Briefing MONTHLY #61 | April 2023

Animation by Rocco Fazzari.

GROWTH SPURT

It has been a month of peering into the region’s economic future as the spring meetings of the International Monetary Fund and World Bank have produced the usual flood of forecasts - and the local institutions have been on the case as well.

So, to save a lot of reading, here are the top line views from four major economic forecasters this month. We also have a summary growth outlook chart for this and next year for 20 Asia Pacific countries in DATAWATCH. Then looking further into the future, we go behind the growth forecasts to look at one piece of interesting new Asia-oriented research from these reports. It is the sort of material that often gets lost in the data dump. See: NEIGHBOURHOOD WATCH.

Asian Development Bank: Developing Asia is forecast to grow 4.8 per cent this year and next. The ADB Outlook says the region’s economies are reopening “with impressive dynamism. Private consumption, investment, and services - including, hearteningly, tourism - are reviving now that the pandemic has largely passed.” China’s return after last year’s lockdowns is brightening the outlook for both the region and the global economy. But South Asia will be the standout growth region this year at 5.5 per cent followed by 6.1 per cent next year, mainly due to India’s strength.

World Bank: The East Asia and Pacific Update says that while regionwide economic activity has recovered from recent shocks with goods exports and private consumption leading the way, output remains below pre-pandemic levels in many Pacific island countries. It says that in the two decades since the Asian Financial Crisis growth in this part of the world has been faster and more stable than the rest of the world with “a striking decline in poverty and, in the last decade, also a decline in inequality.” But the Bank goes on to warn that a lack of productivity boosting structural reforms during that time means that the convergence between East Asia and Pacific countries with the high income countries now appears to have stalled.

International Monetary Fund: Amid a revised global view which suggests that a hard landing for advanced economies has become a much larger risk, the World Economic Outlook looks with some expectation towards the pace of China’s post-pandemic reopening. It says: “With China absorbing about a quarter of exports from Asia and between five and ten percent from other geographic regions, the reopening and growth of its economy will likely generate positive spillovers, with even greater spillovers for countries with stronger trade links and reliance on Chinese tourism.” Nevertheless, the big picture for the world remains grim: “Over the medium term, the prospects for growth now seem dimmer than in decades.”

ASEAN+3 Macroeconomic Research Office: Growth in the ASEAN+3 (China, Japan and South Korea) region is expected to be anchored by domestic demand as regional goods exports weaken due to falling global growth. But an increase in services exports (mainly tourism) will offset the goods export slowdown. Stronger growth in the Plus-3 countries will be an important pan regional boost. The AMRO economists say the biggest risk to the region is the possibility of another energy price shock if the Ukraine crisis escalates, followed by a sharper than expected US economic downturn, and then prolonged weakness in the Chinese real estate sector hitting investor and consumer confidence.

It is a big month for regional summits in May with the first of this year’s ASEAN Summits in Labuan Bajo, Indonesia (May 9-11); the Group of Seven advanced economies meeting in Hiroshima, Japan (May 19-21); and then the Quadrilateral Security Dialogue in Sydney (May 23-24).  The G7 add-on country invitations provide an interesting insight into the global pecking order these days with Japan inviting Australia, India, Indonesia, South Korea, Vietnam, Brazil, the Cook Islands (which chairs the Pacific Islands Forum) and Comoros (which chairs the African Union).

And it is also election time in Thailand on May 14. Having declared this to be the most interesting election in Asia this year back in our January election preview, and with the benefit of a visit to Bangkok in March, we look at five things to watch in ON THE HORIZON.

Greg Earl
Briefing MONTHLY editor

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NEIGHBOURHOOD WATCH

ASIAN INNOVATION

These World Bank estimates (below) suggest that innovation in Asia is increasingly built on locally generated knowledge (measured by patents) from Japan, South Korea, China and Taiwan rather than the west, mainly the US, as was once the case. Source countries are shown on the left and recipient countries on the right. Countries can be both sources and recipients for this knowledge.

The estimates of the changing source of knowledge in the past two decades is presented in the World Bank’s latest East Asia and Pacific Economic Update in the context of the risks of decoupling between the US and China. It notes that in the 1990s, 60 per cent of Chinese innovations were built on US patents but now Chinese patents are cited as much as US patents (the red bar v the dark blue bar on the right in the second chart for China).

Then: 1996-2001

And now: 2014-19

The report says decoupling of the US and China would hurt developing Asian countries because they still depend on the rest of the world for technology creation, and mostly the US, which is still the largest single knowledge provider for the region.

But it says that by 2014-19 China accounted for about 10 per cent of prior knowledge used for Singapore and Thai innovation and inventors in the region are almost just as likely to collaborate with Chinese inventors as US inventors.  But equally importantly, the non-Chinese East Asian knowledge providers such as Japan and Korea now combined rival the US, even without taking account of China’s rise.

CARBON CRUNCH

East Asian countries have been warned that their per capita greenhouse gas emissions are now above the world average increasing the need for more regional cooperation on moving towards a net zero position.

While there are still vast regional differences in emissions, the ASEAN+3 group contains three of the ten largest total emitters in the world in China, Indonesia and Japan and accounts for more than one third of total global emissions.

The Asean+3 Macroeconomic Research Office has devoted the special focus in its annual economic outlook to climate change saying the region’s failure to act will undermine its competitiveness as industrialised countries impose carbon border adjustment policies.

It warns: “Deep and rapid adjustments away from use of fossil fuels also mean that some economies in the region face substantial risks to financial stability if policy actions to promote the net zero transition spark a sudden and disorderly adjustment in market expectations.”   

 

 

 

 

 

 

 

 

 

 

The AMRO study contains a comprehensive comparison of carbon regulation and mitigation policies across the 13 countries and argues that the region has comparative advantages in meeting the global demand for clean energy, low-emission products, carbon removal technologies and offsets. These range from abundant renewable energy resources to comparative advantage in technology manufacturing.

FRAGMENTATION COSTS

The International Monetary Fund has warned that Asian countries may be amongst the biggest losers from geopolitical fragmentation caused by decoupling between the US and China.

The agency has tried to model the costs of fragmentation across its World Economic Outlook and its Financial Stability Report released this month and particularly by looking at shifts in foreign direct investment rather than just trade flows and supply chains.

It concludes that a permanent rise in barriers to investment as the US is now imposing on China could reduce global output by about two per cent. But the losses will be unevenly distributed particularly hurting emerging market countries which are not clearly aligned with either the US or China.

The World Economic Outlook says of this modelling: “Asia became less relevant both as a source and host, losing market share vis-à-vis almost all other regions. Notably, FDI to and from China declined by even more than the Asian average … The share of FDI among countries that are geopolitically aligned is larger than the share going to countries geographically close, suggesting that geopolitical preferences play a key role as a driver of FDI.”

 

 

 

 

 

 

 

 

 

 

 

 

 

This chart shows how China and Asian countries defined as part of a China bloc would be big losers from investment barriers. But in addition, India and Indonesia, which are defined as non-aligned in the modelling, are not necessarily losers from investment barriers due to their sheer size but are still big losers from uncertainty in a fragmented world.

REPLACING RUSSIA

Central Asian countries grew almost 50 per cent faster than expected last year following the Ukraine war reflecting Russian migration, increased exports to Russia and relocation of Russian businesses to avoid sanctions.

But an ADB study of how the war has affected this little recognised sub-section of its membership raises questions about whether these windfall gains can be expected to continue benefitting these seven members ranging from Georgia to Kyrgyzstan.

Several hundred thousand Russians migrated to these countries boosting domestic consumption, money transfers rose 94 per cent in five countries, foreign direct investment rose 18 per cent in Kazakstan, and regional exports rose 43 per cent on 2021.

However, the ADB warns the countries against complacency over the windfall gains from the war and tells them to develop more diverse links to both the east and west. It says Russian skilled workers are more likely to move on to more developed markets than stay in central Asia; the re-export boom will eventually be curbed by sanctions or undermined by more direct covert routes from China and Europe; and Russia’s technological isolation will undermine its ability to supply competitive goods to the region.

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ASIAN NATION

PLACE MAKING

 

 

 

 

 

 

 

 

 

If a picture says a 1000 words, this one from the National Defence Strategic Review certainly provides a new way of thinking about Australia’s place in the world.

The US is nowhere to be seen, Jakarta is arguably at the heart of this vision of the Indo-Pacific and despite all the attention being given to the Pacific Islands Forum countries these days, the Indian Ocean emerges as the real strategic void.

It is the only map in the 110-page public report and only obliquely explained in a characterisation of the Indo-Pacific as having a large population, unprecedented economic growth, major power competition and an emerging multipolar distribution of power, but without an established regional security architecture. And as a result: “Australia sits at the crossroads of the Indo-Pacific where the proximity to this dynamic region means that our nation faces unprecedented strategic challenges.”   

While the core shifts in Australia’s military force structure recommended in the review are well covered elsewhere, the section on defence partnerships provides some sense of hierarchy to how the Albanese government will increasingly see Asia.

1. The US Alliance is more important than ever underlining the “centrality of an alliance partnership” in Australian strategic culture.
2. Southeast Asia is a key area of strategic competition and so investing in partnerships her will be “critical to maintaining the regional strategic balance.”
3. The Pacific is critical to Australian security and Australian development assistance with New Zealand “remains essential”.
4. And only now speaking to the map, Australia is an Indian Ocean state with “the longest Indian Ocean coastline”.
5. When it comes to the other key powers, they are listed as Japan, India, the European Union and only then the United Kingdom, despite the AUKUS partnership.
6. There is a need for more coordination between DFAT, Defence and other government agencies with DFAT “appropriately resourced to lead a nationally determined and strategically directed whole-of-government statecraft effort in the Indo-Pacific.”
7. The defence cooperation program in Southeast Asia and the Pacific is described as an “exemplar of defence diplomacy” and recommended for expansion to the north-east Indian Ocean.

INDIAN STUDENTS

The much anticipated return of international students to Australia after the pandemic has barely begun but concerns are emerging about gaming of visas for work purposes, in a potential repeat of what happened in previous student surges.

The Australian Financial Review reported that some universities were finding that up to half their new Indian students were never showing up for class or being poached by rival colleges with shorter term courses.

And the Nine newspapers reported that at least five universities had introduced bans or restrictions on students from specific Indian states in response to a surge of applications and accompanying rise in what the Home Affairs Department described as fraudulent applications.

Australia is tracking towards its biggest annual intake of Indian students, topping 2019’s 75,000, but concerns are emerging amongst government MPs and the education sector about the functioning of the immigration system and the long-term impact on the country’s reputation as an international education market.

The concerns about misuse of visas for work and the poaching of students with financial incentives comes as Prime Minister Anthony Albanese made the quality of Australian education a key part of his recent visit to India. However, the visit also laid some more groundwork for Australian universities to provide courses in India which might eventually contribute to curtailing visa misuse in Australia.

Pankaj Pathak, chairman of the Western Australian private education providers association told the Financial Review that the problem had picked up late last year and involved a “minority of private colleges that are going after students both in the higher education sector and the quality private sector here.”

CHINESE AT HOME

Chinese-Australians appear to feel more at home in Australia as pandemic fears have faded and as there are modest signs of a recovery in the bilateral relationship that might also reduce incidents of racism.

The Lowy Institute’s latest annual poll of this group of Australians which constitutes 5.5 per cent of the population shows that 92 per cent see Australia as a good or very good place to live which is up 15 points since 2020 and nine points since 2021.

But only three quarters of the people surveyed says they take pride in the Australian way of life to a great or moderate extent which is an increase for 2021 but still a drop from 2020 suggesting some gap between appreciating the place and the way of life. For comparison 83 per cent of all Australians says they take pride in Australia’s way of life to a moderate or great extent.

One notable change in the latest poll amid the emergence of more authoritarian rule in China is on attitudes to government with almost half (48 per cent) of respondents saying democracy is preferable to any other form of government, which was an increase of 14 points since 2021. The number who felt a non-democratic government was preferable in some circumstances declined by nine points to 36 per cent.

But there is still a big divide with the overall population on Australia’s alliance structure with only a bare majority of Chinese Australians believing the US alliance is important to Australia compared with almost 90 per cent for the broader population.

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DEALS AND DOLLARS

 

 

 

 

 

 

TEAM AUSTRALIA

Australian trade ministers have backed the development of a “Team Australia” approach to boosting trade and investment as part of the Albanese government diversification push.

The inaugural meeting of a new Ministerial Council on Trade and Investment in Townsville on April 11 was the first in person gathering of those ministers since 2019.

The meeting came the day after Australia and China each backed away from their World Trade Organization dispute over China’s tariffs on Australian barley with China agreeing to review the tariff over the next three months. Chinese brewers have also stepped up the pressure for better access to Australian barley.

But despite that breakthrough, the ministerial council kept up the focus on diversifying, in effect, away from China by declaring: “Ministers recognised the importance of continuing efforts to diversify trade and investment opportunities to deliver a more productive and secure economy.” They welcomed work to promote “uptake of opportunities created by multilateral, regional and bilateral trade agreements and particularly welcomed steps to deepen economic partnerships in the Indo-Pacific.

The meeting asked officials to work on delivering the Team Australia approach including on diversification, improving coordination on national trade advocacy, improving federal-state coordination on attracting foreign investment, and supporting supply chain resilience.

The Business Council of Australia/Asia Society Australia A Second Chance report in 2021 advocated the Team Australia approach as part of a package of measures to diversify trade partnerships after the pandemic.

CHINESE INVESTMENT

Source: KPMG/University of Sydney

The value of Chinese investment in Australia picked up last year to US$1.4 billion but is still lagging the boom years at the second lowest level since 2007.

The latest survey of investment by KPMG and the University of Sydney shows that the value of investment was more than double the US$585 million recorded in 2021. But the number of deals stayed the same at 11 suggesting Chinese investors are prepared to put larger amounts of money down.

And the survey reveals something of a back to the future momentum with most of the investment accounted for by two West Australian mining deals. They were Baowu Steel Group’s $1,077 invest in Western Range iron ore mine and Zhejiang Huayou Cobalt Company’s $529 million investment in lithium mining.

In a possible reflection of the improved diplomatic relationship state-owned enterprise investment picked up sharply from $200 million in 2021 to $1.5 billion last year. But private investment of $600 million in 2022 was smaller but more diverse across deals in mining, renewable energy, commercial real estate and high-tech services.

In another sign of changing times mostly in China there were only two identified commercial real estate investments as obtaining financing and regulatory approvals from China for overseas real estate investment remained difficult.

TIMOR GAS

The Albanese government’s deal with The Greens requiring new gas projects to be net zero and other new regulations on gas producers may have boosted Timor Leste’s prospects of processing gas onshore.

The Timor government has stepped up its push to pipe gas from the Greater Sunrise field since the Albanese government came to power. It has received signals of support such as the appointment by the Albanese government of former Victorian premier Steve Bracks as a special representative to break the impasse.

The potential $70 billion Greater Sunrise field lies 150 kilometres from East Timor but 450 kilometres from Darwin, but project operator Woodside had previously argued processing in Darwin using existing infrastructure was more efficient. Woodside, the Albanese government and Timor have been negotiating about production sharing and royalty agreements for the potential project and some Timor politicians have warned they would seek Chinese support for onshore processing.

The Australian Financial Review quoted EnergyQuest chief executive Rick Wilkinson saying there was “no question” the safeguard mechanism reforms had raised the stakes for big projects by making them more expensive. “Sunrise being built in East Timor has never had a better opportunity than what we’re looking at right now,” he said.

Timor is due to join the ASEAN group this year which may give it some extra leverage in seeking Australian support for processing its own gas.

TURNING JAPANESE

Another high-profile Australian brand name in Asia looks set to shift from local ownership with the $1.9 billion takeover bid for health nutrients company Blackmores by Japanese food and drinks company Kirin.

Founding family member and former chairman Marcus Blackmore has supported the bid saying Kirin was ethical and strong on culture. Kirin owns the Lion beer business in Australia and has been expanding offshore into health drinks and probiotics. But it has had a mixed experience with dairy and food products in Australia.

The Australian Financial Review had earlier reported that Blackmores had been in sale discussions with the brewing company Asahi, which also runs a health foods division. The discussions did not proceed partly because there were fears about relations with China and the health of its market, which represented about 30 per cent of the company’s earnings last financial year.

Meanwhile The Australian reported that rival Japanese consumer products company Suntory had been looking at a Blackmores investment in recent months.

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DIPLOMATICALLY SPEAKING

“Many commentators and strategists prefer to look at what is happening in the region simply in terms of great powers competing for primacy. They love a binary. And the appeal of a binary is obvious. Simple, clear choices. Black and white. But viewing the future of the region simply in terms of great powers competing for primacy means countries’ own national interests can fall out of focus … It diminishes the power of each country to engage other than through the prism of a great power.

This combination of factors and the risk of miscalculation comprise the most confronting circumstances in decades. This is why I am so steadfast in refusing to engage in speculation about regional flashpoints …. Anyone in positions like mine who feels an urge to add to that discussion should resist the temptation. It is the most dangerous of parlour games. My approach to this is not simply a politician seeking to avoid hypothetical questions. It is a frank and clear-eyed assessment of interests. ”
- Foreign minister Penny Wong (April 17)

“She told us she will turn her back on reality, speaking only in terms of ‘lowering the heat’ and the ‘benefit from a strategic equilibrium’, without providing one clue, let alone a policy, as to how that might be achieved. Never before has a Labor government been so bereft of policy or policy ambition.”
- Former Prime Minister Paul Keating (April 18)

"Wong’s speech confirmed that there is a deep contradiction at the heart of the Albanese government’s foreign policy, between its vision for a multipolar Asian future and its complete alignment with US policies that are quite incompatible with that vision."
- ANU Professor of Strategic Studies Hugh White (April 19)

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DATAWATCH

ASIA'S ECONOMY

Source: ADB outlook (Japan from IMF)

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ON THE HORIZON

 

 

 

 

 

 

THAILAND VOTES

Thais go to the polls on May 14 in an election which seems set to rearrange the nation’s political landscape after 15 years of military coups, violent street showdowns, banning of parties, and serial jumping between other parties.

The military control or manipulation of Thai politics for much of this century means the prospect of a significant shift at the election has received less attention outside the country than may be warranted. The result is still likely to be a messy coalition government but with a potential major presence for two opposition parties which have been the subject of military influenced crackdowns.

A change of power would help offset the general decline in the quality of democracy across Southeast Asia and possibly help restore Thailand’s diplomatic clout when the region faces many challenges.

Here are five things to watch:

Moving forward: The then new and reformist Future Forward Party was the standout success story from the 2019 election winning the votes of young Thais, until it was disbanded after the result. Its Move Forward successor seems to have the same momentum at this election because it is seen as less compromised than other more centrist or opposition parties. Will a coherent reformist party make it into power or continue to linger in opposition?

Split forces: The two generals at the head of the 2014 coup and leading figures in the current government Prayut Chan-ocha and Prawit Wongsuwan are now running in separate parties. Does this suggest a real split in the establishment forces or is it a ploy for post-election manoeuvring? A divided establishment has implications for the 250 mostly establishment Senators who get to vote in the election of the new prime minister.

Shinawatra #3: Former prime minister Thaksin Shinawatra, now in self exile after being removed in the 2006 coup, says he wants to return to the country. His sister Yingluck is also in exile after being removed as prime minister in 2014. With his daughter leading the preferred prime minister polls, will there be a wholesale return of the old Shinawatra populist movement which so unnerved the military twice in the past? Or have the other leaders of the Shinawatra-influenced successor Pheu Thai Party, which is leading the polls, learnt to compromise with the Bangkok establishment to keep a share of power?

Where’s the king: How will Thailand’s still relatively new and untested King Vajiralongkorn deal with any election stalemate. He doesn’t have the aura or respect of his long reigning father but has arguably accumulated more power. Will he be more inclined to deal with the Thaksin forces than the military and establishment would like?

Rules or power: Thailand’s economic agencies have managed almost two decades of political turmoil with some aplomb but the same can’t be said for the political regulators - from the Election Commission, to the National Anti-Corruption Commission to the Constitutional Court. After a promising start with a new Constitution in 1997, these agencies have lost public respect for their decisions and will now be under more scrutiny than ever.