IN COLLABORATION WITH PROUDLY SUPPORTED BY ISSUE 34 4 MARCH 2013 - Indonesia’s Growth Story - The Property Market Crisis in Vietnam - ASEAN’s Economic Integration: Looking at the EU, Should the ASEAN Region Integrate Faster and Further? (Part 1) The Fortnight In Brief (18 th February to 3 rd March) US: Sequestration On March 1, President Obama signed into effect $85 billion in across-the-board cuts as congress failed to reach any last-minute agreements on an alternative proposal to deficit reduction. The IMF has cautioned against sequestration which is expected to slow the global economy, and is likely to cut U.S growth forecast by 0.5%. However, financial markets shrugged off concern over federal spending cuts with both the S&P and Dow seeing gains on the back of better than expected economic data. The ISM factory index rose to its highest since June 2011 at 54.2. Fed Chairman Ben Bernanke once again warned against a premature rate increase which may snuff out the delicate economic recovery. Asia Pacific: Less Scope for Indonesia to Cut Interest Rates Indonesia’s inflation accelerated to a 20-month high of 5.31% in February, driven by higher food prices and power tariffs. This compares unfavourably to a survey of 18 economists’ estimates which placed expected inflation at 4.81%. Indonesia’s central bank has maintained record low borrowing costs at 5.75% for the past year in an attempt to bolster exports. The higher inflation reduces scope for central bankers to reduce interest rates. EU: Review of Greece’s Performance On March 2, officials from the EU and the IMF reviewed Greece’s performance as the government played down the prospect of public sector job cuts. Unemployment is at a record 27%. The government must transfer 25,000 employees to a mobility scheme by the end of the year if vacant spots are not found in the public sector. Finance Minister Stournaras commented that the public sector had already shrunk by 75,000 in the last 1.5 years, and there would be no further layoffs. Bankers have also asked for an extension to an end-April deadline to wrap up a scheme to restore the solvency of the country's four biggest lenders SMU Political-Economic Exchange AN SMU ECONOMICS INTELLIGENCE CLUB PRODUCTION 280 282 284 286 288 290 292 2/18/13 2/19/13 2/20/13 2/21/13 2/22/13 2/23/13 2/24/13 2/25/13 2/26/13 2/27/13 2/28/13 3/1/13 STOXX… 1460 1470 1480 1490 1500 1510 1520 1530 1540 2/19/13 2/20/13 2/21/13 2/22/13 2/23/13 2/24/13 2/25/13 2/26/13 2/27/13 2/28/13 3/1/13 S&P 500 544 546 548 550 552 554 556 558 560 562 2/17/13 2/18/13 2/19/13 2/20/13 2/21/13 2/22/13 2/23/13 2/24/13 2/25/13 2/26/13 2/27/13 2/28/13 MSCI AC…
The badly performing Indonesian currency , property crisis in Vietnam and what ASEAN needs to learn from the Eurozone. This issue of SPEX focuses on the ASEAN region. Read on to find out more!
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IN
COLLABORATION WITH
PROUDLY SUPPORTED BY
ISSUE 34
4 MARCH 2013 - Indonesia’s Growth Story - The Property Market Crisis in Vietnam - ASEAN’s Economic Integration: Looking at the EU, Should the ASEAN Region Integrate Faster and Further? (Part 1) The Fortnight In Brief (18th February to 3rd March) US: Sequestration
On March 1, President Obama signed into effect $85 billion in across-the-board cuts as congress failed to reach any last-minute agreements on an alternative proposal to deficit reduction. The IMF has cautioned against sequestration which is expected to slow the global economy, and is likely to cut U.S growth forecast by 0.5%. However, financial markets shrugged off concern over federal spending cuts with both the S&P and Dow seeing gains on the back of better than expected economic data. The ISM factory index rose to its highest since June 2011 at 54.2. Fed Chairman Ben Bernanke once again warned against a premature rate increase which may snuff out the delicate economic recovery. Asia Pacific: Less Scope for Indonesia to Cut Interest Rates
Indonesia’s inflation accelerated to a 20-month high of 5.31% in February, driven by higher food prices and power tariffs. This compares unfavourably to a survey of 18 economists’ estimates which placed expected inflation at 4.81%. Indonesia’s central bank has maintained record low borrowing costs at 5.75% for the past year in an attempt to bolster exports. The higher inflation reduces scope for central bankers to reduce interest rates.
EU: Review of Greece’s Performance
On March 2, officials from the EU and the IMF reviewed Greece’s performance as the government played down the prospect of public sector job cuts. Unemployment is at a record 27%. The government must transfer 25,000 employees to a mobility scheme by the end of the year if vacant spots are not found in the public sector. Finance Minister Stournaras commented that the public sector had already shrunk by 75,000 in the last 1.5 years, and there would be no further layoffs. Bankers have also asked for an extension to an end-April deadline to wrap up a scheme to restore the solvency of the country's four biggest lenders
run of surpluses. The so-called ‘immune’ economy of Indonesia has finally started to show
signs of weakness owing to the global financial crisis. These factors have mounted pressures
on the rupiah, which has been one of Asia’s worst performing currencies in recent times.
In the short term, the government is faced with the problem of maintaining an imported
inflation threatened by the weak currency and high demand for crude oil imports. The
country has to balance these priorities with the need to reverse export trends in a grim global
market. Slashing fuel subsidies might tip inflation levels and further pressurize the currency
and as a result, worsen the terms of trade. The challenge is to find the right balance to ensure
that the economy pulls out of deficit and returns back to its previous levels.
In the long term, the government has to develop strategic policies to remain competitive in
the region against other emerging neighbors such as Vietnam and Philippines, which boast
better infrastructure and education levels. It needs to focus on developing a sustainable
growth strategy that will be viable for the long run. And most importantly, it needs to invest in
its people, so prevent its population of millions from becoming a liability.
1 A term used to describe Mexico, Indonesia, South Korea, and Turkey as the growth engines for the next decades.
2 Credit ratings are assigned letter designations (such as AAA, B, CC, etc.). Typically, ratings BBB-/Baa and above are considered investment grade and safe for investors to invest in. 3 The demographic dividend is a window of opportunity in the development of a society or nation that opens up as fertility rates decline when faster rates of economic growth and human development are possible when combined with effective policies and markets.
By Hang Dieu Quang, Singapore Management University and Luu Nguyen Trieu Duong, National University of Singapore
The Crisis
The current property market crisis, especially in the residential apartments for sale segment in Vietnam is caused by many factors including: skewed market structure, high inflation rate, speculative demand and oversupply.
Skewed Market Structure
Fuelled by the belief that the Vietnamese economy would continue to grow at double digit rates, the apartments for sale segments were often aimed at the growing middle and high income class. These apartments were priced at very high margins and developers were used to earning abnormally high returns. However, that was during 2006-2007, when the economy was still booming. When the global economic crisis hit in 2008 and Vietnam’s inflation rate skyrocketed to 23%, the demand for high and mid end apartments suddenly disappeared as companies struggled to survive and state-owned firms1 grappled with debts. In addition, foreign direct investments also dried up.
In Vietnam, where the working class makes up a large portion of the population, the housing market is clearly not catered for the majority of the population. With prices for even the low end apartments ranging from 625 USD to 1000 USD per square meter in late 2012, which is equivalent to around 13 million VND to 21 million VND per square meter, the majority of Vietnam’s population are unable to afford housing. This is because prices are about more than 13 times the average annual income of an office worker for a mere 50 square meter apartment. Clearly, majority of the population, even in the big cities, cannot afford that price, even after the crisis, which has led to prices dropping in most segments.
Figure 1: Prices in Primary and Secondary Markets
Source: Vietnam Research Forecast Report 3Q-2012 – Colliers International
The high inflation rate of over 20% in 2008 and the subsequent years forced the government to implement a string of cooling measures including a hike in interest rates for loans. All of a sudden, many developers and speculative buyers found themselves in trouble as they had to repay loans at high interest rates, which were as high as 15% in 2008. In addition, stricter lending policies were implemented as banks were increasingly concerned over their bad debts.
Figure 2: Monthly Prime Lending Rate
Source: State Bank of Vietnam
When the economy was booming and peaked during 2006-2007, many firms and investors viewed the property market in Vietnam as the prime area for quick returns. This led to the practice of borrowing heavily to finance new projects and the purchasing of houses with the hope of reselling at a much higher price. This was particularly attractive when property prices were increasing at a fast pace and bank interest rates were affordable. Furthermore, lending policies were very loose as banks competed for clients and loans.
However, when the demand declined sharply in 2008, many developers and investors found themselves unable to offload properties on hand as buyers could no longer afford the prices. The bubble burst when many developers could no longer sustain the high prices they demanded, as banks pressed for repayment of loans. As a result, prices declined sharply. According to Colliers International, apartments in high-end, mid-end and low-end segments have dropped 40%, 30% and 27% respectively. Yet, many buyers are waiting and delaying their purchases. As such, the current price trend will persist for some time.
Oversupply
During the economic boom, many firms rushed to the property market with the hope of earning staggering high returns, as prices increased steadily. Many state-owned firms with access to cheap loans and easy credit jumped on the bandwagon, which contributed to the property bubble.
This created a steady supply of apartments for sale over the years, which continued well into the current crisis. According to Colliers International’s report for the year ending in Q1 2012,
the supply of apartments rose by 37% with new supply increasing by 32% and existing apartments adding 44% y-o-y. This increase in supply together with continued weak demand would sustain the current declining price trend.
The Significance of the Property Crisis
A prolonged property crisis will create serious repercussions for the real economy. Should property developers continue to fail to sell off their apartments, they may find their ability to meet financial obligations seriously hampered. Loans on finished and semi-finished projects may therefore turn sour, leading to an increase in property-related bad debts.
This prospect of ballooning bad debts from the property market puts an already-battered banking system further at risk. Major Vietnamese banks are already saddled with a large amount of nonperforming loans incurred from past reckless lending to inefficient state-owned enterprises. With the banks’ exposure to the property market taken into account, the total ratio of banks’ bad debt could be as high as 8.8% according to the State Bank of Vietnam’s (the central bank) estimate, the highest in South East Asia.
With the banking system struggling with such a high level of bad debt, of which the property crisis is a major contributor, there is sufficient reason to believe that a credit squeeze2 might occur. In such a scenario, operation slowdowns and business failures will occur, leading to a slowdown in growth and high unemployment. The spectre of credit squeeze will be especially detrimental for the Vietnamese economy given that bank loans are still the predominant channel through which firms in Vietnam finance their operations. As such, there is an urgent need to address the property crisis as part of a larger effort to stabilize the banking system.
Policy Responses
On 7th January 2013, the Vietnamese government issued Resolution 02 (02/NQ-CP) aimed at tackling the property crisis and economic slowdown in general. Regarding the property crisis, the government adopted a two-fold approach.
On one hand, the government provides support for property developers in the form of tax breaks and value-added tax3 (VAT) reduction. On the other hand, the government also tries to shore up demand. The state’s commercial banks are directed to provide low interest loans for public servants and the lower income groups to buy or rent properties under 70m2 selling at 15 million dong per square meter. New financing facilities for real estate purchases such as the Home Saving Fund, the Real Estate Investment Fund and the Mortgage Refinance Fund were also set up. Perhaps most significantly, the government directed provincial authorities to use funds earmarked for new public housing development to buy up commercial residential properties and convert them to public housing instead.
This policy package may succeed in preventing the property crisis from deteriorating. Two welcoming initiatives in the package are the extensive tax breaks and the plan for local governments to buy property inventory. Tax breaks and reductions for property developers ease their cost pressure, thus reducing their risk of default. Meanwhile, the government’s active purchases of existing housing stock provide an emergency relief to property developers who cannot rid themselves of their inventory, preventing these developers from going under.
Nevertheless, as we have argued throughout this paper, the root cause of the persisting supply-demand gap lies in an excessive abundance of middle and upper-end housing units. With these units not meeting the means and the needs of the general populace, while their
intended targets, the upper middle class, are still reeling from the 2012 economic slowdown, private demand seems set to remain low for the foreseeable future. The government’s measures of making credit cheaper and more accessible make property purchases more attractive for potential homeowners (and speculators). However, it remains to be seen whether this factor is large enough to induce market participants to overcome the current mismatch between existing supply stock and buyer’s profile.
Sources:
1. CEIC database
2. Colliers International – Vietnam Research Forecast Report Q1, Q2 & Q3 2012
3. State Bank of Vietnam
1 A legal entity that is created by the government in order to partake in commercial activities on the government's behalf.
2 A reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. 2 A type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale.
In the next issue, Yongxiang will delve deeper to examine the EU region’s integration history to
draw conclusions for ASEAN…
Sources:
1. Bacha, O. I. (2008). A common currency area in ASEAN? Issues and feasibility. Applied Economics,
40, (515-529)
2. Bui, T. G. (Aug, 2008). Development Gaps in ASEAN as Crucial Nontraditional Security Issue: A 4-I
Approach. Consortium of Non-Traditional Security Studies in Asia.
3. Plummer, M. (Nov, 2006). An ASEAN custom union? Journal of Asian Economics, 17 (5), (923-938).
4. Thangavelu, S. M. and Chongvilavan, A. (Sep, 2009). Free Trade Agreements, Regional Integration
and Growth in ASEAN.
5. Tjhiong, R. (March, 2002). Forging an Economic Integration: The Case of ASEAN.
1 Trade creation occurs when there is an increase in trade among member nations in the good or service of each nation's comparative advantage due to the formation of a free trade area or a customs union.
2 Trade diversion occurs when trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union.
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large- cap common stocks actively traded in the United States. It has been widely regarded as a gauge for the large cap US equities market The MSCI Asia ex Japan Index is a free float-adjusted market capitalization index consisting of 10 developed and emerging market country indices: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. The STOXX Europe 600 Index is regarded as a benchmark for European equity markets. It represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
Correspondents :
Vera Soh (Vice President, Publication) [email protected] Singapore Management University Singapore
Ng Jia Wei (Vice President, Operations) [email protected] Singapore Management University Singapore
Samuel Ong (Publications Director/ Editor) [email protected] Singapore Management University Singapore
Yingyu Zeng (Liaison Officer) [email protected] Singapore Management University Singapore
Ng Yongxiang (Marketing Deputy / Writer) [email protected] Singapore Management University Singapore
Darren Goh Xian Yong (Editor) [email protected] Singapore Management University Singapore
Hang Dieu Quang (Writer) Undergraduate School of Economics Singapore Management University [email protected]
Anirudh Ramavatar Maru (Writer) Undergraduate Lee Kong Chian School of Business Singapore Management University [email protected]
Luu Nguyen Trieu Duong (Writer) Undergraduate School of Arts (Economics) National University of Singapore [email protected]
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