Two important themes have come out of the 2015 World Economic Forum on East Asia held in Jakarta in mid-April: ASEAN’s new economic community will surpass the EU in terms of growth and oil prices are expected to rise further .
Dato’ Sri Mustapa Mohamed, Malaysia’s Minister for International Trade and Industry announced that ASEAN (the Association of South East Asian Nations which includes Indonesia, Malaysia, Thailand and Singapore, amongst others) would grow by 5 per cent annually, three per cent more than the two per cent growth he envisages for the European Union: “To the extent that ASEAN grows at 5% per annum and Europe by less than 2%, of course we will catch up with Europe; one day we will be there”.
These comments came on the back of a discussion session entitled “Connecting ASEAN: The Last Mile” which raised the proposed ASEAN Economic Community (AEC), envisaged to be formed by the end of 2015 to create a single market for goods, services, investment and labour.
The speaker looks to the region’s youth for the growth as against Europe’s ageing population. ASEAN has a population over 600 million people, "What we need to do in ASEAN is to grow much faster, so we get there much faster, we overtake faster," said Dato’ Sri Mohamed. Fellow speaker Anthony Fernandes, Group CEO of AirAsia, Malaysia agreed with the Minister: “We have the numbers; 600 million people and a lot of good work. Definitely the AEC can rival the EU … It will simplify business, it will raise standards and it will bring prosperity," he said. "If there is a true economic community, everyone benefits.”
As an economic community ASEAN has been the second-fastest growing economy in Asia, after China. It has expanded in terms of GDP growth over 300% since 2001, this is in contrast to Europe’s 100% expansion5.
Like the EU the challenge comes in integrating the rich and the poor members of the Union. To compare the economy of Singapore with Laos, for example, is hard. In Europe we have seen the uneven union create issues such as the bail-out of Greece, that has almost brought the union to its knees. It can only be assumed that ASEAN will use this history and learn from it when formulating its own structures.
Thailand growth focus
A founding member of ASEAN, Thailand’s Central Bank made a surprise cut to its benchmark interest rate at the end of April, lowering it from 1.75% to 1.50% only a quarter of a per cent from the historic low. In March the Central Bank also issued a surprise cut from 2.00% to 1.75%.
The Thai economy has been growing slowly with GDP increases in 2014 at its slowest level since 2011 at 0.7%. In addition, consumer confidence has been falling, exports decreasing and economic recovery has been slower than predicted.
The Central Bank sees downside pressures on exports from the strong currency and this is not expected to be countered by a recovery in tourist activity.
The rate cut is expected to weaken the Baht to help both domestic consumption and importantly to help raise export levels, which account for around two-thirds of Thailand’s GDP. The rate cut is expected to have a positive impact on GDP with some commentators expecting growth this year at around 3 per cent – fitting in nicely with the expectations for ASEAN as a whole.
The rate cut may only have a short term effect. The government has previously made an effort to speed up spending and announced billion dollar infrastructure projects to boost private investment and consumption with little effect. As has been seen with rate cuts by the Reserve Bank of Australia, it is external factors that are inevitably driving currency movements, whether that be the US Federal Reserve or economic slowdown in China, much more so than the interest rate policy.
Black Gold fit for a King
In a further World Economic Forum discussion entitled “The Geopolitics of Asia’s Energy Supply”, Melody Boone Meyer, Chevron’s President of Asia-Pacific Exploration and Production believes large drops in oil prices is not a new feature of the market: “The price of oil in the last 30 years has fallen five times by 50% … there's a surplus of supply right now, and inevitably the decline will occur.”
However, the first quarter 2015 price declines did not subdue the panel’s optimism for the future of the oil market as voiced by Shahril Shamsuddin, Group CEO of SapuraKencana Petroleum: “The light at the end of the tunnel is that, in the long term, demand is growing and over the next two to three years we will see prices come to an optimum level.”
Energy security is important for the region, particularly for the continued growth it seeks. With increased consumption Asia is expected to become a net importer of oil over the next decade. Even with falling prices in oil it is important for the region’s countries to secure their energy supply.
I have previously written about this in the China context and their efforts to maximise opportunity from renewable energy sources. It would seem that other’s in the Asia region are also looking to sources such as solar and hydro energy to meet their needs, a view backed up by Sudirman Said, the Indonesian Minister of Energy and Mineral Resources.
Big supply and big change
It is hard to write about oil without also taking a look at the world’s largest producer. For the Royal watchers amongst you there will no doubt have been a lot of recent excitement with events taking place around the world. You may assume I am referring to the birth of the Duke and Duchess of Cambridge’s daughter, Princess Charlotte. But in fact I am referencing the newly appointed Crown Prince of Saudi Arabia and the cabinet reshuffle that has taken place.
King Salman bin Abdulaziz has relieved his younger half-brother of his duties and appointed his nephew as new heir apparent, changes that reflect a new era in Saudi Arabian government. Prince Mohamed bin Nayef, 55, the grandson of the founder of Saudi Arabia, King Abdulaziz, remains Minister of the Interior and is the first grandson of King Abdulaziz, rather than a son, to be appointed Crown Prince.
In this political earthquake, the King has also appointed his son, Prince Mohammed bin Salman, as deputy crown prince, and appointed the Ambassador to the US, Adel Al-Jubeir as Foreign Minister, replacing longstanding Prince Saud al-Faisal.
The appointment of the younger generation in such senior posts is seen as a sign of greater continuity particularly at a time when Saudi Arabia is fighting extremism, troubled neighbours such as Yemen and interference from other States such as Iran.
Economically the generational shift is important. The new Crown Prince is a favourite of Washington with close personal ties to US officials and the two new appointments each chair committees determining all security and economic development issues in Saudi Arabia. Almost all powers under the king are now concentrated in the hands of the pair.
The King’s changes have not just been at a central government level, which will inevitably effect macro-economic policy decisions, but with the approval of the Supreme Economic Council (a body that replaced the Supreme Petroleum Council earlier this year), he has also separated the state oil company, Saudi Aramco, from the oil ministry.
The new Supreme Economic Council is chaired by the King’s son, the new Deputy Crown Prince, Mohammed bin Salman who in January was appointed defence minister and head of the council on economic and development affairs, the body responsible for coordinating the Kingdom’s economic reforms.
Saudi Aramco’s outgoing CEO, Khalid Al-Falih, has been appointed Minister of Health and company [ceremonial] chairman, with senior vice-president Amin Al-Nasser taking the role of CEO.
With Saudi Aramco being the world’s largest oil-producing company, producing more than 10 million barrels a day (that is almost one in nine of all barrels consumed globally, analysts do not see the move as a sudden change in Saudi, and de facto Opec, oil policy. However, they do believe that separating the oil ministry and Saudi Aramco has left the door open for further reforms and ultimately gives the company more power to make its own commercial and financial based decisions.
With the challenges faced by lower oil prices, and the moves by other Gulf states to invest heavily in renewable energy sources it may be that the move to separate the entities could lead to the creation of a new energy ministry that will be responsible hydrocarbons, nuclear power and renewables.
Growth in domestic power consumption is rising at about 6 per cent a year which has the potential of turning Saudi Arabia into a net importer of crude oil by 2030. This mean that the new Supreme Economic Council must search for other energy sources at a time when oil prices are low and global consumption of oil should inevitably decrease with global action on climate change.
So with the changes afoot in the middle east and in Asia, with the generational shift in power of Saudi Arabia, the decentralising of control of nationalised entities, the new generation of globally looking leadership, and in Asia, ASEAN economies like Thailand that are looking at managing the effects of globalisation on their domestic markets we ask ourselves, is it time to look at our own global portfolios, or are we best to watch the changes take effect first?
The Ottoman way – an Emerging Market barometer?
Following the recent commemorations for the valiant losses and sacrifices made by Allied forces in Gallipoli, I want to consider the adversary, the Empire the ANZACS and other allied troops were up against and how that Empire has morphed into a modern emerging market economy.
Once the Ottoman Empire, and now modern Turkey, it can be considered a haven of stability in a region in turmoil. It is a member of NATO and a ‘friend’ to the Western international community, including the US and EU.
Out of all of its neighbours (the Caucasus – Georgia and Armenia northeast; Bulgaria northwest; Iran east, Iraq and Syria south) Turkey has the largest economy, sitting at 17th in global terms6.
Geographically Turkey is strategically centre placed to bridge Europe, the Middle East and Asia. It has a significant sized middle class with a strong domestic economy. Many global countries have outposts in Turkey and many are looking to enter the market.
There are tensions between Islamists and secularists, with the official stance remaining secularist. But none of these tensions have to date caused a significant problem. In fact, problems with neighbours suffering from Islamic fundamentalism has, if anything, worked in favour of the secularists. In addition, there are some problems in south-eastern Turkey arising from the Kurdish nationals. But again, these issues have not been a stumbling block to growth.
It should be remembered that both internally and externally Turkey has security by means of it’s strong military, arguably the largest army (bar the UK) in Europe. In addition, Turkey is a full member of NATO. As such the Russians and the Iranians don’t give them the slightest bit of bother, in fact, they are positively courteous neighbours.
Apart from military memberships Turkey is a founding member of the OECD (1961), the G-20 major economies (1999) and part of the EU Customs Union since 1995. The country survived the global financial crisis well with 9.2% economic expansion in 2010 and 8.5% in 2011. Forbes magazine listed Istanbul as having a total of 37 billionaires in 2013, ranking 5th in the world, only a handful in number behind Hong Kong and London with 43 billionaires each7.
As with many emerging economies, the Turkish lira has suffered from low US interest rates and has come under pressure from US dollar gains. A sell-off on lira has been made worse by short-term political uncertainty ahead of June parliamentary elections and claims of political interference by the Central Bank.
These domestic issues are the reason behind the falling currency – weak fundamentals and political uncertainty. Arguments around economic strategy between the Government and the Central Bank have added to the currency pressure.
All that short-term pressure aside, the growth of the economy in the long-term is going to be a result of geographic presence and military power, and ultimately the security of a nation surrounded by currently uncertain, but future emerging economies, or at least economies that eventually emerge out of war torn rubble.
In the short and longer term investors have plenty to be optimistic about, whether that be oil price gains, Asian economic expansion, conversion to renewable energy supply or the growth prospects of emerging markets. There are a number of ways to participate in all of these opportunities, from managed emerging market equities funds through to commodity and energy futures and oil and energy production exchange traded funds. Each have their own focus, and their own associated risks, but a balanced global investment portfolio will likely contain some if not all.