ASEAN’s Pathway to engage the world


June 7, 2017

ASEAN’s Pathway to engage the world

by Joko Siswanto and Alwin Adityo, OJK

http://www.eastasiaforum.org/2017/06/03/aseans-pathway-to-engage-the-world/

 

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At the ASEAN Summit in Manila last month, Philippine President and this year’s ASEAN Chair Rodrigo Duterte declared that ASEAN stands at the centre and future of the Asia Pacific region. The declaration reflects ASEAN’s working plan and motto for this year: ‘partnering for change, engaging the world’.

The ambitious working plan shows that ASEAN, celebrating its 50th anniversary this year, has the desire and appetite for a bigger role on the global stage.

ASEAN could boost its global role through greater engagement with its external partners. ASEAN’s external trade is worth more than trade between its members. Over the past 15 years, the value of extra-ASEAN trade has consistently tripled that of intra-ASEAN trade. The relative magnitude of external trade may lead some to wonder whether it’s time for ASEAN to pursue a more aggressive trade agenda externally.

ASEAN member states conduct trade negotiations with the ‘ASEAN centrality’ principle in mind. According to the ASEAN Charter, ASEAN centrality serves as the ‘primary driving force in [the organisation] and cooperation with its external partners’.

What does ASEAN centrality mean when it comes to trade? The approach is interpreted as a requirement that any benefits or commitments given in ‘ASEAN+1’ free trade agreements cannot exceed those granted in intra-ASEAN FTAs. Liberalisation measures in ASEAN’s FTAs with Japan or India, for example, are likely to be weaker than those in agreements between ASEAN countries.

This implies that ASEAN’s internal trade agenda has been given higher priority than its external trade agenda. For example, in the intra-ASEAN FTAs, Indonesia allows the establishment of foreign bank offices in all provincial capitals subject to an economic needs test. But in ASEAN+1 FTAs, such as the ASEAN–Australia–New Zealand FTA and the ASEAN–South Korea FTA, banks from partner countries can only set up shop in a limited number of cities.

Looking forward, it will be hard for ASEAN to not seek more intensive engagement with its external partners. ASEAN, home to a rising middle class and nearly 400 million people under the age of 35, is a very attractive region for investors. It should not be surprising that many countries, including the United States under the Trump administration, will seek more intensive engagement with ASEAN including on issues of trade and investment.

ASEAN is also taking a lead role on negotiating what is now the world’s sole megaregional trade deal, the Regional Comprehensive Economic Partnership (RCEP). RCEP’s 16 members account for 46 per cent of the world’s population and 24 per cent of global GDP. The agreement aims to offer better terms on trade in goods, services and investment for ASEAN as well as RCEP’s six extra-regional economies.

In addition to RCEP, ASEAN is looking beyond the Asia Pacific for more intensive engagement in trade. Just last month, ASEAN agreed to revive FTA talks with its second-largest external source of foreign direct investment — the EU — after initial discussions were shelved in 2009.

Given that most of ASEAN’s trade is with countries outside the group, ASEAN should seek to maximise whenever an opportunity arises to negotiate an FTA with its external trading partners. These include the six countries that join ASEAN to form RCEP — Australia, China, India, Japan, New Zealand and South Korea — as well as the EU.

The more FTAs ASEAN has with its trading partners, the more likely ASEAN will become more integrated in global supply chains. Peter Petri and Michael Plummer have argued that limiting external economic relationships to common ASEAN-wide agreements is not necessarily advantageous — it may also constrain the ability of members to maximise gains from trade and investment.

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In ASEAN+1 FTAs, market access negotiations with respective trading partners are conducted bilaterally between the partner and each ASEAN member state individually — not with ASEAN as a whole. Thus there is an opportunity for each ASEAN member state to compete with one another to divert trade and investment from the trading partner to their respective countries.

Yet some countries have an incentive to act differently. As the largest country in ASEAN, Indonesia has vast potential as an attractive trade and investment destination. To attract more trade and investment from ASEAN’s trading partners, Indonesia may consider giving them treatment that is better, or at least on the same level, as that given exclusively to the other ASEAN member states.

Significant economic benefits could be reaped from more intensive engagement between ASEAN and its trading partners. Ideally, each ASEAN member state would be tempted to abandon the ‘ASEAN centrality’ concept as it pertains to FTAs, and extend to its trading partners the preferential treatment that under past circumstances would only be given to other ASEAN member states. From a purely economic standpoint, this would no doubt benefit ASEAN through increased extra-ASEAN trade. Such an approach would certainly be in line with ASEAN’s 2017 motto of ‘engaging the world’.

Yet extending the preferential treatment to trading partners in this way is easier said than done. Petri and Plummer note that regional policy concerns often have complex historical, political and cultural roots and can rarely be resolved by economic arguments alone.

A clear pathway exists for ASEAN to reap more trade and investment benefits through expanding its engagement with other countries. But first, ASEAN may need to change the norm that the best terms on trade should be reserved exclusively for other member states. Then ASEAN will be able to maximise the benefits from engaging the world.

Joko Siswanto is an analyst at the Banking Research and Regulation Department, Indonesia Financial Services Authority (OJK)

Alwin Adityo works at the Banking Research and Regulation Department, Indonesia Financial Services Authority (OJK).

 

Saving the Global Trading System


May 22, 2017

Saving the Global Trading System

By Editors,  Eastasiaforum.com

International trade and investment lift living standards. The evidence for this is irrefutable. And modern economic development is not possible without opening up to international markets, competition and capital.

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But the world is re-learning the hard way, through Brexit and the rise of Donald Trump, that institutions and policies that protect the immediate losers from trade are needed to realise and sustain the benefits of open markets. Having a healthy and a well-functioning macroeconomic environment — one that delivers what economists call full employment — and a flexible labour market are crucial. So is having an effective social protection system.

When economic growth slows it is harder for the winners from globalisation to compensate the losers. The United States’ slow recovery from the global financial crisis, which hit close to 10 years ago, has brought these underlying structural problems into sharp focus. The social safety net is in tatters with the healthcare system, education system and redistributive policies exacerbating inequality — inequality in both opportunity and outcome — and bringing into question the American dream.

Australia, Japan, and many other countries have been able to avoid the retreat from globalisation thanks to well-functioning social protection systems. There may have been an inclination in many countries to adopt US institutions since it is the richest, most advanced and powerful economy in the world, but the lesson from Trump’s rise is a clear warning that now is the time to double down on the social safety net when embracing free and open markets.

When times are tough in any country there is immense pressure to put up barriers to foreign competition as a way to protect domestic producers. Protection may bring short-term relief to some parts of society and have short-term political appeal but is a cost to society as a whole, as well as to other countries.

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The global trading system has been stopping countries from committing self-harm for 70 years. The General Agreement on Tariffs and Trade (GATT) which later became the World Trade Organisation (WTO) was created in response to countries’ retreating to protectionism after the Great Depression. Countries voluntarily signed up to be bound by the rules and norms of that system and to have disputes with other countries settled within that system.

The 153-member WTO is far from perfect but it has underpinned successful globalisation. The large membership and diverse interests of the WTO have frustrated the completion of the Doha Round of trade negotiations. The WTO does not cover foreign direct investment and many other issues relevant to commerce in the 21st century. But its dispute settlement mechanism continues to function well and has resolved trade frictions that in an earlier time may have escalated into trade if not military conflict. High profile, geo-politically charged disputes such as the alleged Chinese rare-earth metal export embargo against Japan have been resolved peacefully in the WTO with China accepting the ruling against it.

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Three Amigos from of WTO, World Bank and IMF

In this week’s lead essay, Director General of the WTO, Roberto Azevêdo, reminds us that a ‘strong, rules-based trading system is essential for global economic stability’ and explains how that system can be re-energised.

Multilateral trade deals required all members to sign on to the entire agreement, called a single-undertaking, that made it harder to complete the latest round of negotiations, the Doha Round, as the issues became more complex and the number of countries increased. Azevêdo explains the WTO is ‘learning to be ambitious, but also to be pragmatic, realistic and flexible’, as well as ‘creative, finding innovative solutions and engaging in flexible formats’.

That is all good news for making progress on freeing up trade and reviving slumping global trade growth. But the bigger risk is that the WTO itself could be under threat from the United States, the very country that led its creation and which has underwritten the rules-based order for the past 70 years. The United States and Europe have provided a tailwind for the global economic system but have now turned to become the headwind against its forward movement.

President Trump has not carried through on many of his campaign promises and the world holds its breath in the hope that continues. While he withdrew the United States from the 12 member regional trade agreement the Trans-Pacific Partnership, he has not acted on tearing up existing trade agreements, starting a trade war with China or Mexico, or withdrawing from the WTO. But if jobs do not return in the American rust belt — perhaps as US interest rates rise and the dollar strengthens, or just because many of those jobs are gone for good — and Trump needs to demonstrate action on trade, the world will need to be ready to hold the line against following suit and to save the entire system.

Azevêdo explains that East Asia and the Pacific have a key role to play in boosting trade for jobs, growth and development. Asia will play the key role in saving the global trading system and global economy, if it is to be saved.

China is the world’s largest trader, a remarkable story only made possible with its accession to the WTO in 2001. The world, including the United States, has benefited greatly from China’s success. China’s economy is now the second largest in the world and still depends on open markets for development and its pursuit of prosperity. But China alone cannot lead the global fight against protectionism if the United States turns its back on globalisation.

South Asia and many countries in Southeast Asia need open markets to bring millions out of poverty and into the workforce. Japan and South Korea need open international markets to execute difficult reforms to manage shrinking populations. Asia is now a major growth engine in the global economy and has the interest, ability and responsibility to save the global rules-based order.

The EAF Editorial Group is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Amy King, Liam Gammon and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.

America and China–Managing the Possible


May 21, 2017

America and China–Managing the Possible

by Tan Sri  Dr. Munir Majid@www.thestar.com.my

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The  Go It Alone Eagle and The  Globalist Dragon

THE contrast could not be greater. While United States President Donald Trump raves and rants – and belts this or that person – China’s President Xi Jinping looks measured and assured as he offers an alternative global future to the world.

Xi is no angel of course, as his political opponents would know, but his system conserves and protects him, as Trump’s would not. If only Trump were the leader in a centrally controlled political order – but even then his temperament would blow it apart.

Leadership, like politics, is the art of managing the possible. Trump does not understand this, and does not know how. Xi does, knows why, and knows how.He has a growing economy too behind him, whatever the hiccups. Trump only promises one, without any clarity or logic.

His plan to boost the American economy, based primarily on slashing corporate tax from 35 to 15%, is likely to flounder in an American Congress seriously concerned about its causing the fiscal deficit to balloon.

Already Trump has had to climb down from trying to secure funds from Congress for his dreaded border wall with Mexico in order to avoid budgetary shutdown in September.

The stock market has fallen back from the boost to the price of banks and industrial products following his election. Interest now has returned to what might be termed “American ingenuity stocks” such as Google, Apple and Microsoft on Nasdaq – a proxy for much that is great about America, which Trump’s immigration and closed-door policies threaten to destroy.

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Meanwhile Xi has been rolling out his “Belt and Road” plans – something he first envisaged at the end of 2013 – for greater world connectivity and development, committing funds from China and the Asian Infrastructure Investment Bank, and engaging global financial institutions such as the World Bank.

Malaysia, for instance, will be an actual beneficiary with additional projects thrown in. China is Malaysia’s largest trading partner. But the US has not been a laggard, being Malaysia’s fourth largest trading partner. And indeed the US remains the largest foreign investor in Malaysia, both new investments and total stock.

A staggering statistic not often recognised is that total American investment in ASEAN is more than its investment in China, Japan and India COMBINED!

The point, however, is that this position is being eroded. Trump’s policies are hastening this process. Abandonment of the Trans-Pacific Partnership (TPP) means there is no American strategic peaceful challenge to the Chinese economic juggernaut in Asia-Pacific.

Balance is important to afford choice. Absence of choice means serious exposure to risk. Price, quality and after-service standards are affected, not to mention a new geo-strategic economic underlining.

Over-dominance by China in the region is a price not only countries in the region will pay, something that most probably is on Trump’s mind. It is a price that America too will sooner or later have to pay.

China’s Belt and Road proposition is not without its challenges, of course. India is deeply suspicious of the connectivity with Pakistan which cuts across India-claimed Azad Kashmir, about 3000km of it.

The link to the Pakistani port of Gwadar, in southwest Baluchistan on the shores of the Arabian Sea, is seen by India as a Chinese presence at the entrance to the Indian Ocean and a hawk eye on the Indian sub-continent. With the Chinese also in Sri Lanka, India is circumspect on China’s Belt and Road initiative.

There have also been commentaries on some uneconomic linkages which extend right across the English Channel.

All these reservations, however, do not take into account the benefit of connectivity to economies, the time it often takes to get those economic benefits and, most of all, the patience, persistence and long view of history of China and its leaders.

One of the most striking things about the Belt and Road map is that America is not there. Of course, Xi Jinping does not preclude America just as much as the US did not say that China was not permanently excluded from the TPP. And of course, in the Old Silk Routes and shipping lanes, the New World – America – had not been discovered.

But in their revival, led by now rising and then ancient China after 150 years of national humiliation to the present time, there is the irony that the last three quarters of a century of America world dominance is on course to be marginalised, if not supplanted, by the old Eurasian world centred in an ancient civilisation.

Trump does not seem to understand history. The art of the deal is purely transactional. Short-tempered and short-term gratification does not a strategy constitute.

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So we have leader, system and economic promise distinguishing the two leaders – and the two countries.

Instead of America first, what we are seeing is Trump hurrying America’s decline relative to a rising China. We are not seeing a world changed from people wanting to be like a kind of American to being people wanting to be a kind of Chinese. Actually, the Chinese people themselves want to be like a kind of American, with all that wealth, influence and power.

What we are seeing is China – not America – leading the way to that desired, if not always desirable, end. It is China that is driving the next phase in the evolution of world economic development.

Under Xi Jinping, China appears to be heroically moving towards an epochal point in its Peaceful Rise. With Donald Trump, America is being led backwards and inwards, with all the problems of its governance now all coming out. It is in grave danger of losing in the peaceful competition.

Not knowing how to play that game – certainly under its current President – there remains the danger of the status quo power lashing out against the rising one.

The Greek historian Thucydides observed: “It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable.” A Harvard professor has studied what is now called the Thucydides Trap and found in 12 out of 16 cases in which this occurred in the last 500 years, the outcome was war.

There are many potential flash points against the background of China’s rise – the North Korean Peninsula and the placement of THAAD missiles in the south, the South China Sea – where Trump may temperamentally find cause to lash out. This is the trapdoor he might take the world down because of failure to compete peacefully.

Where is Malaysia heading with China?


Where is Malaysia Heading with China?

by Dr. Shankaran Nambiar

Where is Malaysia Heading with China?

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Malaysian Prime Minister Najib Razak’s father, Tun Abdul Razak, the then Prime Minister, initiated diplomatic relations with China in 1974.  At the time it was a bold step.  China was then a peripheral country because it did not count for anything in terms of political and economic power.  In addition, it espoused an ideology and had a political system that could only attract derision.  Nazib Razak, like his father, is bold ( or desperate, Dr. Nambiar?–Din Merican) in pursuing Malaysia’s ties with China.  What is less clear is his sense of purpose and direction.  In the wider context of things, Najib’s attempts to engage with China seem like a flurry of events in search of an overriding theme.

… it is unclear if Malaysia is seeking greater engagement with China because it thinks the US is an unreliable ally, or because it is a declining power, or… because Malaysia wants to align itself with the power of the future.

Najib’s visit to China in October 2016 was a significant one.  It was noteworthy for several reasons, yet it failed to define Malaysia’s stance within the wider landscape.  It is precisely because it escapes clear definition that it becomes worthy of interpretation.

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The Stressed Out and Aging Najib Razak on a trip to China

The thrust of the Malaysian premier’s visit to China lay in the many economic deals that Malaysia struck.  Economic cooperation is often a part of these official visits.  But there are distinct characteristics to the investment agreements signed at this meeting.  The investments from China that were agreed to were wide-ranging, covering the building of ports, railway lines, and property development projects.  Also included was the purchase of a Malaysian power plant by the Chinese that will supply power to the national energy company, Tenaga Nasional Berhad.

The terms of financing, in the case of these projects, have not been clearly disclosed.  Neither has it been clearly presented if these projects will exclusively employ local human capital, imported Chinese workers, or a mix.  It would be understandable to have key Chinese workers who possess specialised skills run the projects. Amidst intense speculation that the deals were undertaken with the aim of settling the outstanding debts arising from the scandal-ridden 1MDB project, the usefulness of the Chinese investments comes into question.  If only to add to doubt and fear, former premier Mahathir Mohamed’s assertion that Malaysia has been sold to China serves to severely undermine confidence in these investments.

Internal considerations aside, China has a controversial history when it comes to its investments abroad.  There seems to be a pattern of easy loans being extended to countries with internal problems and questionable systems of governance and institutions.  In Africa, the Chinese investments seem to have employed more workers from China than those available locally.  This, if repeated in Malaysia, would reduce the multiplier effects that Malaysia could otherwise gain.

Even in the light of China’s record on foreign investments, the government has not found it necessary to engage in wider information dissemination on the details of the investments, nor has it invited discussion and debate on the advisability of these investments.  The results of feasibility studies and the socio-economic impact on affected communities, if at all undertaken, have not been publicly shared.

The particular positioning that Prime Minister Najib has chosen to take is worthy of examination.  He seems to have swung from his cosy relationship with the US, forged during the Obama administration, to an unquestioning one with Xi Jinping.  What could have prompted such a swift shift?  It could be the realisation that China is the superpower of the future.  But that could not have dawned with striking suddenness.  China is no more or less a power now than it was during the Obama days.  The Department of Justice’s probe into the 1MDB scandal could have been unsettling, although Najib enthusiastically offered to cooperate with the relevant authorities and, of course, within the framework of legal structures.  It could be that Najib wants firmer grounds of support which he thinks are more likely with Xi than President Donald Trump.  Najib’s visit to China preceded Trump’s January 2017 withdrawal from the Trans-Pacific Partnership (TPP). Given the sequence of events, one cannot attribute Najib’s declared commitment to deepen ties with China as resulting from the US’s withdrawal from the TPP. Of course, being a part of the TPP agreement would have provided the right counterbalance against engagement with China.  In the absence of the TPP it would make more sense to work with the US through some other format than to be more reliant on China than necessary.

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Playing geo-politics with President Xi of the PRC

Finally, Najib’s possible epiphany that he has to cater to the sentiments of the Malaysian-Chinese who form an important part of his domestic constituency could not have been a strong motivating factor.  It is true that the 14th general elections, expected to be held in 2018, are approaching. The Malaysian-Chinese community in the country is an important block of votes, one that Najib would covet.  But there are other ways of winning their votes; succumbing to China need not be one of them.  It is not an acceptable argument to claim that Najib is shifting towards China in order to appease the local Chinese because the Chinese community is mature enough to draw the line between what happens within the country and how Malaysia postures externally.

If Najib had chosen to be influenced by Filipino President Rodrigo Duterte that would have been an act of avoidable impulsiveness.  Malaysia, like the Philippines, is a small state that cannot afford to go on a frontal attack against a superpower.  However, this argument has limited force because a small state that does not want to be caught in a conflict between two superpowers would rather be non-aligned than tilt closer to one or other of them.  This is where the principle of non-alignment gains currency, one that Southeast Asia’s leaders —Soekarno of Indonesia,  Ghana’s Kwame Nkrumah, Cambodia’sNorodom Sihanouk, and  India’s Jawaharlal Nehru — had espoused.  It is, therefore, not surprising that US Vice President Mike Pence in his tour of the Asia Pacific in April 2017, chose to visit Jakarta rather than Kuala Lumpur in addition to stops in Tokyo, Sydney, and Hawaii.

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Hedging with India

It is interesting that despite Malaysia’s tilt to China, Najib issued a joint statement with Prime Minister Narendra Modi during his recent visit to India, which included a veiled reference to the South China Sea problem.  With no mention of China or the South China Sea, the statement, with obvious reference to China, called upon all parties concerned to show their utmost respect for the United Nations Convention on the Law of the Sea (UNCLOS).  Malaysia has consistently held the view that UNCLOS should be respected and that the South China Sea problem should be resolved through negotiation.  This is to be expected with Malaysia being a claimant, too.  The inclusion of this issue in the joint statement issued on the 60th anniversary of India-Malaysia diplomatic relations indicates that Malaysia realises its responsibility within the region, particularly ASEAN.  In the context of its closer ties with China it may not want to object to China’s actions firmly and visibly.  While gently acknowledging that it does not agree with China, Malaysia may not want to go further on the issue.

Many of the investment decisions that have been taken in recent times do deepen Malaysia-China ties, but it is not clear if they are set within a broader, well-considered scenario.  Some of the projects that have been coming up recently certainly resolve current problems, as does the sale of the Tun Razak Exchange to the Chinese.  Again, its advisability is uncertain.  The same can be said for the port development projects that Malaysia will engage in with China’s assistance.  They will help Malaysia economically while also placing Malaysia within China’s scheme for the region.  Specifically, it is unclear if Malaysia is seeking greater engagement with China because it thinks the US is an unreliable ally, or because it is a declining power, or, viewed differently, because Malaysia wants to align itself with the power of the future.  It could also be because post-Obama, Malaysia sees less US interest in the region.  Or it could also, very simply, be because economic aid comes more easily and with less questions asked from the Chinese.  The last would be the weakest reason, but one that could really have been the motivating factor given Malaysia’s pragmatic streak.

Dr. Shankaran Nambiar is a Senior Research Fellow at the Malaysian Institute of Economic Research.  He is author of “The Malaysian Economy,” and the recently published, “Malaysia in Troubled Times.” He can be contacted at sknambiar@yahoo.comImage credit: CC by Wikimedia Commons.

IMF on Malaysia–Report Card


May 3, 2017

International Monetary Fund on Malaysia–Report Card

by The International Monetary Fund

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Putrajaya–The Administrative Capital of Malaysia

The IMF conducts an Annual Review of member country economic situation. At the conclusion of the consultations the Executive Board considers the findings which are also conveyed to the Government. A Press Release is issued  together with access to the full staff report on the Fund’s website. The Report  is in the nature of a “Report Card”.

The text of the Press Release is reproduced below. The full report can be accessed and downloaded from  ::

http://www.imf.org/en/Publications/CR/Issues/2017/04/28/Malaysia-2017-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-44869

On March 15, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Malaysia.

Despite a challenging global economic environment, the Malaysian economy performed well over the past few years. Notwithstanding the impact of the global commodity price and financial markets volatility, the economy remained resilient, owing to a diversified production and export base; strong balance sheet positions; a flexible exchange rate; responsive macroeconomic policies; and deep financial markets. While real GDP growth slowed down, Malaysia is still among the fastest growing economies among peers. The challenging global macroeconomic and financial environment puts premium on continued diligence and requires careful calibration of policies going forward.

Risks to the outlook are tilted to the downside, originating from both external and domestic sources. External risks include structurally weak growth in advanced and emerging market economies and retreat from cross-border integration. Although the Malaysian economy has adjusted well to lower global oil prices, sustained low commodity prices would add to the challenge of achieving medium-term fiscal targets. Heightened global financial stress and associated capital flows could affect the economy.

Domestic risks are primarily related to public sector and household debt, along with pockets of vulnerabilities in the corporate sector. Federal debt and contingent liabilities are relatively high, limiting policy space to respond to shocks. Although the household debt-to-GDP ratio is likely to decline, household debt also remains high, with debt servicing capacity growing only moderately.

Real GDP growth rate is expected to increase moderately to 4.5 percent year-on-year (y/y) in 2017 from 4.2 percent in 2016. Domestic demand, led by private consumption, continue to be the main driver of growth, while a drag from net exports, similar to 2016, will remain.

Consumer price inflation is projected to rise and average 2.7 percent y/y in 2017 on the back of higher global oil prices and the rationalization of subsidies on cooking oil. The current account surplus would be largely unchanged as impacts from an improved global outlook and higher commodity prices would be offset by the strength of imports on the back of a resilient domestic demand.

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Bank Negara Malaysia—in full control of the Pulse of the Malaysian Economy

Executive Directors commended the resilience of the Malaysian economy, which reflects sound macroeconomic policy responses in the face of significant headwinds and risks. While Malaysia’s economic growth is expected to continue in 2017, weaker-than-expected growth in key advanced and emerging economies or a global retreat from cross-border integration could weigh on the domestic economy. Against this background, Directors urged vigilance and continued efforts to strengthen policy buffers and boost long-term economic growth.

Directors agreed that the authorities’ medium-term fiscal policy is well anchored on achieving a near-balanced federal budget by 2020. The planned consolidation will help alleviate risks from elevated government debt levels and contingent liabilities and build fiscal space for future expansionary policy, as needed.

Directors recommended that the pace of consolidation reflect economic conditions and that any counter-cyclical fiscal policy measures be well-targeted and temporary. They noted that improvements to the fiscal framework, such as elaborating medium term projections and preparing and publishing an annual fiscal risks statement, would help anchor medium-term fiscal adjustment and mitigate risks.

Directors agreed that the current monetary policy stance is appropriate. Going forward, Bank Negara Malaysia (BNM) should continue to carefully calibrate monetary policy to support growth while being mindful of financial conditions.

Directors emphasized that global financial market conditions could affect the monetary policy space and should be carefully monitored.

Directors noted that the banking sector is sound overall and that financial sector risks appear contained. Nonetheless, they cautioned that potential pockets of vulnerability should be closely monitored. They noted that household debt remains relatively high, while in the corporate sector, there are emerging vulnerabilities in some sectors. Directors suggested that macroprudential measures be adjusted if needed.

Directors underscored the central role of macroeconomic policy and exchange rate flexibility in helping the economy adjust to external shocks. In this regard, they welcomed the authorities’ commitment to keeping the exchange rate as the key shock absorber. They recommended that reserves be accumulated as opportunities arise and deployed in the event of disorderly market conditions. Noting the authorities’ aim to improve the functioning of the onshore forward foreign exchange market, Directors urged the BNM to monitor the effects of the recent measures introduced in this regard, recognizing their benefits and costs.

They emphasized that close consultation and communication by BNM (Bank Negara Malaysia–Central Bank) with market participants will be essential in further developing the foreign exchange market and bolstering resilience.

Directors underscored that steadfast implementation of the authorities’ ambitious structural reform agenda is key to boosting long-term economic potential. They supported the emphasis on increasing female labor force participation, improving the quality of education, lowering skills mismatch, boosting productivity growth, encouraging research and innovation, and upholding high standards of governance.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

RCEP will put ASEAN centrality back on track


May 1, 2017

RCEP will put ASEAN centrality back on track

by Yizhe (Daniel) Xie, Waseda University

As ASEAN celebrates its 50th Anniversary in 2017, business leaders in multinational corporations await a clear sign to boost business activities and international expansion efforts. Having missed deadlines twice, RCEP is apparently not an easy agreement to conclude. But the world desperately needs a quick and big globalisation win, and RCEP is the best possible choice.–Yizhie Xie

http://www.eastasiaforum.org/2017/04/25/the-world-needs-rcep/

Global trade needs a win to fend off rising tides of protectionism and anti-globalisation. The Regional Comprehensive Economic Partnership (RCEP) offers the best ammunition to achieve this.

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 US Vice President Mike Pence at the ASEAN Secretariat in Jakarta

The quick conclusion of this regional mega-free trade agreement (FTA) will signal Asia’s commitment to free trade — from which it has benefited greatly — as well as boost ailing confidence in globalisation.

US President Trump’s withdrawal from the Trans-Pacific Partnership (TPP) three days after his inauguration was a major blow for the other 11 signatories — whose leaders expended substantial political capital on the deal. But this does not discourage Asia’s bid for deeper economic integration.

In March 2017, senior officials from non-TPP countries (China, South Korea and Colombia) joined the TPP summit in Chile. This gave trade watchers some hope for an even broader trade pack — the Free Trade Area of the Asia-Pacific (FTAAP). But increasing global uncertainty makes it difficult, if not impossible, to picture the complex FTAAP. RCEP is the best offering for an ambitious mega-FTA.

Without the United States, the TPP is on the brink of death. Originally, the TPP was initiated by four small economies (Singapore, Brunei, Chile and New Zealand) and it attracted little attention. It was then-US President Bush’s decision to participate in the TPP that revitalised the deal and lured seven other countries (Australia, Peru, Vietnam, Malaysia, Mexico, Canada and Japan) to join the pact. Access to the world’s largest market was the key reason for all countries to take part, while Japan and Vietnam also hoped the deal could contain a rising and assertive China.

Now TPP members are divided on whether they should continue the deal without the United States or embrace China. Japan — the largest market among remaining economies — was initially reluctant to push for ‘TPP 11’. Even though Tokyo has since reversed its course, the possibility of reaching a consensus document with only months before the February 2018 ratification deadline is low — especially given that members like Vietnam and Malaysia would not make the same concessions now as they did to gain access to the US market. The TPP cannot set a new standard in trade and investment without the participation of the two largest regional economies – the United States and China.

The flexibility and gradualism of RCEP is what Asia needs now. It is true that the TPP has a higher standard, more coverage and more aspiration than RCEP, but world leaders can no longer afford such an expensive bid for globalisation. Britain’s decision to leave the European Union, Donald Trump’s rise and Marine Le Pen’s increasing popularity offer cautionary tales for rapid globalisation.

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RCEP recognises the reality of different needs among members, and offers a differentiated package that allows its 16 member countries to have flexibility in opening their economies. The ‘ASEAN way’ approach in RCEP has proved itself to be the best consensus building mechanism in Asia.–Yizhe (Daniel) Xie

Unlike the TPP, RCEP recognises the reality of different needs among members, and offers a differentiated package that allows its 16 member countries to have flexibility in opening their economies. The ‘ASEAN way’ approach in RCEP has proved itself to be the best consensus building mechanism in Asia. Even if the TPP set a visionary long-term standard, it may not be feasible at the moment.

Finally, RCEP is less political and ASEAN centrality is welcomed. While TPP was often quoted as a tool to contain China in the US ‘pivot to Asia’ strategy, RCEP is seen as an extension of the ASEAN+1 FTA model in promoting regional trade and investment. All regional powers — China, Japan and the United States — are comfortable with ASEAN centrality, at least in regional economic integration. Moreover, ASEAN has already established FTAs with all six other countries and its experience in trade negotiations will help expedite the conclusion of RCEP.

Yizhe (Daniel) Xie

Yizhe (Daniel) Xie is a doctoral candidate at the Graduate School of Asia-Pacific Studies, Waseda University and a non-resident fellow at the Pacific Forum, Center for Strategic and International Studies.