Growth and monetary policy in ASEAN countries

The Philippines along with some Association of Southeast Asian Nation (ASEAN) countries are in the “sweet spot” in terms of growth and monetary policy, Moody’s Analytics said.

In a report dubbed “ASEAN Outlook: A Bright Spot” penned by Katrina Ell and Fred Gibson, Moody’s Corporation’s economic analysis arm, said that for one, central banks in these economies have the leeway to further cut rates if need arises.

Indonesia is the most aggressive in easing rates in the current cycle with a total of 100 basis points followed by the Philippines with 75 basis points, it said.

Malaysia’s central bank, on the other hand, is considered to have the “most sophisticated” financial system among the ASEAN-4, which groups the Philippines, Malaysia, Indonesia and Thailand, as it has maintained its policy rates but implemented a tighter consumer lending to thwart credit rise.

It is also “expected” to spearhead in the region the implementation of the third wave of the risk-based financial strength gauge of banks known as BASEL III, which is targeted to ensure banks’ capacity to withstand financial shocks.

BASEL III is the latest modification developed by the Basel Committee on Banking Supervision (BCBS), which was set forth of the Bank of International Settlement (BIS), “to strengthen the regulation, supervision and risk management of the banking sector.”

According to the BIS website BASEL III aims to: improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source; improve risk management and governance; strengthen banks’ transparency and disclosures.

The third modification in the BASEL rules targets to increase resilience of banks in periods of stress through bank-level regulations and through macro level by addressing risks that can build up across the banking sector.

It is scheduled to be fully implemented by 2014 but some central banks have announced their intention to implement it earlier because banks in their respective areas are prepared to meet the more stringent requirements of the new rules. The Philippines, for one, will implement it starting January 1, 2014.

ASEAN groups the countries Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia. Myanmar, Philippines, Singapore, Thailand, and VietNam.

Relatively, Moody’s Analytics does not see any reason for central banks to further cut rates amid the weak global economy, which it projects to improve by mid-2013, but it stressed that because of the policy space central banks have the capacity to ease rates further if pressures increase.

“Central banks are in a good position as price pressures are relatively subdued. There has been a temporary spike in food prices linked to bad weather, but generally global commodity prices have eased,” it said.

In terms of growth, Southeast Asian countries continue to grow amid the negative global economic developments.

The report noted that Singapore “may be in recession” after this export-driven economy was hit hard by the fall of electronics demand “but the rest of the region is performing well.”

“Indonesia, Thailand, Malaysia and the Philippines are expanding at or near potential thanks to solid domestic demand,” it said.

It explained that amid the expectations of continued weak global economy “most of ASEAN will continue to grow near term.”

“That said, the gloomy global economic environment is a threat to the region’s upbeat outlook and if external conditions deteriorate further, exports, investment and sentiment will soften,” it said.

Robust domestic demand has helped economies in the region post strong growth with Indonesia expected to stay above six percent until 2013 and the Philippines to continue its expansion after the first half results stood at 6.1 percent, with the help of the services sector

“The growth in business process outsourcing has been helped by the Philippines’ stock of low-cost, well-educated workers. Government spending has also stepped up ahead of next year’s general election,” it said.

Also, higher investment is helping ASEAN countries solidify their growth but this coincide with the decline in savings rate particularly in Malaysia, Thailand and the Philippines, which in turn “is consistent with rising domestic consumption and the deteriorating current account positions across the region.”

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