ASEAN’s disintegrating premium pitch

 

Despite ASEAN’s formal launch of the Economic Community and early Indonesia enthusiasm with the “Jokowi premium,” stock markets in Jakarta, Kuala Lumpur and Bangkok are all down for the year as foreign investors with large positions lose faith in reform and political direction.

The Indonesian and Malaysian currencies reached decade lows against the dollar the past month, and Thailand’s military rule has been indefinitely extended as big infrastructure projects are delayed. Fifteen years after they were at the epicenter of regional financial crisis, corporate and household debt has again mushroomed to dangerous levels as ratings agencies downgrade previously solid credit and growth stories Indonesian President Jokowi was initially hailed as a savior, as lower oil prices enabled subsidy cuts and trade deficit improvement after he campaigned on a business-friendly anti-corruption platform.

Share price/earnings ratios soared toward the 20 level, exceeding the emerging market average, but buyers poured in for several months. Meanwhile economic growth slipped below 5 percent in the first quarter on stubborn 7 percent inflation. The Indonesian president’s appointees for law enforcement and regulatory agencies were named in wrongdoing investigations and subsequently withdrawn after dithering since they were backed by his political party. A sensible policy shift from commodities to manufacturing degenerated into harsh rhetoric against multinational miners urging a “new economic order” as in decades-ago populist appeals.

He launched a one-stop foreign direct investment shop, but inflows could halve from last year’s $15 billion as companies cite prohibitive logistics costs compared with neighbors in surveys. A ban on natural iron ore exports remains in place despite his pledge to lift it, and a “national car” venture was also announced which will protect high-cost domestic suppliers. Instead of overhauling the general infrastructure regime, in the bottom quarter of the World Bank’s Doing Business ranking, the Indonesian president opted for a “project-based” approach that perpetuates arbitrary rule-making. The central bank also dented confidence by loosening pre-election limits on consumer credit which had jumped for low-income borrowers, and by ordering all domestic transactions to be conducted in rupiah as it slid toward 13,500 dollar for a 7 percent loss this year.

In May local bond yields spiked to 10 percent and the instruments were the worst performers on benchmark global indices. Foreign ownership dropped 2 percent from 40 percent of the total, and external bond issuance shifted to the Islamic sukuk market. Credit default swap spreads rose 20 basis points the first week in June as Indonesian natural resource companies with big dollar liabilities were put on watch by rating firms.

Malaysia’s ringgit just fell to 3.75/dollar, and international reserves have dwindled to $100 billion on a reduced current account surplus and resident and non-resident capital outflows. GDP growth is under 5 percent as value added tax was introduced in April to shrink the chronic budget deficit. Household debt is 85 percent of GDP, and a sovereign wealth fund has run up another $15 billion in obligations now under investigation. Prime Minister Najib set up the structure and his approval ratings have been steadily eroded
by controversies and missteps, including handling of consecutive jet disasters. He has tried to shore up support through hard-line religious and anti-opposition party stances, and the ruling coalition may consider a replacement, according to reports. With these difficulties, Fitch Ratings signaled a sovereign downgrade in the second half.

Thailand’s output grew just 1.5 percent in the first quarter on the same 85 percent level of household debt, but the currency had been firm against the dollar until the central bank recently cut interest rates and relaxed outward capital controls which helped consolidate the army takeover last year. A new constitution and elections are not scheduled until 2016, and only a few subway line upgrades will begin this year out of the original $50 billion infrastructure package. These plans, like ASEAN leaders’ broader economic management and reform reputations, will continue to be discounted without a return to basic commitment and vision. They must rediscover integration and solvency values in the Community spirit belied by their antagonizing actions.

Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.