Dollar Regime Change and Southeast Asia - Who Benefits?

During the last 18 months, for most Asian economies, the curtailing of cross-border financial flows associated with the rising dollar has trumped domestic cashflows in setting overall monetary and financial conditions. Now the immediate pressure on cross-border financing is abating, it’s time to look again at Asia’s domestic cashflows.

Private sector savings surpluses are key indicators in identifying the size and direction of the flow of cash between the private sector and the financial system, and so in turn also are important components in determining movements in bond yields.  The more developed the financial system, the more buffers are in place to mute the impact of changes in private sector savings habits. So let's look at the balances for Southeast Asia and India.

Conclusions? Whilst in Indonesia and Malaysia, domestic trends are pushing the private sector savings balance towards inflection points which international finance are likely to notice and react to, the broader beneficiaries of a general relaxation in cross-border financing conditions are likely to be found precisely in those economies where competing pressures are not currently felt, which means the Philippines and India.  Meanwhile, in Singapore and Thailand, the huge savings surpluses already maintained means changes in international financial conditions are unlikely to be noticed greatly.

Not every Southeast Asian economy has a similar savings surplus/deficit profile or trajectory, so the opportunities raised by the weaker dollar and relaxation of cross-border finance flows are not shared equally.

Indonesia and Malaysia are the economies most obviously exposed to the change in the international financial environment, since both countries are approaching the inflection points in the balance of private sector savings and deficits.  For Indonesia, it seems possible that the improvement seen in 1Q’s trade position will allow the private sector to break into savings surplus for the first time since 2012. Indonesia has been running a savings deficit since 2012, which peaked at 2.7% in mid-2013, but which had recovered to a deficit of just 0.7% of GDP by end-2015 and may well have broken into surplus during 1Q16.

It has been a slow and frustrating process getting to this inflection point. But if it occurs, it will mean that Indonesia’s private sector is no longer fundamentally seeking cashflow from the financial sector in order to maintain its current levels of consumption and investment, but rather that those consumption and investment choices are sufficiently modest to allow for net savings/profits which the financial sector needs to redeploy into public sector or foreign assets.  This domestically-generated financial tailwind is likely to be strengthened by any relaxation in cross-border financing conditions.

Malaysia potentially represents the opposite situation: the country has been gradually working its way through a savings surplus which peaked at 16.6% of GDP in mid-2009 to just 2.7% in 2015.  Stabilization of this negative trend has seemed possible on three occasions, but in each case the negative trend has resumed. What a relaxation of international financing conditions would offer Malaysia is a softer landing if the private sector does eventually lapse into savings deficit.

By contrast, Singapore and Thailand already run such huge private sector savings surpluses that their domestic financial conditions are unlikely to be constrained by internal cashflow issues in the first place. So for both Singapore and Thailand the relaxation in cross-border financing conditions is unlikely to have a significant impact on domestic economic or financial activity. Singapore has run a massive savings surplus for as long as anyone has been counting, and by end-2015 it was running at 18.8% of GDP.  Thailand, meanwhile, has recovered from a marginal deficit in mid-2013 to a surplus equivalent to 11.1% of GDP by end-2015. This dramatic build-up really took off  after the military coup of mid-2014, suggesting it is the result of a rise in precautionary saving responding to political uncertainty.  If so, the savings surplus is likely to be maintained, and act primarily as a damper on domestic demand.

What binds Singapore, Thailand, Indonesia and Malaysia together in this analysis is that domestic private savings surpluses or deficits trends are already in place which will tend to be the decisive influence, with a significant relaxation of cross-border financing availability offering only to qualify those conditions, rather than to supersede them.  Counter-intuitively, it is those economies in which currently the private sector savings surplus/deficit situation or trend puts no clear pressure on domestic financial activity, or offers no obvious new opportunity, that the impact of improved cross-border financing conditions is likely to have a more decisive directional influence. Two economies which come into this category are the Philippines and (outside Southeast Asia) India. 

Philippines has a surplus of 3.8%: this ratio has been falling gently since 2013, but may now be stabilizing or even growing once again.   This week, India announced its 4Q current account balance showed a deficit of US$7.07bn or 1.1% of GDP (the trade deficit narrowed US$3.4bn qoq to $34bn, whilst the surplus of invisibles rose US$0.2bn to $18.1bn), which in turn suggests India is running a private sector savings surplus of a steady 2.5% of GDP.  In neither case does movement of the ratio present any immediate difficulties or offer any significant opportunities; in both cases, therefore,  the absence of such immediate prompts means any improvement in international financing conditions are likely to be felt more obviously.