SOUTH EAST ASIA:ECONOMIC OUTLOOK

Presentation to 31st ASEAN-Japan Business Meeting

Manu BhaskaranCentennial Group

November 2005

5.1.1.2

KEY POINTS

SE Asia is making a comeback

Political risks have been reduced Indonesia is the key improvement

Structural rise in economic growth Investment rates to rise

China and India SE Asia is adjusting, not a loser - yet

POLITICAL RISKS: SE ASIA

Religious extremism / terror: contained

Indonesia: stronger will to act Bali bombs notwithstanding

Decisive measures in Malaysia Singapore: a hard target The exception: Southern Thailand

Bottom line: one-off incidents, not more

Both cyclical and structural positives

Cyclical turn OECD demand, tech demand

Structural factors Coping with competitiveness challenges Rising investment ratio

ECONOMIC PROSPECTS

Cycle: Exposed to global economic risks

Global demand growth to recover Lead indicators in OECD rising

Tech demand also up Electronics demand vital to SE Asia

Rising rates, higher oil prices a risk

ECONOMIC PROSPECTS (2)

CYCLICAL RISKSOECD lead indicators up: export demand

OECD CLI, 6M rate of change, %

-8

-4

0

4

8

12

Jan-0

0

Sep-0

0

May-0

1

Jan-0

2

Sep-0

2

May-0

3

Jan-0

4

Sep-0

4

May-0

5

Total OECD US

TECH DEMAND UPDemand for electronics rising again

3.0

3.2

3.4

3.6

3.8

Jan-9

7

Oct-

98

Jul-00

Apr-

02

Jan-0

4

Oct-

05 3.6

3.7

3.8

3.9

4.0

4.1

4.2US New Orders: computers & electronic prods

Asian electronic exports, excl CN & IN (RHS)

LNLN

External risks Global imbalances threaten

demand US current account deficit Housing bubbles China – possible slowdown

Regional headwinds Rising interest rates, inflation hurt

WHAT CAN GO WRONG?

Resilience has improved Economies more diversified

Domestic demand vs external New niches of activity expanding

Domestic demand has healed Consumer demand revived New investment cycle

Better policy: exchange rates flexible more anticipatory

HOW RESILIENT IS SE ASIA?

SE Asia: coping with new competitors

Share of world exports still high Share of FDI fell

But signs of turnaround Adjusting

Policies changing Companies restructuring

ECONOMIC PROSPECTS (3)

SE ASIAN COMPETITIVENESS

SHARE OF WORLD EXPORTS %

0

2

4

6

8

1990 2000 2002 2003

China

ASEAN

COMPETITION FOR FDIEven China’s share of developing countries FDI fell

0

5

10

15

20

25

30

35

40

Y1998 Y1999 Y2000 Y2001 Y2002 Y2003 Y2004

ASEAN5South- East Europe and the CISChina

SE ASIA GIVES HIGH RETURNSReturn on Capital - US MNCs

0%

5%

10%

15%

20%

25%

30%

1 2 3 4 5 6 7 8 9 10 11

Malaysia

China

Southeast Asian Average

DIVISION OF LABOUR CHANGES

China's trade balance with US and Asia, USD bn

-100

-80

-60

-40

-20

0

20

40

60

1990

1992

1994

1996

1998

2000

2002

US Asia (ex HK)

BUT NEW THREATS EMERGING

Benign impact so far, could change China expanding into components

Direct competition with ASEAN Further shakeout likely, ASEAN SMEs hit? But China cannot dominate everything

Indian manufacturing is rising Strong edge: engineering, skill-related Will pose more competition eg autos

FDI: WATCH INDIA

AT Kearney Survey Ranking

Rank 2004 Rank 2003 Rank 2002

China 1 1 1

India 3 6 15

Hong Kong 8 22 18

Malaysia 15 23 n.a.

Singapore 18 28 22

Thailand 20 16 20

Indonesia 23 25 n.a.

South Korea 21 18 21

Taiwan 25 20 24

FORECASTS

2005 2006 20072006-2010 2011-15

China 9.2 7.2 7.0 7.0 6.8

Hong Kong 5.5 4.0 4.2 4.0 3.5

India 7.2 7.4 7.0 7.3 7.5

Indonesia 4.9 5.4 7.6 6.0 7.0

Korea 3.6 5.8 4.5 4.5 3.0

Malaysia 4.8 6.3 6.5 6.2 6.0

Philippines 4.6 5.5 4.5 4.0 5.0

Singapore 5.0 6.4 5.5 5.8 4.0

Taiwan 3.7 5.2 4.8 4.0 3.0

Thailand 4.5 6.3 7.5 6.5 6.0

CONCLUSION

Political risks SE Asia could do better relative to NE

Asia One-off shocks possible but Resilience has returned

Economic prospects Cyclical risks are rising SE Asia finally reviving from 1997 crisis Can cope with rising challenges from

China and India