ASEAN SMEs Report: 6 Country Snapshots | Ernst & Young

Indonesia: Growth shows no signs of abating

Southeast Asia’s largest economy is enjoying a period of prosperity as reviving investments, consumption and continued regulatory reforms generate growth. GDP growth is forecast at 5.3% in 2018, up from 5.1% in 2017. Given Indonesia’s abundance of natural resources, business expectations are optimistic for the next two years.

Sound consumer confidence, rising household purchasing power and more attractive borrowing rates will sustain Indonesia’s private consumption from its 265 million strong domestic market, which accounts for around half of its GDP. Local demand will drive performance in agriculture and services. Meanwhile, robust private consumption, ongoing recovery in commodity prices and higher exports continue to benefit wholesale and manufacturing, as well as boosting international trade for textile and garments, food production, palm oil and coal.

Potential headwinds include Indonesia’s relatively high levels of household poverty, partly linked to a lack of effective educational reforms, accelerating inflation and weak governance in some provinces. However, we expect strong economic growth on the back of President Joko Widodo’s structural reforms and high infrastructure spending.

Indonesian SMEs: Benefitting from reforms

Indonesia’s business environment continues to improve. In 2015, economic growth was still lacklustre due to poor infrastructure, cumbersome business procedures and a weak institutional framework. In September the same year, a series of economic policy packages began stimulating investment and accelerating growth. These reform packages untangled regulatory red tape and created a conducive business environment for local enterprises and foreign investors. Consequently, Indonesia climbed almost 20 spots in the World Bank’s Ease of Doing Business Index , from a ranking of 91 in 2017 to 72 this year.

SMEs have benefited as Indonesia’s buoyant economic growth, solid private consumption and decline in bankruptcies have stabilised the credit environment. They reaped further efficiencies from streamlined business license application processes, enjoyed tax incentives and greater access to credit and global supply chains.

Malaysia: Economy on a growth trajectory

Southeast Asia’s third largest economy has picked up after bottoming out in 2016, with economic bodies such as the International Monetary Fund and the Asian Development Bank currently bullish on its nearterm performance. Expansion will largely be underpinned by robust private sector investments and improvement in domestic and external demand. Rapid growth has come from continued spending in the manufacturing and services sector, stable labour market conditions and higher consumption. The World Bank expects Malaysia’s GDP to grow 4.8% in 2017 and increase another 5% per annum in the next two years.

These positive indicators have led to broad-based growth across a range of diversified sectors. The outlook is particularly good for the agricultural industry where fewer disruptive weather patterns from El Niño have boosted plantation production. Optimism also abounds for the following industries:

• Manufacturing and wholesale, underpinned by sustained global demand for semiconductors and stronger export growth;

• Mining supported by double-digit growth in commodity exports; and

• Transportation, with the government’s significant budget allocation to boost public transport in 2018 and upskill manpower in the national rail sector.

Clouds on the horizon include Malaysia’s high household debt ratios and increasing consumer inflation of 3.9% – double that of a year ago – which could slow down consumer spending and dampen household sentiment. Already, we are seeing muted sentiment in construction, reflecting latent problems plaguing the sector from foreign labour shortages, rising minimum wages and late payments. External debt in corporates and banks may also pose exchange rate risks to the strengthening Ringgit.

However, with Malaysia’s abundance of natural resources and already well-equipped with infrastructure, we expect current economic growth to continue in the near term. Rising global demand for Malaysia’s commodity exports (crude oil, liquefied natural gas and palm oil) and a new agricultural frontier in Eastern Malaysia will continue to drive expansion.

Malaysian SMEs: Positive sentiments from government spend and Chinese FDIs

Malaysia’s overall SME business sentiment remains positive. This is supported by budget sweeteners, including investments in schools, hospitals and rural infrastructure ahead of the 2018 general election and the relative ease of conducting cross-border trades. Malaysia ranks 24th in the World Bank’s Ease of Doing Business Ranking, the second highest in ASEAN after Singapore.

However, enterprises see risks arising from US protectionism, higher costs from raw materials and business operations and potential interest rate hikes in 2018. Also, as Beijing reins in debt risks, moderating growth in China could impact Malaysia’s economy given the very significant trade relations between both countries.

Against this backdrop, the government introduced programmes to boost labour productivity, upgrade employee skills and infrastructure to boost Malaysia’s competitiveness in higher value-added domestic sectors such as technology and precision engineering.

Philippines: Ushering in a new era of growth

With the World Bank forecasting real GDP growth of 6.7% for 2018 and 2019, the Philippines is on track to be one of the region’s fastest growing economies.xiii The positive outlook is buoyed by declining unemployment rates and a consumption boom from the growing middle-income population.

Expansion is expected to be anchored primarily by manufacturing and services, bolstered by rising external demand from trading partners, strong consumer spending and high public investment. Notably, this includes the Philippines’ ambitious P9t (US$176b) infrastructure “Build, Build, Build” programme, which will restore crumbling roads and bridges, revamp airports and introduce the Philippines’ first subway. This public infrastructure initiative also bodes well for construction and transportation, elevating capital outlays and creating new employment.

Potential risks include resistance to the tax reform Bill needed to secure finance for the planned infrastructure programmes, but in late 2017, parliament formally approved the initial phase of President Duterte’s tax reforms. However, the massive imports required to fuel the infrastructure programme will also create a trade deficit, putting the Peso under pressure.

As a result, we view the well-intended plans to transform the Philippines into a high middle-income economy by 2022 as ambitious. Structural problems are likely to include cross-sector skills shortages, nascent technological maturity, insufficiently robust anti-corruption frameworks, weak legal and regulatory provision and enforcement and a somewhat opaque tax system. These factors, along with investment restrictions for retail enterprises where only locals can own firms with less than US$2.5m capital, put the Philippines at 133 or within the bottom 30th percentile in the World Bank’s Ease of Doing Business Index.

Philippines SMEs: Buoyant prospects but potential loan tightening

Local SMEs, particularly in services and manufacturing are benefitting from buoyant macro conditions, with improving income levels and stable household consumption from expanding credit and sustained remittances. Business operations continue to be anchored by stronger government spending as the Duterte Administration pushes ahead with its infrastructure investment drive. The local elections in 2019 will further boost domestic activities from 2H2018. Improved relations with China should support cross-border trade and help local SMEs expand into Greater China.

However, tighter prudential standards may reduce loans to certain SMEs. In the last four years, bank loan growth in the Philippines has expanded at roughly twice the pace of nominal GDP. In response, the Central Bank, Bangko Sentral ng Pilipinas (BSP) is placing closer scrutiny on real estate loans and project financing. Although the Philippines’ NPL ratio has remained benign at 2% and asset bubbles are not anticipated, tighter prudential standards might make banks more cautious about lending to SMEs. In anticipation, BSP has introduced initiatives to allow greater access to financing and reform the micro-financing system.

Singapore: A strong, resilient economy

Singapore’s economy expanded at an estimated 3.5% in 2017 – a modest but respectable growth for the most mature of the ASEAN-6 economies. While the external environment faces some downside risks, economists expect another year of steady 3% growth with a cautiously positive outlook for 2018.

Manufacturing, at a quarter of GDP, continues to outperform, especially in its technology and biomedical manufacturing clusters. The resurgence in global chip demand by China, South Korea and Thailand paved the way for stronger growth in export-oriented manufacturing. Services is also anticipating growth, particularly financial services, wealth management, business and professional and tourism-related businesses. However, optimism is lower among sub-segments such as retail and food services. The Singapore Statistics Office’s F&B Services Index for restaurants contracted 9% year-on-year in the first half of 2017 after adjusting for inflation.

Construction is most pessimistic, with growth forecasts trimmed owing to weak demand for private industrial and commercial projects. In response, the Singapore government – the construction industry’s largest client – announced S$1.4b (US$1b) of public amenities projects within the next two years to offset the drop in private sector demand. These projects, which include upgrading community clubs, sports centres and police posts, will benefit almost 8,000 SME contractors who typically do not benefit from mega-infrastructure opportunities.

Singaporean SMEs: Enhanced government transformation schemes

External macro uncertainties and internal rising operating costs, skilled labour shortages and intensifying competition are perennial concerns for Singapore’s SMEs. Although asset quality and profitability deterioration have peaked for oil and gas, transportation, storage and many other sectors, they are still contending with cash flow challenges from payment delays. In 2018, we expect Singapore’s loan growth to be higher as more SMEs seek working capital finance.

Despite these challenges, we see reason for local enterprises to be cautiously optimistic. Singapore continues to remain as one of the region’s most reliable economies, with solid financial and fiscal buffers to negate potential economic shocks. The city state’s robust public finances, stable political environment, pro-business policies and influx of foreign investments bode well for domestic SMEs. This is clearly illustrated in the World Bank’s Ease of Doing Business Index with the island nation retaining its number two spot in 2018, behind New Zealand.

Meanwhile, the Singapore government continues to proactively support SMEs with numerous schemes and subsidies to help build capabilities, raise productivity, expand internationally, go digital and groom talent.

Thailand: Strengthening economic fortunes

Thailand’s outlook still lags that of regional emerging markets, with private investment remaining weak and household debt among the highest in Asia, crimping consumption. However, Southeast Asia’s second-largest economy has been staging a modest turnaround, with GDP expanding from 3.2% in 2016 to 3.9% in 2017, and projected to rise by 3.6-4.6% in 2018. Exports rose an estimated 8% in 2017 following four consecutive years of contraction. Future growth will mainly be driven by stronger exports, continued increases in government spending on public infrastructure, tourism and improved private consumption and investment.

The agriculture sector has an optimistic outlook backed by an uptrend in the international price of rice and other agricultural goods. Companies in the services and transportation sector are also expected to do well, supported by international tourists, particularly those from China, switching destinations from western countries to Southeast Asia for political and security reasons. Tourism is expected to accelerate following the end of the mourning period in October 2017 for King Bhumibol Adulyadej, with the Tourism Authority of Thailand forecasting US$92b in tourism revenues in 2018. The construction and transportation sectors will also benefit from a surge in government infrastructure spending with projects totalling more than US$9.1b in 2018. Furthermore, a new personal income tax structure introduced to increase disposable income means that private consumption – the main engine of Thailand’s economic growth – will boost economic activity in most sectors.

The risks to growth momentum for the Thai economy include the potential of a strong Thai Baht denting export competitiveness, uncertainties over US economic and foreign trade policy and the impact of economic structural reforms in China.

Thai SMEs: Fairer skies ahead with Thailand 4.0 reforms

The Thai government is supporting SMEs by focusing on developing skilled workers through quality education, promoting innovation and investing in public infrastructure to improve the country’s global business competitiveness. This has already borne fruit with Thailand surging 20 places in the World Bank’s Ease of Doing Business ranking from 46 to a highly respectable 26 in 2018 – putting it in the top 10 economies to have improved most in the ease of doing business. One major improvement has been the cutting of red tape to reduce the time taken to start a business from 27.5 days previously to just 4.5 days. The government also introduced regulation to fix the long-standing issues of microfinance institutions overcharging vulnerable borrowers with exorbitant lending rates.

Another positive reform was the increased controls over unsecured consumer credit as a means of curbing rising household debt which is close to 80% of GDP. More sustainable consumer spending and lower debt levels could help increase confidence, reinvigorate household consumption and create flow through benefits to SMEs.

Vietnam: Economy remains buoyant

The Vietnamese economy achieved a highly respectable growth rate of 6.7%xv in 2017, with projections for another 6.5%in 2018. This positive outlook is due to robust domestic demand and increased trade opportunities from the new bilateral FTA with the European Union.

Such developments, alongside Vietnam’s labour cost competitiveness and proximity to the Chinese production chains, make it a premier location for SMEs to set up manufacturing hubs. With a globally competitive manufacturing sector integrated into regional supply chains, Vietnam is expected to be one of the top five emerging logistics markets in the medium term.

Other than agriculture which is vulnerable to climatic uncertainties, the near-term outlook for all other sectors is positive. Manufacturing production will be boosted by continued opening of new foreigninvested factories. Construction will continue to benefit from high FDI disbursements to set up new factories, a strengthening housing sector and continued high transport and energy infrastructure investments. Growth in services is projected to remain strong with tourist arrivals boosted by the new e-marketing campaign launched by the government.

Economic growth could be dampened by Vietnam’s long-standing structural constraints, including a highly-leveraged banking sector, inefficient State-Owned Enterprises (SOEs) and government bureaucracies.

Vietnamese SMEs: Improving regulatory environment but watch for credit risks

Vietnam’s overall outlook for SMEs appears positive as the government continues to overhaul the business regulatory system. Initiatives such as simplifying business procedures, enhancing national competitiveness, improving transparency and trimming corporate taxes will create a more conducive environment that will help facilitate greater internationalisation and trade growth for SMEs. The positive effects are already being felt, with Vietnam rising 14 places from 82 in 2017 to 68 in 2018 in the World Bank’s Ease of Doing Business Index.

However, rising income inequality, economic inefficiencies and the lack of business knowledge and skills may impede Vietnam’s growth. Slower growth in China could undermine trade given China accounted for US$19.2b of Vietnam’s exports in 2016. Separately, rising local nationalist sentiments may affect demand for foreign imported goods and services, impeding plans by neighbouring countries to expand into Vietnam.

Also, with concerns around growing credit risks for the financial sector, the credit environment outlook is expected to deteriorate. SOEs and real estate segments will be key sources of fragility. Rising levels of private sector debt and NPLs could dampen SME loans from traditional financial institutions and force enterprises to seek alternative and costly sources of finance to support growth.

It is thus encouraging that the Vietnamese government is instituting pro-business initiatives, including active and flexible fiscal policies, such as providing tax breaks, reducing corporate taxes and offering business support packages to spur growth and position Vietnam as a regional business hub.

This article was contributed by Ernst & Young. To read the full report, click here.

(By Ernst & Young)

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