Welcome to ICAEW’s , a quarterly forecast for the region prepared

Welcome to ICAEW’s Economic Insight: South East
Asia, a quarterly forecast for the region prepared
specifically for the finance profession. Produced by
Cebr, ICAEW’s partner and acknowledged experts
in global economic forecasting, it provides a unique
perspective on the prospects for South East Asia
over the coming years. We focus on the largest
economies of the Association of South East Asian
Nations (ASEAN) – namely Indonesia, Malaysia, the
Philippines, Singapore, Thailand and Vietnam.
World output grows without
exacerbating environmental impact
2014 was an exceptional year for the global
economy, but optimists will hope it marks the start
of a new paradigm for growth. It was the only year
that saw emissions of carbon dioxide (CO2) – the
main agent causing climate change – stay still while
world output grew.1 Previously, emissions had only
failed to grow during recessions. This ‘decoupling’
of the two trends, in the optimistic reading, marks
the turning point where fossil-fuel powered growth
makes way for clean growth based on renewables.
A one-year blip, though possible, is unlikely given
that emissions of the Organisation for Economic
Cooperation and Development (OECD) nations fell
4% over the past five years, but output grew 7%.
In other words, advanced economies have moved
to clean growth on a permanent basis. This will
have profound and lasting effects on economies
worldwide, from the commercial opportunities
available in renewables and energy-efficiency
technology to the necessity for businesses to adapt
to new regulations.
Economic Insight
South East Asia
Quarterly briefing Q2 2015
BUSINESS WITH CONFIDENCE
Climate change is the most acute case of the
environment–economy trade-off softening, but
it is not the only one. This report will consider
this and other examples of development’s effects
on the environment, from a South East Asian
perspective. ASEAN’s own progress is instructive
as environmental impact primarily depends on
development, and as a region with a mix of
economies at different stages, South East Asia shows
us how the environment can be affected by rapid
growth.
In Figure 1, the only country producing lower
emissions in 2013 than in 1970 is the US, whose
per-capita emissions decreased by 22%. The same is
true for most developed countries. The only ASEAN
country to produce a sustained decrease over the
timeframe is Singapore (though emissions remain
above 1970 levels). The city-state’s high emissions
relate partly to the oil refining which takes place
there – in a sense, this means that other economies’
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emissions are misleadingly attributed to Singapore, as
much of the oil is re-exported. These considerations
often make attribution of emissions complex in a
globalised economy. Per-capita emissions peaked in
1994, seven years after Singapore achieved high-income
status. Malaysia hopes to achieve this status in 2020
and there are signs its own emissions are slowing as it
does so (hence the recent flattening of Malaysia’s line in
Figure 1 – this is not linked to any growth slowdown).
This report concentrates on four causes of cleaner
growth. Two are organic: a shift from manufacturing
to services and a shift within manufacturing to cleaner
subsectors. The others are conscious policy choices:
investment in renewables and the drawing-up of
environmental plans. The report assesses their relative
contribution to the shift to cleaner growth in ASEAN,
such as it is – the majority of ASEAN members are not
yet at the stage where emissions are falling.
Figure 1: CO2 emissions per capita, 1970 =100
The service economy
Part of the explanation for the clean growth
phenomenon lies in the shift to services, which
leave a smaller environmental footprint. Singapore’s
transition from a low-cost manufacturing base
to a high value-added international services hub
was engineered principally for unrelated reasons –
essentially, incomes can only climb so high under the
low-cost manufacturing model before eroding the
very competitiveness that it relies on. Other ASEAN
economies are following the Singaporean path, although
they are generally further behind in the process.
800
700
600
500
400
300
200
100
0
1970
1975
1980
1985
1990
1995
2000
2005
2010 2013
Thailand
Indonesia
Malaysia
Vietnam
Singapore
Philippines
World
US
Source: Emissions Database for Global Atmospheric Research (EDGAR)
Among other ASEAN countries, decreases mostly come
when GDP shrinks – such as Thailand and Indonesia’s
crisis-related dips between 1997 and 1998 or the
Philippines’ emissions flatlining during its lacklustre
economic performance in the 1980s. (Although the
Philippines’ emissions are lower also because of its
relatively large service sector.) Since South East Asian
economies have managed such consistent and strong
economic growth over the timeframe, there have been
few falls in emissions.
In general, environmental degradation accompanies
development, but only up to a certain point, and then
further development relieves environmental pressure.
The resultant shape is termed the environmental Kuznets
curve, after Kuznets’ original hypothesis relating to
inequality. It is observed in many forms of environmental
degradation and now, apparently, CO2. So in contrast
to all development to date, as the world gets richer in
future, the environmental impact of economic activity
will decrease.
The effect on emissions is strong: data from the US
Environmental Statistics Agency show that while
manufacturing activity produces 420kg of CO2 per
each $1,000 of output, service activities (excluding
transportation) produce just 112kg.
Most countries develop by first changing from agrarian
economies into manufacturers, hence the first, upwardsloping part of the environmental Kuznets curve where
CO2 emissions increase. Later on, industry gives way to
services as education improves and allows the economy
to become competitive in knowledge-based industries.
When this becomes possible, most economies choose
or organically move to specialise in service activities as
the demand for services increases with income, while
manufacturers tend to experience relatively flat demand
despite increasing incomes.
Figure 3: Value added from manufacturing, % of GDP
%
40
35
30
25
20
15
10
Environmental degradation (pollution)
Figure 2: Stylised environmental Kuznets curve
Pre-industrial
economies
Industrial
economies
Post-industrial
(service) economies
5
0
Indonesia
Malaysia Philippines Singapore Thailand
1970
Vietnam
Post-1970 peak
US
2012
(Singapore 1975
Vietnam 1985)
Source: World Bank World Development Indicators, Cebr analysis
Turning point
Stage of
economic development
Source: Wikimedia Creative Commons
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Growth in income
per capita
The pattern of industrialisation, then de-industrialisation
is very evident in the sectoral mixes in Indonesia,
Malaysia and Thailand, whose manufacturing shares
all peaked between 1999 and 2007. Singapore’s
manufacturing share has fluctuated but ended the
period decisively down on its 1975 reading. Vietnam, the
poorest economy in the group, has seen a growing share
of manufacturing output recently, and may well reattain
the last peak it reached, in 1987.
ECONOMIC INSIGHT – SOUTH E A ST A SIA
Q2 2 015
With agriculture accounting for 18% of GDP and still
decreasing, continuing transition from agriculture to
manufacturing would be expected. The large inflows of
foreign direct investment (FDI) into Vietnam are likely
to increase industry’s share of output in the medium
term. The Philippines is showing an early transition,
for its development stage, into services – like India, it
appears to be largely bypassing manufacturing-intensive
development.
The US has experienced a decline in the manufacturing
share of GDP of over half between 1970 and 2012. This
trend raises the possibility that advanced nations are
simply offshoring their manufacturing emissions. This
would mean that while OECD economies have a longterm trend of declining emissions, progress is illusory
because they are cancelled out by increasing emissions in
developing countries, primarily China. That would be true
if China’s manufacturing were based on fossil fuels. But
China in fact uses increasing proportions of renewables
in its energy mix, and is one of the ‘changing patterns of
consumption’ the International Energy Agency cites as a
driver of lower emissions.
Manufacturing either cleans up or moves out
An accompanying trend of cleaner growth on the global
level is movement into cleaner manufacturing. South East
Asia shows an element of this, increasingly specialising
in semiconductors and other electronic products.
However, this has been undermined in ASEAN by growing
dependence on commodities over the past decade, as
China’s expansion has kept prices and demand strong.
Figure 3 shows how much more intensive in emissions
the processing of commodities is compared to activities
such as manufacturing electronics, machinery or even cars
(which fall under transportation equipment). Compared
to service sector activities, the discrepancy is even greater.
Thailand’s government is aiming to convert its position
as the regional automotive hub in South East Asia into a
centre for manufacturing electric vehicles. In developedworld auto markets, this is a small, but very rapidly
growing sector. The UK saw four-fold growth between
2013 and 2014 in the volume sold, and further growth
is assured as various OECD governments’ emissions
targets rely on electric vehicles gaining higher market
shares. As being a production hub only makes sense
when there is a sizeable market nearby, Thailand is also
encouraging the domestic purchase of electric vehicles.
The pilot programme will install electrical charging
stations in major Thai cities, incentivise investment in
electric vehicle technologies, and subsidise their purchase
(eg, through providing tax credits for export). The latter
policy is necessary as long as electric vehicles remain
uncompetitive with conventional ones, but prices are set
to fall quickly as their market share grows.
energy will in future gradually reduce the importance
of coal and oil, so these can be phased out altogether
rather than be displaced to somewhere else. Reducing
production of fossil fuels, which are the second-most
polluting activity shown in Figure 4, would make a great
difference to South East Asian emissions. Indonesia is the
fifth-largest coal producer in the world, and Vietnam is
the nineteenth-largest. Diversification would also improve
the value added in ASEAN exports, and alleviate its
reliance on China’s growth. Cleaner manufacturing has
many upsides.
Figure 4: CO2 intensity (Mt CO2/$1 bn output (2000$))
Nonmetallic mineral products
Petroleum and coal
Primary metals
Chemicals
Plastic and rubber products
Wood products
Commodity processing/
upstream manufacturing
Manufacturing average
Downstream manufacturing
assembly
Fabricated metal products
Electrical products
Machinery
Transportation equipment
Computer & elec. products
0
200 400 600 800 1,000 1,200 1,400 1,600 1,800
Source: US Economics and Statistics Administration
Investment in renewables booming as
ASEAN scrambles to keep up
2014 was a good year for renewable energy, the third
major driver behind clean growth. Despite oil prices
falling throughout the second half of the year, total
investment in the sector rose, according to the UN
Environmental Programme, by 17% to $270bn. This
almost reached the 2011 peak. New investments are
centred on China, Japan, the US and Europe, but ASEAN is
not letting the opportunity pass it by.
ASEAN’s renewable generation capacity has grown by
83% between 2002 and 2012, led by Vietnam which
added 34bn kWh of hydropower. This resource now
accounts for just under half of its entire electricity
generation. However, ASEAN economies have not,
in general, seen rises in the proportions of electricity
generated through renewables. Singapore and Malaysia
have seen rises of just 0.1 percentage points each. The
Sustainable Energy Association of Singapore estimates
that the island could produce 10% of its energy from
renewable sources by 2020, but to do so, it must ensure
renewable capacity is added more rapidly than fossil fuel
generation.
If South East Asia continues to move towards
automotive production and increases its specialisation
in semiconductors, its emissions intensity will gradually
decrease. Would this simply dilute or displace to
elsewhere ASEAN’s commodity extraction and processing
emissions, rendering the efforts meaningless? Clearly
some of the materials (eg, plastic/metals) in Figure 4
must be produced somewhere, and so more efficient
production will be required. Encouragingly, data on
CO2 emissions intensity in manufacturing show it
decreasing over the medium term. Emissions intensity
in the chemicals subsector of manufacturing fell by 31%
between 1998 and 2006, and average emissions intensity
in manufacturing fell by 13%. But some of these activities
can disappear completely – for example, renewable
Meanwhile, OECD nations have been rapidly growing
their own shares. Progress in the US appears slow but in
fact has accelerated considerably since 2008, when the
new administration discontinued the previous sceptical
stance on climate change. Europe’s progress is more
representative of OECD trends, exhibiting an increase
of nine percentage points in the renewable share of
electricity generation between 2002 and 2012.
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ECONOMIC INSIGHT – SOUTH E A ST A SIA
cebr.com
A Data Insight report 2 finds that South East Asian clean
energy finance totalled $1.8bn in 2014, having grown
at an average of 8% per year since 2010. More than half
of this went to Thailand. The total is a small amount,
especially spread over the entire region, and explains why
renewables have been shrinking in ASEAN’s energy mix
Q2 2 015
since 2002. The growth rate appears high, but 8% is less
impressive in South East Asian terms, where GDP growth
often approaches that.
Figure 5: Total renewable electricity generation as
% of total electricity generation
%
60
50
40
30
20
10
0
Vietnam Philippines Europe
US
2002
Indonesia Thailand Malaysia Singapore
2012
Source: US Energy Information Administration International Energy
Statistics (http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.
cfm?tid= 6&pid=29&aid=12)
ASEAN economies have been adding generation capacity
using coal power. Though Indonesia’s President Widodo
has made some high-profile environmental commitments,
he plans to increase the use of coal power to overcome
the country’s power shortage. This is a stark reminder of
the trade-off between environmental and developmental
priorities in poorer countries: solar power is now costcompetitive with fossil fuels, following a long period
during which it had to be subsidised. But Indonesia has
large coal deposits which it already mines, and previously
exported to China. Therefore Indonesia may well be able
to produce electricity from coal more cheaply. As China
decarbonises its own supply, this cheap and abundant
resource will likely prove impossible for Indonesia to turn
down. Other nations are interested: Thailand and Vietnam
have signed a trilateral strategic cooperation deal relating
to this and other resources, which will set back plans to
increase renewable generation. Chinese lenders also plan
to finance coal plants in various ASEAN countries.
Environment high in public policy agenda,
but progress remains difficult
The last decade saw climate change rise much further
up the agenda. As well as better scientific models and
predictions, it saw changes in public opinion driven
by the Stern report in the UK (2006), Al Gore’s film An
Inconvenient Truth (2006), the UN Intergovernmental
Panel on Climate Change’s fourth assessment report
(2007) and the Copenhagen Summit (2009). By 2010,
most major economies had drawn up plans including
targets for reducing emissions.
Indonesia is the world’s 9th largest emitter of carbon,
though per capita Indonesians emit less than half of
the world average. Its major source of emissions is not
manufacturing but land use, accounting for 85% of
emissions, including 37% from deforestation and 27%
from peat fires.3 Driving deforestation is most commonly
the creation of plantations of palm oil. These sources of
greenhouse gases represent some of the lowest-hanging
fruit in terms of reducing emissions.
of growth alongside emissions reductions. Hence the
Indonesian National Climate Change Council in 2010
drew up a plan which would reduce emissions by 46% on
2005 levels by 2030. However, currently emissions have
risen on 2010 levels. Part of this is because the previous
administration’s plans were hampered by corruption
and ineffective oversight.4 Clearly these problems are
not about to disappear overnight, as the new regime’s
early difficulties with its flagship anti-corruption policies
demonstrate. Norway, in recognition of the difficulties in
reconciling development with ecological sustainability,
promised $1bn to Indonesia if it didn’t change land use in
2010. But it appears that deforestation has increased since
then. Other initiatives, such as the Indonesian Climate
Change Trust Fund (ICCTF), have met similar problems; a
review of its effectiveness finds that ‘it remains to be seen
whether the ICCTF … will be able to play a more central
role in supporting implementation of future national
climate change response efforts’. 5
The problem these schemes hope to solve is preventing
the short-term gains in GDP that can be reaped at the
expense of natural capital stocks ie, the natural wealth
locked in resources such as forests. Calculating the
value of these stocks helps to determine an appropriate
payment that aid donors can afford to give to a
developing economy to safeguard its own resources.
Indonesia may be a prime target for reducing emissions,
but there may be even more cost-effective opportunities
elsewhere. This logic informs guidelines for natural capital
accounting, which helps to quantify the trade-off.6 GDP is
often criticised on the grounds that it is too narrow; but
its appeal is partly in reducing the state of the economy to
a number – hence the value in seeking a similar quantity
for natural capital.
Deforestation in Indonesia has adverse environmental
consequences, not just through climate change, but
also directly through smoke spreading to Singapore and
Malaysia. The 2013 South East Asian haze, during which
regional weather systems spread pollution from Sumatran
wildfires to Singapore and Malaysia, caused dangerous
levels of particulates in these countries’ air. The town of
Muar in Johor even saw a state of emergency declared.
Recriminations from both sides ensued, with Indonesian
politicians countering Singapore’s accusations on the
grounds that Singaporean companies owned many of the
plantations where fires were burning. Ultimately Indonesia
sent troops to fight the fires, as well as creating artificial
rain through cloud seeding above them.
Indonesia’s deforestation, estimated at 10.5% of its forest
area between 2001 and 2013, shows how much more is
needed for the agenda to translate into reality, in addition
to political will and funding. Progress on emissions
reduction in the OECD has eventually gained traction, but
it took some time and took place in a strong regulatory
environment. Environmental plans in the Philippines and
Thailand are relatively modest – they promise cuts in
intensity of emissions (CO2 produced per dollar of GDP)
rather than in absolute emissions. While economies still
have relatively low per-capita emissions, this approach is
justifiable. But where oversight is weak and the emphasis
on economic growth is necessarily strong, environmental
policy can slip down the agenda and make even modest
goals hard to achieve.
As the export of commodities is a low value-added sector,
moving out of these activities can promote rapid rates
Environmental policy more broadly in Singapore has
been characteristically effective, its limited resources
spurring action. The city–state gained fourth place in
Yale’s Environmental Performance Index worldwide
ranking, boosted by high scores for water, air quality and
health impacts. However, Singapore is the only ASEAN
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ECONOMIC INSIGHT – SOUTH E A ST A SIA
cebr.com
Q2 2 015
state with declining per-capita emissions likely derived
from shifts in the economy towards services and cleaner
manufacturing, which creates a more fundamental and
powerful decarbonisation of the economy than policy
does. With the exception of Singapore, policy has so far
made a marginal contribution to decarbonisation in South
East Asia. Its role will grow as governance improves, but
the shift to services is likely to play the pivotal role, albeit
less visibly.
ASEAN is likely to become a more desirable place for
individuals and firms to move to as the environmental
impact of its development subsides. Poor air quality
clearly deters visitors and would-be migrants from
coming. This applies to pollution from local vehicles and
manufacturers, as well as by-products of deforestation.
Floods in South East Asia, which in 2011 caused extensive
damage to Thailand’s electronics industry and had knockon effects on GDP, are likely to be exacerbated by climate
change. With large-scale carbon emitters in the region,
the environmental impact of ASEAN’s future development
will help decide its own fate.
Recent economic news in South East Asia
All ASEAN members have joined the Chinese-led Asian
Infrastructure Investment bank, in developments that
will disappoint the US and Japanese governments
which also desire greater influence within the region.
Though the bank will be far smaller initially than the
US-controlled World Bank and the Japanese-influenced
Asian Development Bank in the loans it can provide, it
appears that ASEAN governments consider the potential
investments are too great to put in jeopardy. This is
despite the framework and precise role of the bank being
at present undecided. Nevertheless, the governments of
Thailand and Indonesia have welcomed the potential new
source of finance; the developing economies in the region
face a shortage of investment finance relative to their
infrastructure needs.
Joko Widodo, six months into his term as president, has
recently been courting potential investors as Indonesia
seeks infrastructure investment. He spoke at the AsianAfrican conference, held in Jakarta, where Indonesia also
made bilateral deals with China – including an agreement
to boost trade by $150bn and another to build a highspeed rail link between Jakarta and Bandung. As well
as being economically necessary, this has symbolic
importance as the first Asian-African conference was held
60 years ago at Bandung.
On 1 April Malaysia introduced a goods and services
tax (GST) of 6% on most purchases. This intends to
shrink its budget deficit and replaces a variable sales
tax, but in order to minimise opposition to the policy
the government chose to zero-rate around 4,000 items
– mainly food and essentials. Ahead of the introduction
consumer confidence fell to a six-year low, according
to the Malaysian Institute of Economic Research. Many
appear to be concerned about a dragging effect of the tax
on the economy. It is yet to be seen whether these fears
are founded.
President Benigno Aquino of the Philippines is still
pushing infrastructure investment as a means to sustain
the Philippines’ recent spell of high growth. The
government’s economic management remains generally
successful, with growth of 6.2% expected in 2015 by
Cebr. A recent plan involving tax breaks to revive the
nation’s automotive industry may rebalance the servicedominated economy.
Lee Kuan Yew, Prime Minister of Singapore from 1959,
through independence in 1965, until 1990, died aged
91. He personally exerted considerable influence over the
country’s subsequent development, building an open
economy with a strong state and heavy emphasis on
education, productivity and economic growth. Over the
next 50 years – a jubilee it celebrates this summer – these
policies transformed it into one of the richest countries in
the world.
Singapore’s latest growth figures show a moderation in
GDP growth to a quarterly 0.3% in Q1 2015, with the
manufacturing sector exerting some drag. Further gains
become more difficult as the island grows ever richer,
though Singapore’s growth-focused institutions have
consistently helped it to sustain steady expansion through
constant reinvention.
Thailand’s central bank, having reduced its policy interest
rate from 2% to 1.75% following a wave of monetary
policy loosening throughout the world, is now warning
that the economy likely contracted in the first quarter.
Investment is scheduled to pick up during the second
quarter, with the government approving in Q1 $6.7bn
of a backlog of applications. However, the slow pace of
approval for investment plans is likely to hinder growth
in the near future. Meanwhile, ex-president Yingluck
Shinawatra is standing trial for her rice-payment scheme,
which paid farmers above market rates for rice and cost
the government billions of dollars.
Vietnam continues to push infrastructure investment
to meet its ambitious growth targets. New Chinese
foreign direct investment is restricted compared to
before, in the wake of last year’s maritime dispute and
anti-China protests in Vietnam. South Korean and
Japanese finance is helping to fill the gap. A prospective
$5bn investment from two South Korean firms proposes
a real estate development on the site of a former shipyard
in Ho Chi Minh City.
Figure 6: Real GDP growth, 2015–2020 (Cebr forecast)
%
7
6
5
4
3
2
1
0
Indonesia
Malaysia Philippines Singapore Thailand
2015
2016
2017
2018
Vietnam
2019
Total ASEAN
(ASEAN-6 plus Brunei,
Cambodia, Laos and
Myanmar)
2020
Source: Cebr analysis
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ECONOMIC INSIGHT – SOUTH E A ST A SIA
Q2 2 015
1
Source: International Energy Agency
2
South East Asian Clean Energy Project Finance – 2014 Review
3
National Council on Climate Change, 2010, Setting a course for Indonesia’s green growth
4
eg, United Nations Office on Drugs and Crime and Center for International Forestry Research, ‘Preventing the risks of
corruption in REDD+ in Indonesia’, 2011
5
Overseas Development Institute, 2014, ‘The effectiveness of climate finance: a review of the Indonesia Climate Change
Trust Fund’
6
See eg, Sustainability: the Role of Accountants (Institute of Chartered Accountants in England and Wales, 2004)
Cebr
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