Notes from the road: South East Asia

Malaysia – domestic and international tailwinds

The Malaysian economy is expected to grow by a respectable 4.5% this year, driven primarily by domestic demand. Various meetings confirmed to me that the country’s links with China should also provide a welcome boost to the economic recovery. In the short-to-medium term, Chinese tourists are expected to return in significant numbers. Longer term, an increasing cohort of Chinese companies are setting up shop in Malaysia to sidestep US trade restrictions, as evidenced by high levels of Chinese activity in Penang. All of this should support a currency that has been at the mercy of rising US Treasury yields and subsequent strengthening of the US dollar.

Despite the tight labour market – especially in services sectors as foreign workers are reluctant to return (with negative experiences during the COVID pandemic cited to me as a factor here) – inflation peaked last year and has since remained relatively stable. This has allowed Malaysia’s central bank to keep rates on hold, making the near-term outlook for the rates market relatively stable. Admittedly, this narrative could change should fuel subsidies be removed, but this seems more like a late 2023-2024 possibility.

Positive longer-term dynamics that I would point out to investors in the country’s debt include a range of reforms planned against a more stable political backdrop. Notable among these are the introduction of a Medium-Term Revenue Strategy and a Fiscal Responsibility Act, which are intended to improve fiscal transparency and will bode well for investor confidence.

Indonesia – short-term positives but longer-term challenges

The ongoing relaxation of COVID restrictions is lifting consumer sentiment in Indonesia, which is the largest democracy in the Muslim world and is a vibrant and thriving country. Furthermore, officials I met at the country’s central bank spoke of a surprisingly positive external growth outlook, and exports to China have recently picked up.

While valuations are on the tighter end of the spectrum, the fundamental outlook for the country’s local bond market is constructive. Inflation has been surprisingly well-behaved and seemingly immune to fuel price rises, given the country’s muted growth recovery – perhaps reflecting lingering damage inflicted by the pandemic. The central bank is keeping to plans for a lower inflation target from 2024, which would help anchor inflation expectations.

Turning to FX, the rupiah is another Asian currency that has succumbed to higher US interest rates. Indonesia’s current account balance tipped into surplus in 2022 on the back of elevated commodity export prices, but it is likely to moderate as imports increase alongside an improvement in domestic demand and as spending picks up ahead of next year’s general election.

I came away with a more positive view over the medium-term outlook for the country’s quasi-sovereign US dollar bonds. Fiscal revenue has outperformed, and state-owned energy company Pertamina was able to receive faster compensation payments from the government, strengthening its cash flow profile.

Longer term, the trip left me questioning how much Indonesia would truly reap from the global energy transition. For instance, while there is an abundance of nickel, the country lacks the necessary raw ingredients for more powerful LFP batteries (used in some electric vehicles). More broadly, a big question for Indonesia is how it will navigate the global energy transition. While the Philippines is shifting to wind and Thailand/Malaysia to gas, coal still accounts for 60% of Indonesia’s energy mix. As my colleagues wrote in a recent paper, the shift to renewable energy will likely take longer than many hope/expect, but at some point Indonesia will need to confront the shifting reality.