income gap. Recently, FDI has also begun expanding into other labour-intensive export industries, such as shoes, toys, and wood products, which is further contributing to employment generation.

Discovery of Oil and Gas: Boon or Bane? Offshore oil and gas resources are believed to exist in Cambodian territorial waters. Although considerable uncertainty still surrounds the scale and timing of oil production, some estimates suggest that one of six offshore exploration areas could contain as much as 700 million barrels of oil. That could produce a revenue flow for the Government of anywhere from $750 million to $1 billion a year, or roughly as much as total revenues collected in 2006 (ADB 2007). The potential therefore exists to try and address, in a significant way, continuing high levels of poverty in the country, and improving social and physical infrastructure.

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THE ASEAN-10 But this assumes that the revenues will not be wasted or pilfered. Large-scale resource revenues have been shown to accentuate weaknesses in governance and are closely correlated with increases in corruption and instances of internal conflict. It does not help that Cambodia ranks very poorly on indicators of economic governance, with endemic corruption. There is also a need to guard against the so-called natural resource curse, where oil wealth leads, paradoxically, to economic stagnation and political instability. This can happen because hydrocarbons production rarely generates much employment, benefits mainly urban areas, can spur inflation and real exchange rate appreciation, in a classic case of Dutch Disease. In short, it is still an open question as to whether the discovery of oil will be a boon or a curse for Cambodia. REFERENCES Asian Development Bank. The Mekong Region: Foreign Direct Investment. Manila: ADB, 2006. ———. Asian Development Outlook 2007. Manila: ADB, 2007. International Monetary Fund. “Cambodia: 2007 Article IV Consultation — Staff Report; Staff Supplement; and Public Information Notice on the Executive Board Discussion”, IMF, Washington, D.C., 2007. World Bank. Cambodia: Country Assistance Strategy of the World Bank Group, 2005–2008, Phnom Penh: World Bank Cambodia Country Office, 2005. ———. Halving Poverty by 2015: Cambodia Poverty Assessment. Phnom Penh: World Bank Cambodia Country Office, 2006.

Indonesia More Populous Development Policies? 1 The fever of the 2009 presidential election, the second direct presidential election, is already emerging. Everybody has been gearing towards the 2009 election, including President Susilo Bambang Yudhoyono and VicePresident Jusuf Kalla. During this period, one of the popular debates is on the choice of development paradigms for Indonesia. Critics say, for instance, that current economic policies have been dominated by the interest of business people; the economy has depended too much on market forces and international power; the trickle down effect has

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ECONOMIC OUTLOOK not worked; and that government programmes have paid little attention to human development, the environment, and poverty alleviation. Apparently, the Government believes that economic growth remains the most important strategy for achieving economic development though other measures have also been incorporated. In May 2007, the government decided that “Accelerating Economic Growth to Reduce Poverty and Unemployment” was to be the key theme for 2008. In 2008, the economy is projected to grow by 6.8 per cent, with inflation at 6 per cent, open unemployment between 8 per cent and 9 per cent, and poverty rate between 15 per cent to 16.8 per cent. The government also prioritized institutional reforms to support sustained economic growth, implying that institutional reform will reduce poverty through the impact of the trickle down effects on economic growth. Attention to inequality has also been enhanced by producing the “Instruction of President (Inpres) Number 6 of 2007” on policies to accelerate development of the real sector and the empowerment of micro, small, and medium enterprises. This programme is also seen as a way to reduce poverty and unemployment through economic growth. Nevertheless, critics have argued that institutional reforms and development and empowerment of micro, small, and medium enterprises must be made to directly alleviate poverty and not to accelerate growth alone. To foster economic growth, the government has focused on infrastructural development, with the development of toll roads and power generators. The government has fully supported public-private participation schemes to develop such infrastructure.

INDONESIA • Sustained economic growth and macroeconomic stability is expected to continue during the forecast period. • Business and consumers confidence is improving. • There is, however, a rising perception of economic injustice, between business people and those with fixed income.

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THE ASEAN-10 Progress has also been made in creating a more favourable business climate. In the first quarter of 2007, the House of Representatives ratified the Investment Law, which provides the basic principles of legal certainty, transparency, accountability, and equal treatment for domestic and foreign investors. On the other hand, the government has also hinted at the adoption of more populous development programmes. The government has attempted to directly attack poverty issues, not merely through high economic growth alone. In 2007 the government consolidated poverty reduction programmes in the Ministries of Home Affairs and Public Works, and State Ministry for Development of Impoverished Regions. The attack on poverty has also been enhanced by expanding the scope of the National Community Empowerment Programme (PNPM), launched in 2006, to achieve national coverage by 2009. Funds will be used for productive assets, such as rural infrastructure, education, and health. Furthermore, the government has maintained subsidies for electricity and fuel, particularly for kerosene, used mostly by the poor. The government also raised the budget allocation for education, including the provision of limited free schooling and scholarship for poor families. Similarly, the government increased the budget for health, including the continuation of the health insurance programmes for the poor. In 2007 the government also continued providing rice and conditional cash transfer to the poor families. The government has also become more confident. After repaying all loans from IMF in 2006, earlier than the due date of 2010, the government had terminated the CGI (Consultative Group on Indonesia) Forum in 2007. The CGI is a consortium of countries and institutions providing loans to Indonesia. The government has decided to focus more on domestic financing, to avoid currency risk, maturity risk, and interest rate exposure. Not only did the government attempt to directly attack poverty, there were also measures to improve governance through bureaucratic reforms and a more robust budget for the eradication of corruption and law enforcement. The government proposed to raise salaries of civil

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ECONOMIC OUTLOOK servants by 20 per cent, to provide a 13-month salary, and to increase meal allowances. Budgets have been enlarged for institutions working directly with governance and law enforcement, such as Supreme Audit Agency, Supreme Court, Ministry of Law and Human Rights and the Attorney-General Office. The government issued Government Regulation No. 3/2007 regarding the accountability of the regional government. Under this regulation, the regional government should report their operation to the Regional Parliament and be accessible to the public.

Sustained Economic Growth2 Until the third quarter of 2007, the Indonesian economy has shown resilience against the sub-prime mortgage crisis in the United States. Worries about the repeat of the Indonesian 1997–98 financial, social, and political crisis may have been exaggerated. Policy-makers and the financial communities in Indonesia may have been more prudent this time, after learning the mistakes in 1997–98. The political stability during 2007 is another key factor that has reduced the possibility of a repeat of the 1997 crisis. As mentioned in the previous edition of the Regional Outlook, the Indonesian economy in the first semester of 2006 had shown a quick recovery from the “2005 mini economic crisis”. The economy became even stronger towards the end of 2006. Overall, the economy managed to achieve 5.5 per cent growth in 2006, though still little lower than 5.7 per cent in 2005. In the third quarter of 2007, the year-to-year economic growth had even been more promising at 6.5 per cent — higher than the target set in the 2007 State Budget.3 At the same time, the absolute number of poor people declined from 39.30 million in March 2006 to 37.17 million in May 2007, or from 17.75 per cent to 16.58 per cent.4 In the third quarter of 2007, manufacturing remains the largest contributor (27.3 per cent) to GDP, followed by the agriculture, livestock, forestry, and fishery sector (15.3 per cent) and hotel, trade, and restaurant sector (14.7 per cent) However, transportation and communication has been the sector with the highest year-to-year

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THE ASEAN-10 growth (12.5 per cent) in the second quarter of 2007, followed by electricity, gas, and water and the agriculture, livestock, forestry, and fishery sector. The economy has been driven by exports and private consumption. Private consumption still constituted more than half (56.4 per cent) of GDP, followed by export (47.9 per cent). Government spending contributed about 7.4 per cent to GDP, while investment formed more than one-fifth (22.3 per cent) of GDP.5 It should be noted that imports also constituted a relatively large portion (38.8 per cent) of GDP. The role of private consumption had declined, though not much, to 58.3 per cent in the second quarter of 2006. The current account surplus was larger than expected. This was partly because of large remittances from Indonesian overseas workers. The strong balance of payment has increased the international reserves — achieving US$52.8 billion at the end of the third quarter of 2007 or equivalent to 5.4 months of import and servicing official debt.6 Spatially, more than half of GDP (59.3 per cent) was produced in the Island of Java — in Western Indonesia — with Jakarta being the largest contributor, followed by East Java and West Java. In all three provinces, the trade, hotel, and restaurant sector was the largest contributor. The provinces in the Eastern Indonesia contributed the least. The province of Papua, for example, only contributed 1.2 per cent of the GDP, suffering from a large decline in the mining sector during the third quarter of 2007. The continued recovery was also aided by a much lower inflation rate of 6.6 per cent in 2006, compared with 17.1 per cent in 2005. In 2007, the rate was already 5.1 per cent in October 2007. This may reach about 6.6 per cent at the end of 2007, which is higher than the targeted rate of about 6 per cent. With a stable and consolidated macroeconomy, the Bank of Indonesia has continued to lower interest rates, from 10.75 per cent in October 2006 to 8.25 per cent in October 2007. The lower interest rate may have helped to boost investment. The rupiah has also kept up with the overall strengthening trend, with reduced volatility.

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Improvement in Business and Consumer Conditions7 Consistent with favourable macroeconomic statistics, the results from surveys on business and consumer confidence also indicate a favourable economic performance. Business conditions have continued to improve in all sectors since the second quarter of 2006 until the third quarter of 2007. The largest increase in business confidence was found in the electricity, gas, and water sector, the lowest in the mining and manufacturing sectors. The improvement in the business climate was because of rising profits arising from an increase in production capacity. On the other hand, there was no significant change in the number of employed workers. The survey also showed that consumers were happier because of their rising incomes and attendant rising quantity consumed goods. The increase was particularly seen on the consumption of fresh fish and non-food items such as education, housing, and transportation. Decline in consumption was seen in the consumption of fresh meat and recreation. It should be borne in mind, however, that this result may only reflect the middle and higher income groups in Jakarta and its surroundings.

Concluding Remarks The government seems to have been able to maintain a “continuity of improvement”, though people may have expected much more. A recent national survey conducted in October 2007 showed that 31 per cent of the respondents said that the current economic condition was better than in the previous year.8 It is an improvement, though not much, from 29 per cent in October 2006 and 24 per cent in October 2005. In October 2007, 33 per cent said that economic conditions did not change, while 32 per cent said that it was worse than in the previous years. The fact that 69 per cent of respondents did not perceive the 2007 economic condition as being better than in 2006 may explain the decline of the respondents’ satisfaction with the government’s performance, from 59 per cent in October 2006 to 54 per cent in October 2007. There was also a decline in the percentage of respondents who were

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THE ASEAN-10 happy with the government’s performance in the areas of attacking poverty, reducing unemployment, controlling prices of daily needs, and supplying fuel.9 Probably, the positive economic outlook came from sections of the community who got their income from profits, not from salaries or other forms of fixed income. It can be noted that compared with September 2005, before the “mini crisis”, the price level in September 2007 was about 1.32 times that in September 2007. A declining inflation rate does not mean that the price level has declined. In fact, the price level has continued to increase. Therefore, people with fixed income during September 2005 to September 2007 lost their purchasing power by about 25 per cent. To have the same purchasing power as before the crisis, people’s income should have grown by at least 32 per cent during this two-year period. At the same time, the declining interest rate may have also hurt people with fixed income who deposited their savings in banks. The economy will keep growing with a continuous improvement in macroeconomic conditions. If the government can improve the purchasing power of those with fixed incomes, and not simply by reducing the inflation rate, the percentage of people who are satisfied with the government’s performance will rise significantly. Otherwise, improvements in macroeconomic conditions will only benefit the business sector and fuel the perception of economic injustice. NOTES 1. The policies and programmes discussed in this subsection are cited from the unpublished “Presentation Book. Q2-2007”, Bank Indonesia, Jakarta. 2. Most of the discussion in this sub-section was up to the second quarter of 2007 as the paper was prepared in October 2007. Otherwise mentioned, the statistics were cited from “Pertumbuhan Ekonomi Indonesia Triwulan II 2007”, Berita Resmi Statistik, No. 43/08/Th. X. Jakarta: Badan Pusat Stastistik, 15 August 2007. 3. The macroeconomic statistics in this article are cited and/or calculated from “Pertumbuhan Ekonomi Indonesia Triwulan III 2007”, Berita Rasmi Statistik, No. 59/11/Th.X. Jakarta: Badan Pusat Statistik, 15 November 2007.

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8.31

Interest rate1 (in December)

21,912.66

Trade Balance 5.06

42,196.33

Import (US$million)

Inflation (CPI average)

64,108.99

4.78 5.45 6.36 3.79 –1.37

Export (US$million)

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

2003

7.43

6.40

17,155.33

55,009.10

72,164.43

5.03 6.55 7.11 2.82 –4.48

2004

12.75

17.11

11,244.14

74,934.61

86,178.75

5.68 5.08 7.93 2.66 3.11

2005

9.75

6.60

24,419.04

78,780.77

103,199.80

5.48 4.77 7.18 2.98 2.21

2006

Indonesia: Selected Economic Indicators, 2003–2009

8.25

6.0–6.50

115,000– 125,000 75,000– 90,000 25,000– 50,000

6.3–6.6 6.5–7.5 7.0–8.0 2.0–3.0 3.0–4.0

2007E

7.00–7.50

5.0-6.0

130,000– 150,000 100,000– 120,000 10,000– 50,000

6.6–7.5 7.0–8.0 7.5–8.5 2.5–3.5 3.5–4.5

2008F

6.00–7.00

4.5–5.5

145,000– 170,000 110,000– 135,000 10,000– 60,000

7.0–8.0 7.5–9.5 8.0–10.0 3.0–5.0 3.0–4.0

2009F

104 ECONOMIC OUTLOOK

12/24/07 11:02:33 AM

02b EcoOutlk p87-154.indd 105

9,290

36,320

137,024

–1.3

8.14

9,830

34,724

130,652

–0.6

16.42

9,020

42,586

128,736

–1.0

14.87

9,000– 9,500

55,000– 60,000

125,000– 140,000

–1.8

9.0-12.0

8,500– 9,500

60,000– 70,000

120,000– 135,000

2.0–3.0

8.0–11.0

8,000– 9,500

65,000– 80,000

110,000– 130,000

2.0–3.0

4.0–8.0

NOTES: E — estimate for 2007 by the author; F — forecast for 2008 and 2009 by author. 1. 1-month Bank Indonesia Certificate SOURCE: GDP and inflation statisitics are calculated and cited from Economic Indicators, July 2006 and May 2007. Export and Import, interest rate, M-2, total outstanding debt, foreign exchange reserve and exchange rate statistics are cited from Indonesian Financial Statistitics, Vol. IX, No. 6, June 2007. Fsical balance statistics are cited from “Kerangka Ekonomi Makro dan Pokok-Pokok Kebijakan Fiskal 2008. Penyusunan Asumsi Makro”. Jakarta: Ministry of Finance, 18 June 2007, downloaded from www.anggaran.depkeu.go.id/web-content-list. asp?ContentId=177.

8,465

36,296

Foreign Exchange Reserve (US$ million)

Exchange Rate at year-end (Rp/US$)

135,401

–1.7

Fiscal Balance (% of GDP)

Total Debt Outstanding (US$million)

8.12

M-2 money supply growth (%)

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ECONOMIC OUTLOOK 4. “Tingkat Kemiskinan di Indonesia tahun 2007”, Tim Koordinasi Penanggulangan Kemiskinan, 15 July 2007. 5. The statistics refer to those at 2000 constant price. 6. “Statement by the Governor of Bank Indonesia: BI Keeps BI Rate at 8.25%”. Press Release No.9/36/PSHM/Humas-Bank Indonesia, 8 October 2007. 7. “Kondisi Tendensi Bisnis dan Indeks Tendensi Konsumen Triwulan II-2007. Kondisi Bisnis dan Ekonomi Konsumen Membaik”, Berita Resmi Statistik, No. 44/08/Th. X. Jakarta: Badan Pusat Statistik, 15 August, 2007. The survey on business tendency was carried out in some cities in all provinces in Indonesia to managers of medium and large enterprises. The survey on Consumers Tendency was only carried out in Jabotabek (Jakarta, Bogor, Tangerang, and Bekasi) to consumers from middle and higher income groups. 8. Prospek Kepemimpinan Nasional. Evaluasi Publik Tiga Tahun Presiden: Survei Nasional November 2004–Oktober 2007. Jakarta: Lembaga Survei Indonesia (LSI), October 2007. 9. Ibid.

Laos Economic Performance Gross domestic product (GDP) grew by 8 per cent in 2007 increasing from 7.6 per cent in 2006. In terms of value, GDP per capita increased from $665 in 2006 to $728 in 2007. Before 2002, the agricultural sector accounted for about 50 per cent of GDP, but its share in GDP has declined to 42.3 per cent in 2006

LAOS • Lao PDR continues to enjoy rapid economic growth and reduced poverty accompanied by a stable political system. • Moreover, the friendship and diplomacy with neighbouring countries, especially Vietnam and China have been strengthening in recent years. • Economic growth is expected to rise in the medium term.

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THE ASEAN-10 and 38.6 per cent in 2007, due mainly to the double-digit growth in industrial sector since 2002. The growth of industrial sector has been driven by gold and copper mining, and construction activities such as Nam Theun 2 hydropower project, and the Sepond and Phoubia mining projects. The service sector has grown by about 6–7 per cent since 2003. The growth of the service sector was the result of a steady improvement in tourism and trade. Macroeconomic conditions remain relatively stable, which reflect improved monetary and fiscal discipline. The Central Bank has conducted prudent monetary policy by restricting domestic credit based on open market operations and setting reserve requirements. The Central Bank also operates a managed-floating exchange rate regime, which adjusts referenced foreign exchange rate every day in order to stabilize exchange rates. Growth of broad money (M2) increased from 7.6 per cent in 2005 to about 30 per cent in 2006 due to the inflow of foreign assets. International reserve was about 3.2 months of imports in 2005– 2006. Exchange rates have stabilized since 2002. The Lao currency, kip, depreciated against the U.S. dollar of about 0.1 per cent during 2004–2005, but kip appreciated against the U.S. dollar of about 4.9 per cent during 2006–2007. Due to stable exchange rates, lower inflation has occurred during the period. Inflation rate was about 10–15 per cent during 2002–2005. However, in 2006, the inflation rate declined to 7.2 per cent — the lowest level, and is expected to reach 5 per cent in 2007. Tax revenue has increased from about 20 per cent in 2005 to 29 per cent in 2006. In addition, Lao government also increased the wages and salaries of government employees. As a result, the budget deficit increased from 3.34 per cent in 2005 to 4.48 per cent in 2006. An increase in tax revenue was due to the strengthening of tax collection management and increased revenue from mainly natural resource tax, income tax, and profit tax. In order to strengthen budget management, a new fiscal law was approved in 2006, and value added tax will be introduced by 2008. Due to the expansion of gold and copper exports, the trade deficit declined from $328 million in 2005 to $178 million in 2006. External

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ECONOMIC OUTLOOK debt burden to GDP has however remained high, about 78 per cent of GDP during 2005–2007. Approved foreign direct investment (FDI) increased by more than 100 per cent during 2005–2007, with the share of mining and hydropower project value greater than 60 per cent. The Lao Government continues to implement various reforms including the Public Financial Management Strengthening Programme (PEMSP); State Owned Enterprises (SOE) Reconstruction; and strengthening the private sector and trade reform. Moreover, the Lao Government is continuing to strengthen the country’s trade sector in order to increase growth. Tariffs have been reduced under the commitment of the ASEAN Free Trade Area (AFTA). Furthermore, Lao PDR also plans to join the WTO by 2010.

Economic Outlook The projection of growth rates during the forecast period is based on the assumption that the government will continue with its fiscal, and SOE reforms, coupled with a prudent monetary and exchange policy in order to maintain macroeconomic stability. Growth will likely increase to about 7–8 per cent during 2008–2009 due to the contribution of construction activities from hydropower projects and mining projects. The industrail sector will continue to grow by double digits from these projects. Both the agriculture and services sectors will see the increase; the former is due to increases in FDI and the latter to the the increase of tourists and trade expansion. Tourists are predicted to exceed 1.7 million by 2010. Under prudent monetary policy from the Central Bank, inflation and exchange rate are expected to be stable in the medium term. Inflation rate is expected to stabilize at around 5–6 per cent. Depreciation of the exchange rate of kip against the U.S. dollar is also expected to stabilize at around 5 per cent. Trade is expected to be in surplus during 2008–2009, due to increases in exports of electricity and minerals. The budget deficit is expected to decline to about 3 per cent during 2008 and 2009 because of an increase in tax revenues coupled with prudent budget management.

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215.5 10,609.4

227.5 10,658.6

238.4 10,137.5

57.9

2,077.5

–5.1

7.2 7.6

553.1 882.0 –328 –6.8

7.4 12.3 7.8 4.1

2005

335.7 10,136.4

48.9

2,201.5

–3.8

7.0 22.7

882.0 1,060.2 –178.2 -1.1

7.8 13.3 7.6 4.3

2006

384.5 9,560.0

110.8

2,380.2

–3.4

6–7 37.1

1,146.6 1,153.5 –6.9 1.2

7.8 12.4 8.0 4.5

2007E

418.3 10,038.0

75.2

2,480.2

–3.0

6–8 16–18

1,490.6 1,255.0 235.6 3.0

7.9 12.5 7.8 4.5

2008F

455.1 10,539.9

82.5

2,575.2

–3.0

6–9 16–19

1,937.8 1,365.4 572.3 5.0

8.0 12.9 8.0 4.0

2009F

SOURCES: Committee of Planing and Investment, Ministry of Finance, Bank of Lao PDR author’s estimation by consulting with cocerning government agencies.

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

43.1

30.9

–2.6 2,120.6

–6.2

Fiscal balance (as % of GDP)

10.6 22.9

363.3 712.7 –349 –7.6

7.0 11.9 7.3 4.1

2004

1,822.4

15.6 41.8

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)

335.1 462.1 –126 –2.0

6.5 11.4 7.4 3.5

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)

2003

Laos: Selected Economic Indicators, 2003–2009F

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ECONOMIC OUTLOOK The main challenge is likely to be fiscal management as well as the external shock such as another Asian financial crisis. The larger fiscal deficit could cause macroeconomic instability and a larger external debt burden.

Malaysia Underpinned by robust domestic demand and continued strong exports, the 2006 Malaysian economy strengthened with real gross domestic product (GDP) expanding by 5.9 per cent. In 2007, which marks an important milestone as Malaysia celebrates its fiftieth year of nationhood, GDP growth did not achieve its expected growth rate of 6 per cent as outlined in the Ninth Malaysia Plan (9MP), a blueprint for the direction of the Malaysian economy for the next five years from 2006 to 2010. The 9MP period is an important mid-point in the country’s drive to achieve the national vision of a developed nation status by 2020. However, the economy is expected to grow at 5.7 per cent. It is further expected that the GDP growth for 2008 will be further revised downward to 5.4 per cent, against the Government’s targeted growth rate between the range of 6.0–6.5 per cent (as forecasted by the Malaysian Institute of Economic Research (MIER) Third Quarter 2007 Malaysian Economic Outlook).

MALAYSIA • Economic management in 2007 is focused on enhancing domestic resilience to facilitate growth. • The Government kept its 2008 Budget expansionary. • Attracting investment through special incentives in the Iskandar Development Region, the Northern Corridor Economic Region and the Eastern Corridor Economic Region. • The Malaysia International Islamic Financial Centre (MIFC) initiative, launched in August 2006, is set to spur further growth and position Malaysia as an Islamic financial hub.

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THE ASEAN-10 This downward growth revision was in light of the International Monetary Fund’s recent downward forecast revision for the global GDP growth for 2008 to 4.8 per cent from 5.2 per cent. The downward trend in growth is due mainly to two factors: (i) the turbulence in the financial markets and market crunch triggered by the fallout from the U.S. sub-prime mortgage market, which coincided with the tenth anniversary of the Asian financial crisis;1 and (ii) a significantly increased price of crude oil that reached US$95 a barrel.2 This record level price of oil is caused by an unexpected drop in U.S. stockpiles, and concern that supply from the Middle East may be disrupted. Although Malaysia seems to have successfully weathered this year’s global and regional financial turmoil so far, as unfazed by the U.S. sub-prime crisis, undeniably, the full consequences of the defaults on sub-prime mortgages on Malaysia’s economic growth remains to be seen (as what happens in the United States will have implications for the rest of the world). On the supply side, the main growth driver for the economy is the services sector, which is expected to achieve the highest growth of 9 per cent (2006: 7.2 per cent) as compared with other sectors. This increase in growth in the services sector is very significant as it is being fuelled by the Visit Malaysia 2007 (VMY 2007) campaign, which could potentially raise the number of tourist arrivals to 21 million by year end (2006: 17.5 million). In order to further spur growth to its targeted 9MP path, the Government increased the pay of one million civil servants to between 7.5 per cent and 42 per cent from 1 July. It is the first pay rise since 1992, as announced by the Prime Minister Datuk Seri Abdullah Ahmad Badawi. In addition, an additional 20 per cent pay increase to police and army personnel on top of the above increments was also provided. This salary increase is expected to boost higher domestic consumption in order to support higher economic expansion. The agriculture sector is expected to decline from 5.2 per cent to 3.1 per cent, and the industry or manufacturing sector is slowing down from 7.2 per cent to 3.1 per cent. This relatively expected huge decline in the manufacturing sector is due to a higher hike in oil prices.

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ECONOMIC OUTLOOK In line with VMY 2007, patronage of domestic airlines has expanded, with a surge in intra-regional travel, followed by enhanced connectivity and competitive air fares. In October, AirAsia, the first low-cost airline in Asia founded by Malaysian Tony Fernandes, has been given the green light to fly to Singapore from four cities, Kuala Lumpur, Penang, Kota Kinabalu, and Kuching, taking the country a step further towards becoming the region’s premier hub for low-cost travel. These new routes will expand AirAsia’s connectivity to more than eighty destinations across the continent, and provide additional connections for its sister airline AirAsia X, which is due to fly to Australia’s Gold Coast on 2 November, to Guangzhou, China at the end of 2007, and to Melbourne and London in 2008. Part of the slowdown in GDP growth is attributed to slower growth from the external demand side, particularly moderation in the export performance, especially for electrical and electronics (E&E) and other manufactured products. Exports fell in three of the first eight months of 2007 due to a housing recession and credit crunch in the United States, Malaysia’s biggest trading partner, curbed demand for electronics. In 2006, the United States is Malaysia’s top export destination, with exports amounting to US$30,186 million (18.79 per cent). The second top destination for Malaysian’s exports is Singapore with a value of US$24,757 million (15.41 per cent), third is Japan amounting to US$14,244 million (8.87 per cent), and fourth is China with US$11,638 million (7.24 per cent). In particular, with the World Bank’s forecast that the U.S. GDP growth will be lower from 3.3 per cent in 2006 to 2.4 per cent in 2007, and the current United States gripped in the subprime “toxic products” crisis, it is essential that Malaysia is strengthening its domestic front of the economy. The Malaysian economy, one of the most open and dependent on trade with a surplus ratio of trade to GDP at 124 per cent in 2006, will continue to insulate itself from any adverse impact of external uncertainties. The top four imports destinations for Malaysia are Japan, importing US$17,341 million (13.22 per cent), second in ranking is United States with imports amounting to US$16,434 million (12.53 per cent), third is China with an import value of US$15,883 million (12.11 per cent),

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THE ASEAN-10 and fourth is Singapore with US$15,314 million (11.68 per cent). In terms of commodity classification, the largest export and import group since 1980s comprise mainly of electrical, machinery, apparatus, and parts. It is therefore not surprising that Malaysia’s export performance has become heavily dependent on E&E exports, which only accounted for 5.5 per cent of total exports in 1975, reached their peak at 61.7 per cent in 2000 before declining to 51.1 per cent in 2006. The balance of payments position is expected to remain strong with the current account recording a surplus for the eleventh consecutive year. The surplus in the current account will continue to be emanated from the goods and travel account. However, the current account surplus of 16.3 per cent in 2006 is projected to narrow to 14.4 per cent of GDP by 2007. Foreign direct investment has jumped 72 per cent to RM25.9 billion (US$7.7 billion) in 2006. However, Malaysia has lagged behind some Southeast Asian nations in attracting investments, and removing the non-internationalization policy will encourage more flows into the country. The net international reserves has increased steadily over the years from 17.5 per cent in 2006 to expected 18.5 per cent increase in 2007, which was supported by sustained export earnings, higher tourism receipts, larger portfolio capital, and FDI inflows, and strong stock market performance. At the end of 2006, reserves amounted to US$82.5 billion, and rose further to US$101.1 billion in November 2007, which could finance 8.9 months of imports. Part of these funds were transferred to financial markets, enabling accommodative monetary policy, e.g., loan growth, in 2007. The fiscal position of Malaysia is expected to continue to consolidate. Fiscal deficit is expected to decline from 3.3 per cent in 2006 to 3.2 per cent in 2007. At the end of 2006, the total debt outstanding which, was US$51,953 million, declined by 0.8 per cent to US$51,542 million in 2007. In terms of monetary stance, Malaysia has implemented a tight but stable monetary policy since November 2005. Pursuing a tightening bias in the monetary stance is needed to mitigate the potential pass-through from oil prices to overall inflation. BNM has kept Malaysia’s benchmark interest rate, that is, the Overnight Policy

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ECONOMIC OUTLOOK Rate (OPR) steady at 3.5 per cent since April 2006, after raising it three times from November 2005, primarily to curb inflation. The average overnight interbank rate rose from 2.38 per cent in 2006 to 3.5 per cent in 2007, but the average lending rate of commercial banks decreased from 6.57 per cent to 6.35 per cent. Accordingly, these interest rates are “appropriate” even as the U.S. housing recession risks will curb demand for the nation’s exports. Moreover, the scope for lowering borrowing costs to spur the economy will also be further restricted by inflation. Inflation risks are expected to increase, as risk-transfer of derivative markets will create new risks, and because no one knows where exactly the risks have been transferred to, and who is holding how much toxicity. However, the inflation in 2007 has eased to 2 per cent, which was due largely to better supply conditions, keen competition, effective price monitoring as well as strengthening of the ringgit. This 2 per cent increase is contributed by higher prices from three groups: (i) food and non-alcoholic beverages; (ii) transport; and (iii) rental and utilities (which account for 87.4 per cent of the total increase in the Consumer Price Index (CPI)). However, BNM has forecasted that inflation will be in the range between 2 per cent and 3 per cent in 2008. The Malaysian ringgit has continuously appreciated against the U.S. dollar since 21 July 2005, when BNM replaced a fixed exchange rate regime (RM3.8/US$1) with a managed float regime. Since 2005, BNM has not intervened in the foreign exchange market to curb gains in the currency. The ringgit has gained by almost 13 per cent against the dollar since abandoning the U.S. dollar peg in 2005. At the end of 2006, the exchange rate reached RM3.53 per U.S. dollar, mainly due to a weaker U.S. dollar and an increase in portfolio inflows into the Asian emerging countries. The appreciation of the ringgit was the only factor that has offset the upward pressure on domestic prices. The ringgit has strengthened from 3.53 in 2006 to 3.41 in 2007, and is expected to strengthen further to 3.33 in 2008. In 2007, the ringgit has gained 4.5 per cent against the U.S. dollar and will see greater corporate competition, and mitigating inflationary pressure simultaneously.

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THE ASEAN-10 In late March 2007, BNM announced further liberalization of the foreign exchange administration policies. These measures taking effect from 1 April 2007 can be classified into four groups according to their objectives: (i) expanding the scope of foreign currency business conducted by licensed onshore banks; (ii) promoting investments in ringgit assets by non-residents by lifting the limit on the number of residential and commercial property loans that non-residents can hold; (iii) improving business efficiency and investment opportunities; and (iv) strengthening the development of capital market by allowing resident and non-resident corporations to use proceeds obtained from the listing of shares through Initial Public Offering on Bursa Malaysia aboard. In October 2007, BNM Governor Tan Sri Dr Zeti Akhtar Aziz announced that the country may scrap its remaining capital controls and allow offshore trading of the ringgit, making the economy more attractive to investors. Malaysia has banned offshore trading of the ringgit in 1998 and pegged the currency to the dollar as regional currencies collapsed during the Asian financial crisis. The offshore trading ban is the last remnant of those controls. In November 2007, BNM announced the liberalization of the foreign exchange administration rules, which allow resident companies with export earnings to pay another resident company in foreign currency for the settlement of purchases of goods and services. The objective of this liberalization is to enhance Malaysia’s competitiveness by reducing the cost of doing business for resident companies. With the liberalization, exporters would have greater control and flexibility in the management of their foreign currency cash flow and, thereby, more effectively settle their domestic and overseas transactions. The role of Islamic financial instruments continued to expand in Malaysia, which is currently the world’s largest Islamic capital market. Islamic banking assets in Malaysia has increased 8 per cent in the first six months of 2007 to RM143.7 billion (US$42.5 billion)

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ECONOMIC OUTLOOK from RM133 billion last year, accounting for 12 per cent of total banking assets. In line with promoting the Malaysia International Islamic Financial Centre (MIFC) as a hub for Islamic finance, BNM is also planning to allow overseas lenders to set up stand-alone Islamic units for foreign banks. BNM will issue new licences to those that have applied to set up stand-alone Islamic units in Malaysia, in order to lure more investors especially from the Middle East. In September 2007, Prime Minister Datuk Seri Abdullah Ahmad Badawi announced that Malaysia plans to cut taxes on Islamic insurance companies and issue broker licences for Middle East investors. BNM will further give tax breaks for Islamic products and relaxed rules to allow commercial and investment banks to conduct Islamic business transactions in foreign currencies. The Malaysia International Islamic Financial Centre was launched on 14 August 2006 as a nationwide initiative to create a vibrant, innovative and competitive international Islamic financial services industry in Malaysia. (http://www.mifc.com/). In terms of enhancing domestic resilience to facilitate growth and development, initiatives were taken to encourage the private sector to assume a leading role in economic development. In the 2008 Budget, corporate tax was reduced from 27 per cent in 2007 to 26 per cent in 2008, and will be further reduced to 25 per cent in 2009. Another major tax measure was the simplification of the tax system, from imputation to single tier system. With regard to Malaysia’s establishment of three largest economic corridors developments, special incentives and master plans were also in place to attract investment in the Iskandar Development Region (IDR) (launched on 4 November 2006), the Northern Corridor Economic Region (NCER) (launched on 30 July 2007) and the Eastern Corridor Economic Region (ECER) (launched on 29 October 2007). The Budget 2008 also provided a substantial allocation for education and human resource development, as it has done in the past. In terms of creating skilful workforce, three key policy documents, namely the Education Blueprint 2006–2010, the Strategic Plan for Higher Education: Laying the Foundation Beyond 2020, and the Higher

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THE ASEAN-10 Education Action Plan 2007–2010 were launched, setting the stage towards strengthening human capital development. The National Higher Education Strategic Plan, for example, specifically talks of lifelong learning and is supported by the Education Master Plan launched earlier in 2007. The year 2007 is also ten years after the 1997 Asian financial crisis, which caused the market to crash to its lowest levels. How strong is Malaysia now to cushion future external volatility? Undoubtedly, Malaysian fundamentals remain strong despite the slump in the United States caused by the sub-prime crisis, and as such the Malaysian market is resilient to weather external storm. Investor sentiments from local retail players may cause the market to be slightly volatile and challenging but will remain robust for long-term investors. Some analysts are forecasting the Malaysian stock market may hit a high of 1,480 point by year-end. Malaysia’s strong foreign reserves and a strengthening market underpins continued confidence in the local market, despite uncertainties in other markets. On the upside, the Malaysian market continues to attract foreign funds and institutional investors on the back of the roll-out of 9MP projects, and the Iskandar Development Region, the Northern Corridor Economic Region, and the Eastern Corridor Economic Region, as well as improvements in corporate earnings and increased merger and acquisition activity. However, the overall growth prospects for Malaysia could also be a wait-and-see between three main global forces of economic balance: (i) The impact of global imbalances on the weak U.S. dollar, increasing asset prices and financial market volatility, and the Asian currency appreciation arising from U.S. current account deficit and Asian amounting surplus; (ii) Japan’s low interest rate, fuelling the Yen Carry Trade; and (iii) China’s growth, as China’s economy is currently the biggest contributor to global growth, grew 11.5 per cent in the third quarter 2007 and has added pressure for faster currency appreciation and higher borrowing costs to curb inflation and asset bubbles.

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–5.0

Fiscal balance (as % of GDP)

44.2 3.8

66.2 3.8

52,786 41,276 4.5

–4.1

1.4 25.2

126,646 105,166 21,480 12.1

6.8 9.6 6.4 4.7

2004

70.2 3.78

51,790 39,490 5.4

–3.6

3.1 15.6

140,977 114,627 26,350 14.6

5 5.3 6.7 2.6

2005

82.5 3.53

51,953 40,133 4.8

–3.3

3.6 17.1

160,654 131,143 29,511 16.3

5.9 7.1 7.2 5.2

2006

97.8 3.41

51,542 40,149 4.2

–3.2

2 13.0

181,538 152,136 29,401 14.4

5.7 3.1 9 3.1

2007E

109.9 3.33

48,700 38,583 3.9

–3.1

2.4 16.8

199,740 169,559 30,182 13.0

5.4 3.8 8.6 3.5

2008F

121.2 3.28

45,400 37,271 3.4

–2

2.1 17.9

197,300 157,200 40,100 14.4

5.3 3.7 8.4 3.4

2009F

SOURCE: Bank Negara Monthly Statistical Bulletin, Economic Report, IMF World Economic Outlook, and Global Insight’s Data.

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

49,141 40,325 6.4

1.2 11.1

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)

104,706 83,299 21,407 12.1

5.8 9.2 4.2 6

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)

2003

Malaysia: Selected Economic Indicators, 2003–2009F

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119

THE ASEAN-10 NOTES 1. In March 2007, the U.S. sub-prime mortgage industry collapsed due to higher-than-expected home foreclosure rates, with more than 25 sub-prime lenders declaring bankruptcy. For example, the stock of the country’s largest sub-prime lender, New Century Financial, plunged 84 per cent, before ultimately filing for Chapter 11 bankruptcy on 2 April 2007 with liabilities exceeding $100 million. The sub-prime meltdown also resulted in earnings reductions for large Wall Street investment banks trading in mortgage-backed securities, especially Bear Stearns, Lehman Brothers, Goldman Sachs, Merrill Lynch, and Morgan Stanley. 2. The average spot crude oil price was US$53.39/barrel in 2005, and US$64.29/ barrel in 2006.

Myanmar Myanmar’s official GDP growth rate for FY2006 (ended 31 March 2007) was not announced in time by the authorities around April — not even at end October when this report was prepared. Even if the authorities were to publicize this figure on time, such information would have been unrealistic due to the deficiencies in data in terms of its reliability, completeness, comparability, and timeliness. Reports from the IMF and EIU, however, do make their own projections of Myanmar’s GDP growth rates for 2006/2007 and beyond (see Regional Outlook estimates in the table). Official data shows double-digit GDP growth rates since 1999/00 but there is no strong evidence to support such figures. On the other hand, ADB did not make

MYANMAR • Export of high-priced gas will boost modest economic growth during the forecast period. • Economic and political instability however will affect overall economic performance and forecasts. • Per capita GDP is still the lowest in the region with a deterioration in living standards.

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ECONOMIC OUTLOOK its projection but mentioned that “(d)ata for variables [being] closely correlated with GDP suggest that economic growth was significantly less than officially estimated”. Instead, ADB just published the recent official data up to FY2005. According to official authorities, the contributing factors for this achievement are impressive growth rates in the agricutural, energy and power, manufacturing, mining (natural gas) and services, and exports sectors. Meanwhile, the government’s five year-plan (2006–2010) have projected average growth rates of 10 per cent due to higher agricultural production, new gas fields, and increases in hydropower generation. At this point, the ADB has remarked that “(t)he economy would be fortunate to achieve even half that over the medium term”. According to IMF estimates, the growth rates of GDP in FY2006/07 and FY2007/08 are 7 per cent and 5.5 per cent — moderately strong growth. The London-based Economist Intelligence Unit (EIU) estimates GDP growth to be 3 per cent and 3.3 per cent for 2006 and 2007 respectively; and although there will be expansion in the gas and oil sector, the rest of the economy will remain weak. While other international institutions point to the expansion of agricultural production in the country, the EIU argues that agriculture suffers from poor productivity, with output remaining below its full potential. The rice policy has also caused a lack of incentives, forcing farmers in several townships to grow rice when growing other crops would have been more profitable. The EIU also has reported that manufacturing is constrained by an inadequate quantity and quality of inputs, primarily owing to problems in obtaining access to imports. Other obstacles include power and water shortages, a lack of competitiveness with regard to imports from Thailand and China, and a limited demand for Myanmar exports, such as garments, because of sanctions imposed by the United States. Moreover, poor prospects for consumption and for investment by local enterprises have and will affect future economic growth prospects. According to the IMF, there has been a pickup in growth on the back of stronger export growth, especially in natural gas, agricultural expansion, booming construction, and some normalization of the banking

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THE ASEAN-10 sector, which will boost growth in the projected period. However, the IMF view of the official growth projection is implausible and inconsistent with other sources of growth projection data as it does not take into account the lack of inputs (imports of capital goods, fuel, and fertilizers) as well as anecdotal evidence that workers in urban areas indicate a deterioration in living standards. The following three significant economic indicators also impact negatively on the economy. Inflation is one of the major factors continuing to trouble the economy since Myanmar started to transform its economy to a market-oriented system. According to official data, inflation in the 1990s averaged around 25 per cent per annum. The highest rate of 58 per cent was recorded in 2002/2003. The root cause of the inflation is the budget deficit, which has continued to be totally financed by the Central Bank — resulting in increases in the amount of money supply (M2) of between 31 and 38 per cent from 2003 to 2006. Furthermore, in October 2005, fuel prices were raised by about 800 per cent. In addition, the recent increase in salaries of government employees including civil servants and military persons in March 2006 has fuelled inflation. To make the situation worse, in August 2007, fuel prices were again increased: petrol price was raised by 67 per cent, diesel 100 per cent, and gas 500 per cent. The monetization of the budget deficit and the fuel price hikes have continued to push up the general price level. This provoked peaceful protesters to make three modest requests including the request to ease living conditions. In reaction to these protests, there was bloodshed and several thousands of civilians and monks were arrested. In short, inflation is growing sharply, and it has drastically affected the living standard of citizens in the country. Regarding exchange rates, the country practises a multiple exchange rate system with the use of strict foreign exchange controls. The official exchange rate of the kyat (local currency) has been fixed at approximately 6 kyat per U.S. dollar since 1977. External trade is conducted at the market-determined parallel exchange rates but tariff rates are much lower than the market rate. Since 1993, Foreign Exchange Certificates

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ECONOMIC OUTLOOK (FECs), equivalent to the U.S. dollar on a one to one basis, have been used to legalize the market rate, initially to promote tourism. In 1988, the country’s parallel exchange rate was 25 kyat per U.S. dollar whereas the present market rate is 1,350 kyat (as of October 2007), i.e. more than 200 times that of the official rate. Regarding the external sector, EIU projection of exports for 2006/2007 was US$5.6 billion whereas sales of gas to Thailand alone account for around US$2.16 billion — about 40 per cent of the total export revenue. Export revenues will remain buoyant in 2007/2008 supported by sale of natural gas to Thailand, and by strong demand from China and India for mining, energy, and agricultural and forestry products. Garments, in spite of U.S. sanctions and the WTO’s Multi Fibre Agreements (MFA) measures, occupied fourth place in the country’s export revenues behind gas, forest products, and pulses. Imports in 2006/2007 were US$2.2 billion probably due to the importation of petroleum, hydropower projects, machinery, and building materials. Among its trading parners in 2005/2006, Thailand was Myanmar’s major partner followed by China and Singapore. However, trade and foreign exchange restrictions imposed by the government have seriously affected the economy. For border trade with neighbouring countries, businesses have not been affected. As far as foreign direct investment (FDI-approved) is concerned, the potential is favourable. In 2005/2006, Thailand’s investment in hydropower was US$6 billion, and India invested US$31 milllion in the oil and gas sector. Singapore, Russia, and the United Kingdom all together invested around US$101 million in 2006/2007. Due to the expansion of sanctions this year following the violence, it does not look like there will be major investments in Myanmar during the forecast period of 2008 and 2009. In the light of the above developments, exports of about US$4 billion in 2006/2007 (including high prices of gas exports) and double-digit growth of the manufacturing sector contributed to modest economic growth in 2006/2007. The country faces macroeconomic instability and pervasive structural weaknesses, according to the IMF. This takes various forms

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THE ASEAN-10 like fiscal deficits of around 5 per cent of GDP; low revenue reflecting limited coverage, weak tax administration, and widespread discretionary tax exemption; burden of State Economic Enterprises (SEEs); multiple exchange rates, weakness in banking system; and lack of incentives for farmers and administrative control in the agricultural sector. Despite rich resources and vast potentials, the economy suffers from continued high inflation, structural impediments that discourage investment, and low living standards. The business environment in Myanmar has not been favourable in 2007/2008, especially the tourism sector, which has been affected by recent political developments. The violent crackdown on protesters has caused the number of tourists travelling to Myanmar to drop dramatically; governments of the United States, New Zealand and Britain have advised their citizens against visiting Myanmar. Meanwhile, several big tour operators have also called for a boycott. The national airline, Myanmar Airways International, announced that it was halting its flights amid a dramatic drop of visitors from Thailand and Malaysia because a London-based insurer stopped coverage of the airline due to the recent crisis. Consequently, the two of the largest hotels, Kandawgyi Hotel and Hotel Nikko, have closed their doors because of a drastic downturn in tourism. According to reports, many hotels owned by Singaporeans and Thais are empty, and business has dried up at tourist agencies and airline offices. In addition, a business firm from Italy also has declared a boycott of gems mined in Myanmar. Furthermore, the largest clothing firm from South Africa, “Mr Price”, announced that it is boycotting garments that it used to order from Myanmar and a Swiss business firm has returned seafood and fish products back to Myanmar. South Africa and Switzerland have not officially announced a boycott. New economic sanctions are being imposed by the United States, EU, Australia, and Japan. The United States imposed sanctions on Myanmar twice within four weeks after renewing the sanctions of 2003 in July 2007. The new U.S. sanctions are targeting the assets of the country’s leaders and tightening controls of U.S. exports to Myanmar, while the EU has adopted a package of measures that do not harm

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2,970.0 5.8 1,280.0

6,996.0 6,996.0 2.4

–4.7

7.7 33.3

2,902.0 1,973.0 929.0 2.3

13.6 5.0 –2.7 13.6 21.4 14.4 11.0

2004/05

3,170.0 5.6 1,305.0

7,227.0 7,227.0 2.1

–3.8

12.6 25.1

3,531.0 1,984.0 1,547.0 4.0

13.2 4.5 5.2 13.2 19.1 12.8 11.8

2005/06

3,207 5.5 1,500.0

7,148 7,148.0 1.8

–4.9

40.0 31.3

3,919.0 2,174.0 1,746.0 4.1

11.3 7.0 3.0 n.a 12.7 8.5 4.2

2006/07

3,269 1,800.0

1,600.0

7,160 n.a 1.0

–4.4

35.0 36.5

7,200.0 3,200.0 4,000.0 1.7

10.0 4.0 3.8 n.a 7.1 4.7 2.4

3,240

7,113 n.a 0.2

–4.7

35.0 38.4

6,600.0 2,700.0 3,900.0 2.7

10.0 5.5 3.3 n.a 9.8 6.5 3.3

Estimate/Projection 2007/08E 2008/09

2,000.0

3,301

7,198 n.a 1.2

–4.2

25.0 34.9

6,000.0 2,100.0 3,900.0 0.7

10.0 4.0 n.a. n.a 7.1 4.7 2.4

2009/10

SOURCES: CSO, Selected Monthly Economic Indicators; Economic Intelligence Unit, Country Report, Myanmar, various issues. IMF Report: Myanmar, September, 2006. ADB Outlook, 2007 Southeat Asia: Myanmar. ADB: Key Indicators 2007: Myanmar.

2,859.0 5.8 1,095.0

Foreign exchange reserves (US$ million) (Official Exchange rate (kyat/US$1) Market Exchange Rate (kyat/US$1)

–5.4

Fiscal balance (as % of GDP) 6,938.0 6,938.0 2.3

8.0 11.0

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

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

2,781.0 2,240.0 541.0 –1.0

13.8 0.0 –2.0 13.8 20.8 14.6 11.7

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

GDP growth (% change) GDP(International Monetary Fund) GDP (Economist Intelligence Unit) GDP (Asian Development Bank) — Industry sector growth (% change) — Services sector growth (% change) — Agriculture sector growth (% change)

2003/04

Myanmar: Selected Economic Indicators

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125

THE ASEAN-10 the population but target those responsible for the violent crackdown and the overall political stalemate in the country. The Australian government has directed the Reserve Bank of Australia to implement financial sanctions against Myanmar regime figures. The European Union, the 27-nation bloc, in mid-October, imposed the sanctions banning imports of timber (US$68 million), gem stones (US$11 million) and precious mining products, in addition to sanctions that include visa bans and asset freezes on the generals, government officials and their relatives. Japan has also cut humanitarian aid programmes worth US$4.7 million. The West is considering withdrawing investments in gas and oil, and if it is so, the country’s Asian neighbours will replace them. Furthermore, “the current system lacks transparency, creates incentives for corruption, and induces distortions in the economy” (ADB Outlook 2007). In the light of the above concerns, Myanmar’s economy in 2007/2008 is estimated at 3 per cent — mostly caused by the recent political developments in Myanmar. For the years 2008/2009 and 2009/2010, the growth rates are projected at between 4 and 5 per cent provided the political tension can be diffused.

Philippines Macroeconomic conditions in the Philippines are expected to remain favourable in 2008 although the momentum for growth will slow from a year ago. Real GDP is projected at 6.3 per cent from 6.6 per cent

PHILIPPINES • Macroeconomic conditions expected to remain favourable in 2008 and 2009. • The services sector continues to underpin strong growth. • Political economy conditions will play an important role in determining the quality and momentum of growth.

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ECONOMIC OUTLOOK in 2007. As in previous years, consumption and exports will be the main drivers. The country’s electronics exports (which account for 60 per cent of total merchandise exports) will benefit from recovery in global demand and complete liquidation of inventory cycle in the U.S. IT sector. Private consumption will also remain robust, with growth accelerating to 6.5 per cent from 5.9 per cent a year ago, underpinned by steady remittances inflows (projected to rise by 19 per cent from 16 per cent in 2007) and improvement in rural incomes (due to better harvests expected). However, with weak labour markets, the prospect of private consumption shifting to higher gear this year is not so good. Although the unemployment rate has declined to 7.4 per cent from 8.2 per cent a year ago (data as at April 2007), underemployment was still substantial at 18.9 per cent. After expanding by 6 per cent last year (due to election-related spending), public consumption is expected to slow at 3.5 per cent, as the government tightens controls over expenditures and targets to bring down the budget deficit to around 1 per cent of GDP. The modest trend in government spending is likely to be sustained in the coming years as the government intensifies the implementation of civil service reforms (such as reforms at the Social Security System) and monitoring of public enterprises and other important government-owned and controlled corporations. Private investment will remain a major sore point preventing the economy from growing above potential. Although growth in private investment has picked up in recent years, fixed capital investment has been declining by an average rate of 3.2 per cent annually since 1998, and the investment-to-GDP ratio falling since 1996. The low inflation and interest rates expected this year will definitely improve the business climate, but this will not be enough to generate sufficient investments in the country. With low competitiveness (in the Global Competitiveness Index for 2007, the Philippines ranked 71st out of 125 countries surveyed), and judging from a modest increase in foreign direct investments last year (16 per cent rise to $1.2 billion as at first half of 2007), it seems that more radical measures are needed to address the country’s weak investments.

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THE ASEAN-10 On the supply side, the services sector will continue to underpin the strong growth in domestic output. Over the last seven years (1998– 2005), average growth in services sector (5.1 per cent) has outpaced that of agriculture (2.9 per cent) and industry (2.8 per cent), and has been crucial in real GDP and employment growth in the country. This year the services sector will remain buoyant, growing by 7.4 per cent, with strong performances from traditional growth drivers such as trade and transport, storage and telecommunications services, as well as from private and financial services adding new momentum. In particular, the rapid growth of business process outsourcing (BPO) in the country is worth noting, given the strong interest in this sector by foreign investors (currently more than 90 per cent of BPO firms in the Philippines are foreign-owned). The IMF expected the growth in BPO to accelerate in the coming years, expanding by 38 per cent per year to over $12 billion by 2010, and becoming a key growth driver in the country. After a slow recovery last year from weather-related disturbances, the agriculture sector is seen to grow by 3.9 per cent. This should offset the steady growth in industrial output (4.9 per cent), as both manufacturing and construction sub-sectors are weighed by rising oil prices, and by low capacity utilization rate (currently below 80 per cent) for manufacturing. The expansion in industry will also be limited by slower activity in mining and quarrying as metal prices in global markets are expected to soften from recent highs. External balances will be generally stable amid a moderate growth external environment. As growth in global economy is expected to continue at a solid pace (world GDP growth of 4.8 per cent as projected by the IMF), the country is well positioned to benefit given its high dependence on trade. Exports growth is seen to go up to 7.8 per cent from estimated growth of 6.5 per cent in 2007 due partly to increased intraregional trade particularly in ASEAN. However merchandise imports are also expected to rise by almost 5 per cent to reflect the increased activity in electronics export industries, thus creating a trade deficit of US$6.7 billion compared with its level of US$7.7 billion a year ago. But with positive services account due to strong capital inflows from

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ECONOMIC OUTLOOK improving global economy and remittances from overseas workers, the current account should generate a surplus (5.2 per cent of GDP) in 2008. Reflecting this, the official reserves are seen to improve at US$32.5 billion by year-end as the peso consolidates at 43.67 peso against the U.S. dollar. Monetary policy will remain accommodative, consistent with inflation targets. Strong overseas income remittances and steady growth in deposits will also help domestic liquidity (M3) to ease further to 14.3 per cent from 15 per cent in 2007. This will also allow domestic interest rates to be low (with a benchmark 91-day t-bill rate averaging 3.4 per cent), aided by benign inflation rates (averaging 3.5 per cent) and the generally low interest rates in major central banks around the world. On the fiscal front, the government has reckoned to limit fiscal deficit at 1 per cent of GDP in 2007 and to narrow it further to 0.9 per cent of GDP by 2008. But owing to structural problems of weak tax collection and low tax-effort ratio, fiscal difficulties will continue to prevail despite efforts to consolidate. Moving forward the Philippines needs to confront three policy issues critical to sustaining the growth momentum. First, fiscal sustainability. Although not yet a problem in the near-term, fiscal sustainability risks are gradually increasing as evident in the country’s high public sector debt to GDP ratio (estimated at 72.7 per cent in 2007). This implies that to improve the debt dynamics, the recent fiscal gains need to be sustained. As well, new fiscal reforms related to tax administration and effective enforcement of tax regulations to broaden revenue base have to be fully implemented. Recently the government has announced that it will intensify its efforts to restructure the Bureau of Internal Revenue (the main agency that collects 80 per cent of taxes), including plans to develop anti-tax evasion programme and cleaning the tax payer register at the BIR. Plans to further pursue power reforms and accelerate privatization programmes are also in the main fiscal agenda. While these restructuring measures are encouraging, they represent at best a small step in a long road towards completely overhauling the entire tax system — a key towards a near-term improvement in revenue collection.

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14,065 55.56

100.8 72.1 14,560 56.26

95.4 63.1

–3.8

7.3

6.0 10.3

38,794 44,478 –5,684 1.9

6.4 5.2 5.2 7.7

2004

17,659 53.06

86.3 54.9

–2.7

6.4

7.6 10.3

40,263 48,036 –7,773 2.0

4.9 2.0 3.8 6.8

2005 5.4 3.8 4.5 6.7

2006

22,953 49.13

77.4 50.5

–1.1

5.4

6.2 22.7

46,526 53,343 –6,817 5.0

NOTE: * 91-day T-bill rate SOURCES: Country websites; IMF WEO; ADB Economic Outlook; author’s estimates.

Reserves (US$ million) Exchange Rate (year-end)

Public Sector Debt (% GDP) Ext Debt (% GDP)

–4.6

6.0

Interest Rate (%)*

Fiscal Balance (% GDP)

3.5 4.2

35,339 41,190 –5,851 0.4

4.9 3.8 4.0 6.1

CPI Inflation (average) M3 growth (%)

Exports (US$ million) Imports (US$ million) Trade Balance (US$ million) Current Account (% GDP)

GDP growth (%) Agriculture Industry Services

2003

Philippines: Selected Economic Indicators, 2003–2009

30,986 44.43

72.7 45.4

–1.1

3.5

2.9 15.0

49,596 57,343 –7,747 5.4

6.6 3.5 5.1 7.9

2007E

32,535 43.67

69.9 41.3

–1.0

3.4

3.5 14.3

53,514 60,210 –6,696 5.2

6.3 3.9 4.9 7.4

2008F

33,836 44.0

66.2 41.0

–0.9

4.0

4.0 14.9

56,724 63,822 –7,098 5.0

6.2 3.8 4.8 7.6

2009F

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130

ECONOMIC OUTLOOK The financial turbulence in global markets that broke out in July last year also highlights the need for the Philippines to continue its financial and corporate sector reforms and minimize the heightened volatility and widening of risk spreads that can undermine the country’s financial systems. Although the Philippines has come a long way to strengthen its financial systems (as seen, for example, in a decline in non-performing loans and assets since 1997), vulnerabilities remain. The challenge therefore is for the Philippines to sustain the foundation for a strong upswing through reforms that promote healthy banking and corporate balance sheets and accommodative financial conditions. Restoring the health of the banking sector will allow the resumption of lending activities that are critical to much-needed growth in investment and manufacturing. Finally, political economy considerations will play out significantly in determining the quality and momentum of growth. In addition to implementing credible and consistent macroeconomic reforms, political stability matters if the hard-won gains of reforms are to be preserved.

Singapore The biggest challenge facing the government has shifted to overcoming supply bottlenecks and containing overheating pressures. Demand is no longer the main point of concern. Rather, pro-growth policies of income tax cuts, looser immigration policy, and the upcoming integrated resorts have perhaps been overly successful in attracting investment and foreign workers. There is increasing concern that inflation pressures and business costs are accelerating. Business costs, including rentals and wages, are rising rapidly. Escalating costs and limited slack amidst a tight labour market could hurt competitiveness and constrain growth. Singapore has climbed to the fourteenth most expensive city for expatriates, overtaking New York City, according to Mercer’s latest cost of living index. Since 2004, Singapore has climbed from the 46th spot to 34th in 2005, 17th in 2006 and 14th in 2007. Across Asia, Singapore is now the fifth most expensive, behind Osaka, Hong Kong, Tokyo, and Seoul.

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THE ASEAN-10 There is nevertheless some debate and disagreement about the extent of overheating. Recent public statements suggest that the government does not think the economy as a whole is overheating. Whether more tightening measures may be introduced in the coming year will depend on the government’s conviction over this “no overheating” view. Recent tightening — including the MAS shift to a “slightly” steeper appreciation bias and property-specific cooling measures — may be sufficient if overheating is really not a big concern. Inflation is under control, according to the government. Inflation, at close to 3 per cent and near 12-year highs, may be climbing but is largely due to the 2 per cent GST hike. The MAS estimates the GST impact at about 1.4 per cent points to overall headline inflation. Come July next year, CPI inflation will likely drop to a more reasonable rate given the effects of the GST base. However, there is concern that inflationary pressures are accelerating. Higher energy, food, and labour costs are rising sharply, driven by record oil prices, adverse weather conditions, and tight labour markets. Inflation risks are clearly in danger of surprising to the upside over the next year. The housing CPI component may also not be capturing the full extent of inflation pressures. Housing CPI costs, at +0.4 per cent in September, are lagging actual steep increases in property prices and

SINGAPORE • Growth will likely decelerate to about 6.2 per cent in 2008 on moderating external demand, tightening global financial conditions, and supply constraints. • The biggest challenge facing the government has shifted to overcoming supply bottlenecks and containing overheating pressures. • Inflation pressure are rising, driven by higher fuel, food, rental costs and the GST hike. CPI inflation will likely breach 5 per cent, and possibly 6 per cent, in early 2008. • The MAS may have to allow the SGD exchange rate to appreciate at a faster pace given rising inflation risks.

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ECONOMIC OUTLOOK rents. The housing component carries a large weight of 22.4 per cent in the CPI basket, broken into three separate components: accommodation (14.7 per cent), fuel & utilities (4.2 per cent), and household durables (3.4 per cent).1 These housing costs will show up more visibly next year and could potentially lift CPI inflation sharply to 5 per cent or above in the first half of the year. One reason for the low CPI housing inflation is because of the generous conservancy and utility rebates the government has been handing out. Another reason is lag in the measure of imputed rents as a majority of Singaporeans live in owner-occupied HDB housing. Imputed rents are based on the Annual Assessed Value of the residence, which is only gradually adjusted over time, possibly over a 1 or 2 year cycle. The URA rent indices suggests that any adjustment next year could be sharp, as the annual assessment of property values starts capturing the actual rent increases. The government is also projecting the economy to decelerate to a slower growth rate of 4.5–6.5 per cent in 2008, down from the expected 7–8 per cent range this year, largely due to slower global growth. Growth prospects in the U.S. economy may weaken on a housing correction and tighter credit condition. Slower global growth would likely cool demand and inflation pressures. We are forecasting GDP growth of 6.2 per cent in 2008 and 6.8 per cent in 2009. Despite the underlying and justified concerns about the global economy, the Singapore economy will likely outperform yet again next year. Previous initial government growth forecasts for the last four years have consistently under-estimated the actual performance. Recent third quarter data suggests surprisingly limited fallout from the global financial turmoil and U.S. sub-prime crisis. Fed rate cuts, with funds rate already cut by 75 bps so far, will moreover reduce Singapore domestic interest rates and fan demand pressures. The economy has also diversified with several new growth engines — pharmaceuticals, biomedical, financial services, construction, and tourism — which are probably less sensitive to the U.S. business cycle. Singapore could previously rely on a fairly elastic labour supply curve to meet rising labour demand and contain wage costs. But that easy option

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THE ASEAN-10 may no longer be available, with both the unemployment rate now down to a near-decade low and costs of housing foreign workers soaring. Labour market is at its tightest in a decade. The unemployment rate (seasonally adjusted) has fallen to 1.7 per cent in 3Q07, down from the 2.3 per cent in 2Q07. The economy is at full employment. Monthly earnings probably continued rising sharply during the third quarter, following the already sharp 8.5 per cent increase in the second quarter. Labor productivity has fallen given rising wage costs. Sharply higher rents costs and tighter property supply also means that the supply curve for hiring additional foreign worker will no longer be as elastic. Rents have accelerated over the past year for both residential and commercial space. According to URA rental indices for 3Q07, rents for residential and commercial space have risen by 39 per cent and 57 per cent respectively from a year ago (see Figure 1).

Figure 1: Rents for Residential & Commercial Still Racing, Up 39% and 57% Respectively From a Year Ago (Third Quarter 2007)

155 145 135 125 115 105 95 85 75 65

Mar-00

Mar-01

Mar-02

Mar-03

Rents: Residential

Mar-04

Mar-05

Mar-06

Mar-07

Rents: Office

SOURCE: CEIC Data Limited.

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ECONOMIC OUTLOOK

Figure 2: Job Growth Remains Strong Despite Global Financial Turmoil, with 57,600 Jobs Created in 3Q07 70 '000 60 50 40 30 20 10 0 -10 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Manufacturing

Construction

Services

Others

SOURCE: CEIC Data Limited.

Higher accommodation costs are a substantial component of the wage costs of foreign workers and will show up more materially in overall inflation pressures and business costs. Jobs moreover continued to be generated at a frantic pace, virtually uninterrupted by the global financial turmoil and sub-prime crisis, according to the latest 3Q manpower statistics. About 57,600 new jobs were created from July to September. That brings the total number of jobs created to 171,400 for the first nine months of the year. Full year job creation will likely eclipse the 176,000 jobs generated last year, and surpass 200,000. That implies that the labour force grew at an incredible 8 per cent pace this year, supported by a large influx of foreign workers. Overheating and inflation risks therefore remain high. We are forecasting inflation to average 3.7 per cent in 2008, considerably higher than the government’s guidance of 3 per cent. Upside surprises to inflation remain considerable given escalating housing, energy, food and wage costs. The economy moreover is now at full employment. Cost of hiring foreign workers has now increased considerably given

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THE ASEAN-10 higher accommodation costs. Rents and prices of property continued to soar during the third quarter. Pressures may dissipate if the global economy slows, cooling the investment boom. But there is a good likelihood that more tightening measures may be in the pipeline as incoming data provide more evidence of overheating and inflation pressures. Some prioritization and deferment of investment projects may be necessary to manage demand pressures. Further monetary tightening may be necessary, with a good chance of another MAS move come April 2008. The “slightly” steeper Singapore dollar (SGD) appreciation bias may be too gentle a move, with the tightening impact showing up after a considerable lag as the topside of the S$NEER band only gradually adjusts slowly upwards (see Figure 3). Prospects of a stronger SGD appreciation are therefore

Figure 3: “Slightly” Stronger Appreciation Bias May Be Too Gentle a Move 10 Jul 2003 = 100

112

Slope of SGD NEER appreciation assumed at 3% per annum compared to 2% previously

110 Appreciation of the S$ against its trade weighted basket

108

106

104

102

SGD NEER

100

98 Jan-08

Oct-07

Jul-07

Apr-07

Jan-07

Oct-06

Jul-06

Apr-06

Jan-06

Oct-05

Jul-05

Apr-05

Jan-05

Oct-04

Jul-04

Apr-04

Jan-04

SOURCE: Citi estimates.

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ECONOMIC OUTLOOK likely in 2008, and the SGD is expected to strengthen to 1.36 against the U.S. dollar by end-2008. The URA’s latest 2Q figures describe well the alarming surge in housing and office rents. The Property Rental Index is surging at some 31.2 per cent from a year ago. Rental for the core central region — the catchment area for most expatriates — is up about 35.5 per cent from a year ago.2 The private residential occupancy rate is currently at 95.1 per cent, a historical high. This is higher than even the property boom period of 1990–96, where occupancy rates peaked at 94.3 per cent in December 1995. The Office Rental Index is rising at an even faster rate, up some 46.4 per cent in 1Q07 from a year ago. The Office Rental Index has surpassed its June 1996 peak, higher by some 3.5 per cent. The increase in the Office Rental Index for the Central Area is somewhat higher, rising some 48.3 per cent in 2Q07 from a year ago. Office rents in the central region are already some 8 per cent higher from the previous peak in June 1996. Indications are that office rents will continue to rise given limited new supply and continued strong office space demand, especially from financial institutions. Wage pressures, less startling than housing and office rents, are also starting to emerge given a tightening labour market. Manufacturing business cost has been edging higher, rising 2.9 per cent in 1Q07. This is the highest rate of increase in about three years. Most of the increase can be attributed to rising labour costs. Labour unit cost of manufacturing rose 6 per cent in 1Q07, the highest rate of increase since 2Q03. The civil service is seeing some of the higher attrition rates and wage pressures. The government announced in April this year that wages of civil servants would be increased by some 3 per cent to 33 per cent. With the unemployment rate now comfortably below 3 per cent and job growth remaining strong, wage pressures will likely increase. These bottlenecks and rising business costs have not shown up materially in CPI inflation. The latest CPI inflation reading is rising, coming in at 1.3 per cent for June, but remains relatively low nevertheless. This has led to some recent questioning whether the CPI is a flawed gauge of inflation.3

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SOURCE: CEIC Data Company Limited, Citigroup estimates.

0.7 2.9 6.5 4.2

16.9 12.0 15.9 24.2 96 1.74

External Sector Exports (% yoy, US$) Imports (% yoy, US$) Trade balance (US$ billion) Current account (% of GDP) International Reserves ex. Gold (US$ billion) Currency/US$ (period average)

Other 3M interbank Rate (%, average) 10-year SGS yield (%, average) Fiscal balance (% of GDP) Population (persons million)

3.1 –0.1 1.2 –3.3 0.5 92 22,066 4.0

Real Sector Real GDP (% yoy) Domestic demand ex Inventory (% yoy) Real Consumption: Private (% yoy) Real Gross Fixed Capital Formation (% yoy) Consumer prices (% yoy) GDP (US$ billion) GDP per capita (US$) Unemployment Rate (%)

2003

1.0 3.2 5.6 4.2

25.0 26.9 17.4 20.1 112 1.69

8.8 6.2 5.6 10.2 1.7 107 25,329 3.4

2004

2.2 2.9 6.9 4.3

25.5 20.8 29.6 24.5 116 1.66

6.4 2.7 3.1 0.1 0.5 117 26,876 3.1

2005

3.5 3.4 10.0 4.5

18.4 19.3 33.1 27.5 137 1.59

7.9 6.4 2.5 11.5 1.0 132 29,475 2.6

2006

Singapore: Selected Economic Indicators, 2003–2009F

2.7 2.9 8.0 4.7

10.2 11.2 34.1 28.0 145 1.50

8.0 8.2 4.7 17.0 1.9 154 32,735 2.2

2007E

2.2 3.2 7.0 4.8

10.4 11.1 35.8 26.0 160 1.39

6.2 6.1 4.2 10.3 3.8 183 38,048 2.0

2008E

2.3 3.2 6.0 4.9

11.2 11.6 38.6 25.0 185 1.37

6.8 6.8 4.9 10.5 2.6 207 42,297 1.9

2009E

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ECONOMIC OUTLOOK CPI inflation is expected to accelerate on the back of the 2 per cent GST hike (to 7 per cent), rising rental costs, and stronger wage pressures. CPI inflation will likely breach 5 per cent, or possibly even 6 per cent, in early 2008. Bottlenecks and supply constraints are clearly causing a surge in business costs. Current CPI inflation gauge may not fully capture these price and cost pressures. Supply-side policies, including for both office and residential space, may need some time to materialize. The government has been releasing more land for commercial and residential development, and assuring the public that supply remains adequate. Policy issues that naturally arise is whether the government will need to tame excessively strong demand conditions with tighter policies, either through tighter monetary or fiscal policies, in the interim period. Tighter immigration policies is less clear cut and is a double-edged sword, reducing pressure on rents but increasing pressure on wage costs as a result. NOTES 1. See Department of Statistics, Household Expenditure Survey 2005, for more details on household expenditure weights. 2. Central core region refers to postal districts 9, 10 and 11, and Downtown Core and Sentosa planning areas. 3. See Anna Teo, “CPI: A Flawed Measure of Inflation”, Business Times, 24 July 2007, for a good discussion.

Thailand The Newly Elected Coalition Government By the time this article is published, the success or otherwise of the elections set for 23 December would become apparent. The elections should be held as scheduled but delays of several weeks are possible (and acceptable) to facilitate the celebrations marking the eightieth birthday of the highly revered King of Thailand. It is widely expected that the elections would produce a coalition government as neither the Democrat Party (DP) nor the People’s Power Party (PPP) are expected a win an outright majority in the 480-seat Parliament under the 2007

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THE ASEAN-10 constitution. The new constitution’s provisions are clearly intended to do away with vote buying and money politics as much as possible. To the extent that the Election Commission also intends to strictly enforce the new rules, official results in many constituencies could be held up because of allegations of wrongdoings. If legal settlement does not promptly occur, the formation of the next government could be delayed. The bigger question is which side will win. Forecasts based on the voting patterns in the constitution referendum in August and the number of former MPs joining various political parties indicate that PPP (formed primarily by ex-Thai Rak Thai MPs) could win 160 to 180 seats, followed by DP with 120 to 130 seats, and Chat Thai with 60 to 80 seats. The remaining 90 to 140 seats are expected to be distributed among the five or six newly formed political parties. Such an outcome appears likely notwithstanding initial fragmentation of TRT following the court decision to dissolve the party and ban its 111 executives from politics for five years. PPP appeared to have reconsolidated itself and kept its voter base in the north and northeast largely intact. Therefore, the likelihood that DP and Chat Thai would form the next coalition government would depend largely on the ability of the smaller parties to take away votes from PPP in these two key regions.

THAILAND • Thailand’s economic outlook for 2008–2009 would be largely determined by three factors: the formation of a stable coalition government, the government’s ability to jumpstart investment, and the global economic environment. • Assuming a relatively benign outcome for all three factors mentioned above, we expect the Thai economy to grow 4.6 per cent in 2008 and 4.6–5 per cent in 2009. • These are modest improvements but would be significant since it would mark a broad-based recovery in domestic demand that would offset slowing exports, which had been the main growth engine in 2006–2007.

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ECONOMIC OUTLOOK If DP and Chat Thai form the core of the new coalition governmentthen DP would likely pursue policies seen to be market-friendly and outward-looking. This should help restore confidence, paving the way for a recovery in investment. To be sure, the DP-led coalition government will also have to promise many populist policies since these are now a necessary feature of Thai politics. Moreover, the new constitution also explicitly obligates the government to implement wide-ranging social programmes such as comprehensive education and healthcare. While DP is seen to have capable politicians, its 120 to 130 MPs may limit its ability to form a strong core and to control its coalition partners, thereby constraining its ability to push through difficult reforms. If PPP is able to form the core of the new coalition, then popular support for it must be broad-based since it is clear that the Council for National Security (which staged the coup on 19 September 2006) has stated that it wishes to see the fragmentation of TRT, not its return

Figure 1: Number of MPs by Region Bangkok, 37

Northeast, 136

South, 54

Central, 97

North, 76 NOTE: Another 80 MPs to be elected from party list. SOURCE: Krungthep Turakit.

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THE ASEAN-10 to power. Its rise to power would be handicapped from the beginning. Several groups that had opposed former premier Thaksin Shinawatra will fiercely oppose the PPP-led government. The Thai army is expected to be sympathetic to such a view even if the new army commander has remained distant from politics. Moreover, the ban on 111 of TRT’s top politicians from politics for five years means that it would be a challenge for PPP to find qualified persons for key Cabinet posts. The PPP-led coalition government may also want to press for amnesty of the 111 politicians and concentrate more on populist policies to repay rural voters who helped put PPP in power.

Jump-starting Investment Thailand’s economic growth has been largely export-driven in 2006– 2007. Exports of goods and services is now 75 per cent of GDP, up from half that in 1997. Clearly, Thailand’s further reliance on exports as the main engine of growth is likely to face limitations in view of baht appreciation and a slowdown in Western economies. Exports grew 17 per cent in 2006 in U.S. dollar terms but should slow to 15.5 per cent in 2007. We expect exports to grow 9 per cent in 2008 and 10 per cent in 2009. Meanwhile, the current account surplus is expected to be depleted by 2009. We expect both public and private investment to finally stage a meaningful recovery in 2008 and 2009. For too long, Thailand’s investment has withered because of political uncertainty and the delayed implementation of various promised mass transit projects. If there is clarity on these two issues, private investment should recover by 2Q08. Moreover, the government could boost confidence by immediately instructing the Bank of Thailand to end its 30 per cent reserve requirement which has impeded capital inflows into Thailand. It could also promise not to amend the Foreign Business Act and clarify its position on nominees to erase doubts that now hold back foreign investment. These have already been promised by DP. While these measures may immediately put pressure on the baht to appreciate,

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ECONOMIC OUTLOOK

Contribution to GDP Growth (Percentage Points)

Domestic demand Private consumption Private investment Government consumption Government investment Change in inventories Net exports GDP Growth (%YoY)

2004

2005

2006

1H-07

6.6 3.4 2.5 0.5 0.3 0.1

5.9 2.3 1.8 1.1 0.6 0.4

3.0 1.7 0.7 0.3 0.3 –2.8

1.3 0.6 –0.3 0.8 0.1 –0.4

–0.5

–2.1

4.8

3.5

6.3

4.5

5.0

4.3

SOURCE: Phatra Securities.

Figure 2: Capacity Utilization and Private Investment Index

80

%

%Yo

25

Capacity utilization-LHS 20

Private investment index

75

15

70

10 65 5 60

0

55

-5

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

Jan-99

Jan-98

Jan-97

Jan-96

-10 Jan-95

50

SOURCE: BoT.

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THE ASEAN-10 it is expected that the Bank of Thailand will intervene to limit such appreciation. Over the next one to two years, the increased investment is likely result in substantial increases in imports of capital goods. This is expected to turn the current account from a substantial surplus in 2007 to a small deficit by 2009.

Good Fiscal Position, Sub-par Revenue Growth We do not expect additional fiscal stimulus from the next government. This is because the current government has already approved the 2008 budget, which will produce a deficit equivalent to 1.8 per cent of GDP. To be sure, Thailand can maintain such fiscal deficits or even increase them in the coming years since public debt (including debt guarantees for state enterprises) is less than 40 per cent of GDP. However, the Ministry of Finance has indicated that it wants to restructure the taxation system with a view to reducing the tax rate on direct taxes (personal income and corporate income). However, it also hinted at raising various excise taxes as well as the value-added tax (VAT). For the past several years, the normal 10 per cent VAT rate has been suspended, and a lower 7 per cent rate has been applied. We expect the Finance Ministry to recommend the next government to approve tax reforms, which include the raising of the VAT towards 10 per cent to ensure that government revenues once again keep pace with nominal GDP growth.

The Global Environment and Monetary Policy Low inflation and reliance on exports as the main engine of growth meant that Thailand’s monetary policy has recently concentrated on exchange rate targeting, a practice similarly carried out by several other Asian countries. This has meant rapid accumulation of international reserves during the past two years. The Bank of Thailand appears committed to keeping the baht “stable” vis-à-vis the U.S. dollar for as long as Thailand depends on exports as the main engine of growth. Accordingly, the market continues to speculate that recent cuts in the U.S. Fed funds rate would induce the Bank of Thailand to follow suit especially if global slowdown mitigate

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ECONOMIC OUTLOOK

Figure 3: Public Debt to GDP

60.0

% of GDP

55.0

50.0

45.0

40.0

35.0

2000

2001

2002

2003

2004

2005

2006

Jun-07

SOURCE: MoF.

Figure 4: GDP and Government Revenue % YoY

18.0 16.0

Nominal GDP Government revenue

14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1Q-00

1Q-01

1Q-02

1Q-03

1Q-04

1Q-05

1Q-06

1Q-07

SOURCE: NESDB, MoF.

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THE ASEAN-10 any semblance of future inflationary pressures. However, we expect Bank of Thailand to maintain its policy rate at the current level of 3.25 per cent throughout end of 2008. Thus, the extent to which Bank of Thailand can ease monetary policy would very much depend on external conditions. An unexpectedly sharp global slowdown that brings with it significant roll-back in commodity prices (especially oil) would lead to surprise rates cuts in Thailand. For now, this does not appear so. Bond yields have not fallen along with cuts in the Bank of Thailand’s policy rate since July 2007. The steepening of the yield curve suggests that the market is expecting more inflation and/or economic recovery ahead. The bond market may also be anticipating significant funding requirements for large public projects in the near future. Inflationary pressures could build up in early 2008 following wage increases for civil servants and state

Figure 5: Monthly Change in Net Foreign Reserve 6

Bn US$ Monthly change in total reserve (gross reserve + forward)

5 4 3 2 1 0 –1

–3

Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07

–2

SOURCE: Phatra.

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31-Jan-07

28-Feb-07

26-Sep-07

12-Sep-07

29-Aug-07

Core CPI

15-Aug-07

1-Aug-07

18-Jul-07

10Y Yield

4-Jul-07

6.0

20-Jun-07

6-Jun-07

23-May-07

2Y Yield

9-May-07

25-Apr-07

11-Apr-07

28-Mar-07

14-Mar-07

5.5

14-Feb-07

Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07

7.0

17-Jan-07

3-Jan-07

146 ECONOMIC OUTLOOK Figure 6: Consumer Price Index

% YoY Headline CPI

5.0

4.0

3.0

2.0

1.0

0.0

SOURCE: MoC.

Figure 7: Policy Rate and Government Bond Yield

%

5.0 Repo rate

4.5

4.0

3.5

3.0

SOURCE: TBDC, BoT.

12/24/07 11:03:01 AM

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SOURCE: NESDB, Bank of Thailand, Phatra forecast.

42,148 39.59

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

0.3

Fiscal balance (as % of GDP) 51,783 40,879 16

1.8 5.0

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)

78,105 74,346 3,759 3.3

7.1 9.5 3.6 11.4

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)

2003

49,832 39.06

51,312 39,138 8.5

0.0

2.7 4.8

94,941 93,481 1,460 1.7

6.3 8.0 6.9 –4.8

2004

52,066 41.03

52,040 36,026 10.8

–0.5

4.5 8.1

109,193 117,722 –8,530 –4.4

4.5 5.4 4.9 0.3

2005

66,985 36.05

59,935 41,595 8.3

1.2

4.8 6.9

128,220 125,975 2,245 1.6

5.0 5.8 4.2 4.8

2006

Thailand: Selected Economic Indicators, 2002-2009F

80,000 33.50

57,500 37,000 8.5

–1.5

2.2 3.7

147,772 137,737 10,035 5.2

4.1 4.1 3.9 5.0

2007E

83,500 34.00

58,300 37,700 9.0

–1.7

3.0 4.2

161,072 155,643 5,429 2.7

4.6 4.6 4.9 3.6

2008F

84,000 34.00

59,300 38,600 9.5

–1.8

2.6 4.5

177,179 182,103 –4,924 –0.9

5.0 5.2 5.2 2.9

2009F

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148

ECONOMIC OUTLOOK enterprise workers along with a rise in the minimum wages in 4Q07. Fuel price increases have also pushed up transportation costs.

Vietnam Vietnam can be broadly characterized as a developing country undergoing gradual economic transition, away from a centrally planned, and towards a more market-oriented economy “with socialist characteristics”. 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 late 1986. The basic thrust of Vietnam’s economic reform and business liberalization process has been fairly consistent over the last twenty years, if sometimes a little slower than most of the international community would like. In return, the country has been rewarded with robust GDP growth, averaging in excess of 7.5 per cent per annum over the last decade. Agriculture accounts for roughly 20 per cent of GDP, with industry and services each accounting for about 40 per cent of the national economy.

VIETNAM • Vietnam’s sustained economic growth trajectory remains strong, at over 8 per cent per annum, and currently there are no leading indicators of a marked slowdown transpiring in 2008–2009. Inflation and a stubborn trade deficit are the only clouds on the relatively bright economic horizon. • Economic reform momentum will be maintained under the current leadership, in conformity with various external commitments made by Vietnam. With most of the necessary laws in place, following through with effective implementation and enforcement is now key. But corruption and institutional capacity weaknesses will continue to constrain the pace of much-needed public administration reform. • Foreign investor activity in Vietnam continues to burgeon, thanks in part to Vietnam’s January 2007 accession to the WTO. Intel’s recent decision to construct a US$1 billion chip assembly and testing facility near Ho Chi Minh City is an important psychological milestone for Vietnam.

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THE ASEAN-10 Lacking much of a domestic private sector before the mid-1990s, and burdened by an inefficient and unwieldy state-owned enterprise 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. In 2007, Vietnam is likely to see FDI inflows of around US$12.5 billion or more. The country’s accession to the World Trade Organization (WTO) in January 2007 has only helped increase foreign investor appetite for Vietnam, as foreign firms anticipate a more liberalized domestic market, thanks to commitments made by Hanoi as part of its WTO entry bid. In addition, Vietnam’s exporters should encounter improved access to foreign markets, thereby making the country an even more attractive host country platform for export-oriented FDI projects. Not only is the aggregate quantity of FDI activity burgeoning, but so too is the quality of this investment. Intel Corporation’s decision to construct a US$1 billion chip assembly and testing facility in the country — which will be the biggest such factory that Intel operates anywhere in the world — has helped underline a growing appreciation that Vietnam can support more advanced kinds of business than just relatively low-end, high-labour manufacturing, such as garment and shoe production. Foreign investors and local companies alike in Vietnam are increasingly plugging into more advanced international production networks, and undertaking more complex activities, including things like computer software outsourcing. The principal constraints that Vietnam faces in this regard are its insufficient physical infrastructure — such as roads, rail, and port facilities — as well as some of the softer infrastructural needs, such as education, rule of law, effective public administration, and intellectual property rights in particular. One of the factors that has helped keep Vietnam’s policy-makers focused on economic reform has been the roughly 1.5 million or so young people joining the workforce each year. These people need jobs, if social and economic stability is to be maintained. Efforts to “right size” the state enterprise sector (see below) means that the greatest burden is being placed on the private sector to create employment,

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ECONOMIC OUTLOOK although the bulk of the domestic private sector comprises of smalland medium-sized enterprises. Although there are some exceptions that prove the rule, Vietnam has not quite yet reached a point where its corporate community includes a robust body of large-scale companies outside of the state enterprise sector. That reality is undoubtedly changing, and for the better, helped by major leaps being made in the financial sector, including an increasingly active stock market. Vietnam has seen the number of listed firms increase from just two in July 2000 (when the stock market first opened) to over 200 today, with a further 3,000 or so companies having issued shares on the informal securities market. But even so, Vietnam does not yet have the kind of robust domestic corporate sector that can really take advantage of the export-oriented benefits that come with WTO membership. While past reform efforts have tended to focus on improving the business-enabling environment for new companies to formally register and commence business operations, there is now a need to also focus some attention on building up larger corporate entities in the private sector. Some observers argue that a law governing — and possibly encouraging — greater merger and acquisition activity would be a welcome fillip in this regard. Most of these larger corporate entities in Vietnam are still stateowned enterprises, where the government remains the only shareholder, or a growing number of “equitized” former state-owned enterprises, where the government is still a major shareholder. A number of trends can be observed here. The first is that increasingly large and well-known state firms are being partially divested by the government, including in some so-called strategic sectors, such as banking and insurance. And these same companies are finding a proportion of their shares traded in the securities market, allowing the development of a Thatcher-like public share-owning culture to develop. A second trend is that some state-owned enterprises are converting themselves into increasingly large so-called “economic groups”, somewhat similar to the chaebol model of South Korea. Potentially at least, this second trend is a source of some concern, as we see state enterprises leverage their considerable assets to expand into non-core business areas and become

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THE ASEAN-10 highly diversified business entities, often with multiple cross-holdings. One worry here is that such activity will “crowd out” private sector companies, which do not enjoy the same kind of access to financial resources that privileged state-owned firms take for granted. If so, then how can the private sector be reasonably be expected to serve as a provider of employment for the large number of people joining the labour force each year? Some observers are hoping that the revised Enterprise Law, which came into effect in mid-2006, will provide part of the solution. The 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, these two new laws seek to bring about a more level playing field for business, whether they are state-owned or private, local or foreign invested. Foreign investment projects have been given until mid-2008 to convert into corporate entities under the new Enterprise Law, and state-owned firms have until mid-2010 to do the same. In addition, the State Capital Investment Corporation (SCIC) has recently been established by the government, modelled in part on Temasek Holdings of Singapore and SASAC (State-owned Assets Supervision and Administration Commission of the State Council) of China. SCIC is intended to remove the conflict of interest that previously existed for ministries that were expected to both regulate business activity within their respective realms, and represent the government’s ownership in state-owned firms actually operating in the same areas. By becoming the vehicle by which the government’s interest in various firms — whether wholly or partially owned by the State — is held, rather like a conventional asset management company, SCIC should be able to exercise its position to ensure that firms under its remit operate along professional lines and pursue optimal business strategies. That said, as a relatively new institution, it will take time for SCIC to develop the institutional capacity to effectively implement the not inconsiderable role it has been given. And looking further ahead, SCIC’s mandate allows it not only to represent the government’s stake in firms and make divestments on behalf of the State, but also to make

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ECONOMIC OUTLOOK new investments on behalf of the State. So, could we actually see the size of the state enterprise sector grow, and not gradually diminish in Vietnam, as widely anticipated? It is not wholly inconceivable. If so, some observers may need to rethink their views on elements of the economic reform programme in the country. Vietnam is now entering its third decade of economic reform. As the “low hanging fruit” of initial reforms are successfully addressed, Vietnam will increasingly need to take on more complex, and in some cases more intractable, economic development challenges. With much of the legal and regulatory framework now in place, thanks to an accelerated legislative agenda pursued by the National Assembly in recent years, so as to make Vietnam WTO-compliant, attention will shift to implementation and enforcement; turning paper laws into tangible realities. Vietnam has a relatively patchy record when it comes to reform implementation, as many of its institutions lack sufficient capacity to be as effective as laws would expect. There is also the thorny problem of corruption which serves to inhibit the country from making bolder strides in areas like public administration reform. 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. The former two ratings agencies give Vietnam a stable outlook, while Moody’s outlook for Vietnam is positive. In the most recent iteration of the World Bank’s “Doing Business” annual survey, Vietnam ranked 165th out of 178 countries; up five places from the previous year.

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8.3 5.6 15,646

–1.2

6.3 15,777

6.7

14.4 3.1

0.9

7.8 28.0

24.6 27.0 –2.4 –3.4

7.8 10.2 7.3 4.4

2004

8.6 15,875

5.2

17.4 2.9

–1.2

8.3 29.4

30.0 32.0 –2.0 0.4

8.4 10.6 8.5 4.0

2005

11.4 16,077

6.0

19.5 3.3

–5.0

7.5 28.9

34.3 38.0 –3.7 –2.1

8.2 10.4 8.3 3.4

2006

14.0 16,200

5.7

21.6 3.6

–4.8

8.9 26.0

37.6 41.0 –3.4 –1.0

8.3 10.5 8.6 3.0

2007E

17.0 16,400

5.8

23.0 4.0

–4.4

6.8 24.0

40.0 43.0 –3.0 -0.5

8.5 10.8 8.7 3.5

2008F

5.5

27.0 5.5

–4.2

7.0 24.0

45.0 47.0 –2.0 –0.1

8.5 11.0 8.5 3.5

2009F

19.0 16,500

SOURCES: Asian Development Bank, International Monetary Fund, HSBC, Standard Chartered Bank, and author’s estimates.

3.7 15,403

8.0

13.1 2.5

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)

14.1 2.7

–1.4

Fiscal balance (as % of GDP)

3.1 21.0

3.8 17.6

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

20.0 22.5 –2.5 –4.9

7.3 10.5 6.5 3.6

16.7 17.6 –1.1 –1.9

7.1 9.5 6.5 4.2

2003

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)

2002

Vietnam: Selected Economic Indicators, 2002–2009F

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Reproduced from Regional Outlook: Southeast Asia 2008-2009, edited by Deepak Nair and Lee Poh Onn (Singapore: Institute of Southeast Asian Studies, 2008). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

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

155

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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/

156

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Reproduced from Regional Outlook: Southeast Asia 2008-2009, edited by Deepak Nair and Lee Poh Onn (Singapore: Institute of Southeast Asian Studies, 2008). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

THE CONTRIBUTORS

Political Outlook Terence Chong is a Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Singapore. 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. Tommy Koh is Ambassador-at-Large and Chairman of the Institute of Policy Studies and the National Heritage Board, Singapore. He contributed the section “ASEAN at Forty: Perception and Reality”. Ooi Kee Beng is a Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Malaysia. Milton Osborne is an Adjunct Professor in the Faculty of Asian Studies at the Australian National University, Canberra, and a Visiting Fellow at the Lowy Institute for International Policy, Sydney, Australia. He contributed the country section on Cambodia. Vijay Sakhuja is a Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the section “India’s Growing Profile in Southeast Asia”. Lorraine Carlos Salazar is a Visiting Research Fellow at the Institute of Southeast Asian Studies. She contributed the country section on the Philippines. Leonard C. Sebastian is Associate Professor and Coordinator of the Indonesia Programme at the S. Rajaratnam School of International Studies at the Nanyang Technological University, Singapore. He contributed the country section on Indonesia.

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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 “Southeast Asian Security: An Overview”. Ian Storey is a Fellow at the Institute of Southeast Asian Studies. He contributed the section “China’s Relations with Southeast Asia”. Martin Stuart-Fox is Professor Emeritus at the University of Queensland. He contributed the country section on Laos. Pushpa Thambipillai is teaching at the Department of Public Policy, University of Brunei Darussalam. She contributed the country section on Brunei Darussalam. Tin Maung Maung Than is a Senior Fellow at the Institute of Southeast Asian Studies. 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. Chua Hak Bin is Director, Asia Pacific Economics & Market Analysis, at Citigroup Global Capital Markets. He contributed the country section on Singapore. Sanchita Basu Das is a Research Associate at the Institute of Southeast Asian Studies. She contributed the overview section “Regional Economic Trends” with Denis Hew. Nick J. Freeman is an Associate Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Vietnam. Carol S. Guina is Capacity Building Expert (RETA 6237), Phnom Penh Plan for Development Management, Southeast Asia Regional Department, at the Asian Development Bank. She contributed the section “The GMS Economic Corridors”. Denis Hew is a Senior Fellow at the Institute of Southeast Asian Studies. He contributed the overview section “Regional Economic Trends” with Sanchita Basu Das.

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THE CONTRIBUTORS Masahiro Kawai is Dean at the Asian Development Bank Institute. He contributed the section “Evolving Regional Financial Architecture in East Asia”. Kian-Teng Kwek is Associate Professor, Department of Economics, Faculty of Economics and Administration, University of Malaysia. She contributed the country section on Malaysia. Lee Poh Onn is a Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Brunei Darussalam. Jayant Menon is Principal Economist, Office for Regional Economic Integration, at the Asian Development Bank. He contributed the country section on Cambodia. Joergen Oerstroem Moeller is a Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the section “Energy and the Environment”. Kyophilavong Phouphet is Deputy Director, Department of Economics, Faculty of Economics and Business Management, at the National University of Laos. He contributed the country section on Laos. Aladdin D. Rillo is International Consultant (Macroeconomist) at the Asian Development Bank. He contributed the country section on Philippines. Suphavud Saicheua is Managing Director (Head of Research Group) at Phatra Securities Public Co. Ltd, Thailand. He contributed the country section on Thailand. Rodolfo C. Severino is a Visiting Senior Research Fellow at the Institute of Southeast Asian Studies. He contributed the section “Regional Economic Integration and the ASEAN Charter”. Mya Than is an Associate Senior Fellow at the Institute of Southeast Asian Studies. He contributed the country section on Myanmar. THE EDITORS Deepak Nair is a Research Associate at the Institute of Southeast Asian Studies. Lee Poh Onn is a Fellow at the Institute of Southeast Asian Studies.

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