Domestic investment needed for growth

Domestic investment needed for growth

Dow Jones, Singapore

A rise in domestic investment, not consumption, is required to drive economic growth in Southeast Asia in coming decades amid rising competition from China and India, says U.S. investment bank Morgan Stanley.

In a report received over the weekend, the bank's Southeast Asia economist Daniel Lian said Malaysia, Thailand, Indonesia and the Philippines needed to invest in creating indigenous productive capacity in "second track" economic sectors like agriculture, small and medium enterprises, and services.

This, he said, will help the four countries balance their excessive dependence on export-oriented manufacturing and raise productivity in the face of China and India's emergence in the global economy.

He added that although many investors have pinned their hopes on growth through rising domestic consumption, there are "serious institutional barriers" preventing this from happening.

"A young population, institutionalized or forced saving social structures, the high price of property relative to income, unequal distribution of income and wealth, and undervalued exchange rates all contribute to excessive saving," he said.

"In my view, these institutional barriers will remain for a long time, thus dimming the prospects for private consumption," he added.

In the case of Malaysia, Lian said government investment in various projects since 1998 meant the infrastructure is overbuilt and that fiscal consolidation must take place.

"In this regard, Malaysia is hoping that the private fixed investment ratio will return to the 20 percent (of gross domestic product) range, thus boosting the gross investment ratio to the 30% range," he said.

Malaysia's private investment declined from 30.2 percent of GDP in 1994 to 10.4 percent in 2004.

As for Thailand, Indonesia and the Philippines, Lian said the three have barely kept up with their infrastructure investment since the Asian crisis.

Lian estimated that Thailand, after a pause in the first half of this year, could continue to raise its domestic investment share in GDP from its current mid-20 percent to mid-30 percent levels in five to six years.

He also said conditions for domestic investment in Indonesia have become more favorable due to the rise in the gross savings rate to 32.1 percent last year from an average of 29.7 percent in the preceding decade.

"Political risks seem to have stabilized with the election of Mr. (Susilo Bambang) Yudhoyono as president. Of key importance is that he has a clean image, which gives him the legitimacy to launch an anti-corruption campaign, in our view," Lian added.

Turning to the Philippines, the Morgan Stanley economist said there have been slow but positive developments in the country's fiscal profile, such as the recent approval of a tax reform bill and stricter tax evasion control.

"If the present pace of reforms continues, we believe that as the fiscal accounts reach normalcy and attract foreign investment, there will be some momentum in investment next year, boosted by government involvement in social and infrastructural activities," he added.