This analysis will be limited on the most liquid forex pair (EUR-USD and USD-JPY) as they generally dictate USD’s power against broad currencies in general. EUR and JPY may present negative outlook for 2017. Our forecast indicate that the USD will be stronger against other currencies in general. This strength would be supported by the weaknesses of EUR and JPY.
Current move of USD is ranging with limited move as the market is still waiting and speculating for a still uncertain rate hike decision. Many economists predict that there would be 1 hike by the end of this year followed by another 1 or 2 hike in 2017. The expectation of hike in 2017 will support USD strength. Why are the rate hikes likely? Because global economic condition is starting to improve (no more Brexit and China major slowdown). This “no major global risk” condition should be an opportunity to increase the rate. However US’s inflation is still far from target of 2%. The fed has been waiting for this 2% target to be achieved.
However some of the fed members had agreed that chasing this inflation target should not be a priority over rate hike plan. This is because the increased interest rate will be a defense for future economic crisis or become stimulus for future significant slowdown. Given these reasons we can speculate that at least 2 rate hikes will happen between 4Q2016–2017, which will support USD value.
Euro has shown weak economic data in 2016, especially after Brexit.
- Low economic growth
- Low inflation (ECB’s medium term target is close to 2%)
- Composite PMI – much lower business expansion
Given the negative outlook, market has expected ECB to cut rate further and increase stimulus program. However ECB stated in September there won’t be further easing for now. This will cause europe’s economy to remain slow in 2017. On the other hand, increasing the rate is an unlikely option. Even with current bechmark rate at 0%, there were large non performing loan, especially in Italy.
The low benchmark rate which failed to stimulate the economy, has hit banks’ earnings. This could be reflected from the slump of european banks’ stocks.
This deadlock of slow growth, bad debts, and too low interest rate will significantly hit europe’s economy in 2017.
Why is the Japanese Yen forecasted to be weaker than USD in 2017 ? Because current yen level is too strong, it has hit Japan exporters. This is not good for Japan as Japan is a net exporter.
- Downtrend in export
- Slow growth
- What’s even worse? Deflation
Those weaknesses coupled with already negative interest rate, would be a serious pressure on JPY accumulated in 2017. The market expected BOJ to give more monetary stimulus and possible fiscal stimulus (helicopter money) to depreciate the yen to a sustainable level for Japan’s economy. BOJ may no longer be able to avoid these stimulus expectations in 2017 (despite an issue in the legality of fiscal stimulus in the form of helicopter money) since Japan’s economy may fall further in 2017.
This analysis will be based on the data up to 3Q2016. For 2017, there are several reasons why the global economy may slowly improve. Commodities price has started to stabilize. Oil price has reversed up from the slump in 2015. China’s data has been showing positive signs. UK also proved that Brexit fear is slighted exagerrated as latest serials of data turned out to be positive. However there could be some weaknesses in Europe and Japan. US economy could be improving, although not significantly assuming gradual rate hike between 4Q2016 until 2017.
We will first dicuss US’s prospect then the prospect of the global economy. US year-on-year GDP growth is still weak in 2016 (below 2%). This is coupled with “still far from 2% target” inflation. On the other hand, instead of giving stimulus like the rest of central banks, the fed plans for gradual hike. This could give pressure for US growth in 2017. However as China’s economy and commodity prices have started to improve, US may get some support for growth. Therefore US outlook seem to be slightly positive in 2017.
For explanation of 2017 global outlook :
I. Commodities price has started to stabilize
- Bloomberg Commodity Index (source : bloomberg)
- WTI Crude Oil Price (source : NASDAQ)
With the OPEC countries and Russia (based on last meeting in Algeria) agreeing to be cooperative in the need of price stabilization, next year oil price outlook could be positive. This positive outlook on commodities price will support growth on commodity exporting countries. Most of emerging market, whose economy mostly supported by commodities, will gain from this condition.
II. China has started to slowly recover
Although the overall growth trend within 1 year is still negative, the July growth (6.7%) has slightly beaten market forecast of 6.6%. This might show that China has started to erase expectation of further slowing growth, although significant growth improvement in 2017 would be unlikely. China’s import growth has also gone to positive territory in August 2016 from nearly 2 years of declining imports yoy growth.
- China’s imports yoy growth (source : self-generated graph from CEIC data)
This could mean improving global demand from China which is a good sign for global economy.
III. Brexit impact on UK proved to be limited
- GDP growth post Brexit turned out to be positive
- UK Composite PMI (source : )
Business contraction in July has bounced into expansion in August (more than 50 indicates expansion). These data gave positive outlook on UK’s economy.
IV. Euro and Japan weaknesses in 2017
Both countries already have low interest rate ( euro 0% and japan 0 until -0.1%) which have been reduced during 2015–2016 to support their stimulus program. The stimulus however proved to be not effective enough to stimulate growth.
Moreover these countries are still far from their inflation target. The low interest rate will make future monetary stimulus to be harder to implement. This uneffectiveness of monetary stimulus could be caused by the still existing problems that have not been completely extinguished. Euro area has large bad debts (non performing loan) problem, especially in Italy. Japan has low consumption and too strong currency rate. These problems may accumulate in 2017.
When we’re talking about growth, demographics is a key factor and is probably the most reliable indicator (albeit incomplete) in forecasting the long term future. The productivity of a country is not determined by the size of its population but rather the size of its working age population. It is the people of working age who contributes the most to the output of the economy, not the seniors or the children.
We can already see this phenomena starting to take place, it is no coincidence that Europe and Japan’s slowdown in growth coincides with its stagnating or even diminishing population. A Government can do so much in sustaining economic growth but ultimately they are working with less and less people which makes it difficult.
Image taken from– A common age demographics of a developed nation, the decline in the number of young population indicates a decrease in the workforce and the overall population in the near future.
This phenomena does not occur without a cause, as countries develop, they will incur inflation and in the long run will become more expensive to live in. This causes many people to have less kids. Some may even choose to not marry at all which has become quite common in modern cultural values.
That being said, there are several countries and regions in this world that will have a burgeoning workforce in the next few decades. This provides them a solid base for development.
Note: China is a very special case, they are currently at the peak in their workforce numbers, unlike Japan and the other developed nations which are gradually declining naturally. However, their past one child policy can potentially be a huge blunder as they will experience drastic demographic changes in the next few decades.
Peaking in the next 10–30 years:
South East Asia Region
These are the countries that have the potential to be the next bull markets in the near future. Much has been said about the 21st century being Asia’s century and looking at the demographics, it’s really not hard to see why. The next decade or so, the countries in Asia (barring East Asia: Japan, South Korea and China) and several countries in South Africa region will have an optimal number in their workforce which would lead to greater productivity in their respective economies.
Will peak in the next 30–50 years:
West Africa Region
There is a strong case that after Asia develops, it will be Africa’s turn. Many countries especially in West Africa have overcome their turbulent past and is now looking forward to a bright future. Their population is rapidly increasing and its very possible that in the not so distant future, they too will enjoy rapid economic growth.
There are 2 types of countries and regions that i have exempted from this analysis. The first type of countries are countries that have a high turnover in immigration. These countries are usually English speaking and are the business and financial hubs in the world. This includes the USA, UK and Singapore. Demographic changes are almost unpredictable in these countries as people continuously migrate in or out. They already have a highly dynamic economy and looks likely to stay that way for a while.
The other type of countries i have omitted are countries that are still continuously mired in conflict and political uncertainties. These countries will have no clear pattern in their demographics until stability is achieved. This includes several Arab states and countries in Central Africa.
Probably the most important factor that makes Singapore a hub is that it has always been a politically stable country. Much of this has to do with 2 factors: a relatively small population making it easier to govern, and the competence of the dominating People’s Action Party set by Lee Kuan Yew. Political stability such a crucial ingredient in becoming a financial hub. Many big corporations would only choose to base their operations in a highly stable country with low corruption and a well enforced rule of law.
This is something very hard for Indonesia to achieve especially ever since the democratic reformations. There are many different parties continuously wrestling for power with their own vision. The long term direction of Indonesia is therefore not predictable with public sentiments continuously changing, some times the people want a free market economy, other times they want to be protectionist, much depends on which side is the most convincing at that moment. This will continuously hinder Indonesia’s prospects of being a financial hub as many businesses would always think twice before taking the risk of opening shop in Indonesia as they can never know what is going to change tomorrow. Unlike Singapore, that for many decades have a clear vision and therefore enjoys great stability.
What this also means for Indonesia is that they can’t have a financial sector as strong as Singapore’s. An advanced financial sector consists of many investment banks, wealth management and business consulting firms. Many of these firms can only prosper on a busy and stable business environment. This is a hallmark of the financial hubs as the establishment of these services places the city/country as one of the centers for money and investments in the world. Wealthy individuals from around the region would come and park their money or invest in instruments provided by these advanced financial institutions, thus bringing large sums into the country. Jakarta and Indonesia meanwhile simply do not have the ingredients to facilitate these levels of advancements in its financial sector. They would definitely grow to become a regional power in the future as they currently only have less than half the population that are using commercial banking services, thus great space and potential for growth. To be one of the hubs in global trade however is something else entirely. It’s one thing to get the common people to bank a bit of money in their savings accounts, it’s another to get billionaires from other countries to save and invest their money into the country, and thats where all the big money and investments come from. That’s what makes a hub.
There are two ways a country can find itself in a situation where it can’t repay it’s debts. Either the Government has been borrowing excessively for it’s fiscal policy and defaults on their short term obligations. The other way is when there is a systematic failure in the country’s banking system which leads to the Government having to bail out the banks. We are going to discuss the aftermath of both these situations.
Firstly the Government of the country will approach/be approached by the world banking institutions, the “lenders of last resorts” such as IMF and the World Bank. Several countries in Asia and Africa will also be negotiating with China’s Asian Infrastructure Investment Bank (AIIB) and Asian Development Bank (ADB). Meanwhile countries in the EU will also be negotiating with the European Central Bank. The indebted country will negotiate for new loans to service their short term obligations they couldn’t cover. Negotiations will be on how the country will restructure their economy to warrant these new loans. This includes providing plans on how the Government will increase their tax revenue and which Government spending will be cut. The IMF will usually propose several reforms for the country.
If the current debt levels are at a very critical level, there might be negotiations on the sales of the country’s national assets. The assets can literally be anything the Government owns from state owned enterprises or even Government owned buildings and properties. The Greece debt crisis resulted in several of their airports being sold to German firms.
After an agreement is met, the Government now has the funds to meet their short term obligations and prevent default. However, the hard work is just about to begin.
Impact on the economy
The first thing that will happen prior to default is foreign investors and investments will rapidly pull out of the country. Usually coupled with other external factors, all of this will cause the currency to weaken drastically, thus causing rapid inflation in the country. Riots and strikes would then follow causing most business activities to come to a standstill, halting the economy.
Asian Financial Crisis, Indonesia 1998
Greece Sovereign Debt Crisis
Most banks will close, either temporarily or even permanently as they cannot cope with the drastic amount of cash withdrawal caused by the panic of the population. Many businesses may not survive and go bankrupt resulting in the overall economy (GDP) to shrink.
Some countries such as present day Venezuela (above) is experiencing an economic crisis at such a critical level, the Government is forced to ration out goods for the people.
If resentment has been rising towards the incumbent head of state, calls for impeachment might occur as the people calls for drastic change on the system. The replacement then will bring messages of optimism and bring about major reforms. Slowly, with large sacrifices from higher tax rates and massive cuts in Government spending, the economy may gradually recover.
Indonesia Democratic Reformations, 1998
Greece’s Syriza Party led by new PM Alexis Tsipras
In Singapore’s short history, she has quickly established herself as a financial hub where wealthy individuals from around the region would choose to park their wealth. Here are the landmarks which got Singapore to where they are today.
Singapore Banking Act and the Establishment of the Monetary Authority of Singapore (1970–1971)
Shortly after its independence, the Singaporean Parliament introduced The Singaporean Banking Act (Act 41 of 1970). These are sets of regulations that still applies to Singapore’s financial industry until today. This is a highly significant landmark as these legislations set the foundation for Singapore’s status as the banking and financial hub in the region, implementing Bank Secrecy laws that would make Singapore a “haven” for wealthy investors. With this legislation, Singaporean Banks are not required to disclose client information regardless of criminal charges. Not many other countries can introduce such laws successfully due to its potential for corruption, collusion and many other harmful practices. The only other countries that implements bank secrecy laws are Switzerland, Luxembourg and Lebanon.
Additionally, Singapore also established the Monetary Authority of Singapore (MAS) which is a Government institution that specifically manages Singapore’s banking and financial industry. Other countries traditionally do not have such a specific and advanced institution to manage the financial industry, relying on traditional Government departments and agencies to oversee the highly complex and dynamic Banking industry. MAS was specifically designed to make Singapore more focused and agile in its Banking industry authority. As a result, Singapore is yet to experience a single banking failure since its independence, making it an extremely safe and secretive place for many wealthy individuals and organizations to park their money.
Entry of many giant multinational investment banks (1970s – 1990s)
After the legislations in the early 1970s, many giant multinational banks find it extremely lucrative to set up their operations in Singapore. This is very important because these banks bring with them many different currencies and exotic financial instruments for wealthy individuals and organizations to invest and trade with. In developing economies such as Indonesia, the financial institutions are mostly limited to G7 currencies. Additionally, advanced financial instruments are also heavily regulated in order to prevent harmful practices which could otherwise harm the country’s economy like the financial crisis triggered in the US in 2008. This lack of variations provided by developing countries restricts its financial institutions from growing to a global level as investors would rather flock to Singapore which could provide way more options to its clients.
Asian Financial Crisis (1997–1998)
The Asian financial crisis in Thailand caused a massive shock in ASEAN markets. Many investors lost their trust in emerging economies such as Indonesia, Thailand and the Phillipines. However, it can be argued that Singapore benefitted heavily from the experience. During the 1998 financial crisis many investors moved their money to Singapore and many are yet to return. The event further cemented Singapore’s status as a haven for wealthy individuals to park their assets.
Note: It’s also important to add that many banks in Singapore such as Citibank and HSBC allow individuals from other nations to open bank accounts even though they may not be resident in Singapore. Its therefore no surprise why Singapore is such a haven for money laundering activities.
This analysis uses GDP per Capita as a tool to measure roughly the average income level of the countries, thus analyzing their historical economic progress. World Bank has cited GDP per Capita benchmark of USD12,500 for high income and developed countries.USD4,000 for middle income and developing countries.
Malaysia; GDP per Capita: USD10,876 (Upper Middle Income Country)
The 2nd most developed economy in ASEAN behind financial hub Singapore, Malaysia is on the verge of being a developed economy after running consistently impressive growth for many decades. It has strong prospects for the long term future, despite recent political difficulties. Present day Malaysia is at the levels of South Korea and Taiwan in the early 1990s, when they were just established as developed economies.
￼There’s no obvious reason why Malaysia won’t catch up to South Korea’s developments in the next 20–30 years. Their growth has been consistent over the past few decades and are proven to be quite resilient to crises. They have a healthy diverse economy driven mostly by the manufacturing and services sector, which is a standard model of high income countries. Their services sector, mainly tech, ecommerce and banking are expanding larger and larger into neighboring ASEAN countries. They handled the middle income trap pretty well and even with maturing slower growth rates, they are expected to be fully developed quite soon.
Thailand; GDP per Capita: USD5,774 (Middle Income Country)
Thailand was on par with Malaysia in the early 1990s, they were considered newly middle income countries. However Malaysia’s economy boomed over the next few years while Thailand’s growth stayed at a very conservative pace. A lot of it had to be attributed to the 1997 Asian Financial Crisis which was triggered in Thailand that severely harmed its economy. It slowed down the momentum of their growth significantly.
￼What differentiates the Thailand economy with the Malaysian economy in the 1990s was that Malaysia had strong growth in their higher value industries, which include pharmaceuticals, medical technology, Banking, tech and ecommerce. Thailand’s economy however was very slow to evolve and still mainly revolved around their automotive manufacturing industry. The Thailand economy seem to have difficulty overcoming the middle income trap as they currently couldn’t find much growth in their services sector which could otherwise generate higher value. Therefore i expect the Thailand economy to have consitent little growth, barring any major reforms.
Indonesia; GDP per Capita: USD3,834 (Lower Middle Income Country)
￼Indonesia has for the most part been behind Malaysia and Thailand. Present day Indonesia is only as developed as Malaysia and Thailand were in the early 1990s, just before the Malaysian economy started to boom rapidly. That being said, things are currently looking positive for Indonesia. They are expected to enjoy a faster development than the Thailand economy in the 90s. Indonesia has consistently recorded growth rate of at least 4% annually since recovering from the Asian Financial Crisis. Additionally, much of Indonesia’s growth in recent years are driven by its rapidly expanding services sector. If the Government can stimulate growth in its sluggish Manufacturing sector then Indonesia will have a diversified economy with impressive growth. This is why Indonesia is quite likely to catch up to Thailand’s level in the next 10 years or so.
In the next 20-25 years, assuming current growth remains constant, Indonesia can potentially develop into an upper middle income country. It will look a lot like Brazil’s present day economy which has similar population demographics and market structure. Indonesia currently has the right age demographics to make the progress to a more developed economy. The country has a young population and in the next few decades will have a massive workforce. This leads to greater output generated by the economy, leading to higher disposable income among the workforce to be spent on the market, which leads to a prosperous business cycle.
Phillipines; GDP per Capita: USD2,635 (Lower Income Country)
Since the 1980s, things haven’t quite worked out for the filipino economy. Although there has been improvements in the last decade or so, the country has lagged far behind and is currently still classified as an undeveloped economy. Much of this has to do with the lack of political stability in Phillipines history. Nonetheless, growth seemed to be picking up in the last one and a half decade or so. At the current rate, Phillipines is projected to reach the benchmark per Capita for a developing economy USD4,000 at some point in the next decade. They have a continuously diversifying economy similar to Indonesia, however output has always been weak in all sectors. There is one important factor that must be considered. Newly elect President Duterte’s policies on Drug War may have been deemed controversial. But national public sentiments for him is highly positive. If President Duterte can clean up the drug war issue quick and focus on revitalizing the economy, Phillipines will quickly rebound.
Vietnam; GDP per Capita: USD1,684 (Lower Income Country)
Vietnam is the least developed country in this list simply because they started developing late and from such a low base. The war with America really held them back in development when other ASEAN countries were growing. However, ever since the Vietnamese economy started stabilizing in the early 90s, growth has been impressive.
One of the reasons as to why Vietnam has so much promise amongst investors is that the Vietnamese political landscape and economic policies are somewhat similar to China in their pre boom years in the early 1990s, focused on manufacturing and other value added goods.
￼The single party system that Vietnam employs, if done right can ensure stability in the political landscape, leading to a single national vision in economic growth. This facilitates strong growth. Vietnam has the most potential out of other ASEAN countries to record supergrowth like China did, who often exceeded 10% annually. This is further supported by the fact that Vietnam has a solid foundation for their services sector as they have one of the highest broadband penetration in ASEAN. They have the potential to be big in the e-commerce market and thus will have a busy and diversified economy. If they hit that momentum of 10% growth annually, they can easily catch up to Indonesia and Thailand in 10–15 years. If Vietnam can sustain the rapid economic growth for a prolonged period of time, it’s not impossible that they reach a GDP per Capita of USD25,000 similar to present day South Korea and Taiwan in 20–30 years.
Edit: Vietnam however has a unique problem it does not share with the other ASEAN countries, rather a condition quite similar to their northern neighbors. Vietnam has an aging population, unlike the other ASEAN countries. At some point in the not so distant future, this will slow down Vietnam’s economy as they would deal with a diminishing population, workforce and spending in their economy. There are ways to handle this problem such as introducing liberal immigration reforms to push the natural flow of workforce immigration. Nonethless this will remain a highly complex and sensitive issue that will no doubt prove to be a problem in the future.