SMU Political-Economic Exchange

AN SMU ECONOMICS INTELLIGENCE CLUB PRODUCTION - ASEANs Energy Architecture: Needs, Challenges and Solutions (Part 1) - Wealthy & Healthy Or Not? - What happened to the Indian Economy?
The Fortnight In Brief (5th August to 18th August) US: Better growth, and inflation could finally be underway The economy grew at an annualized 1.7% in Q2 of 2013, beating the 1% expectations. Manufacturing expanded with the ISM index increasing to 55.4 for July, from Junes 50.9, the fastest pace in more than two years. Core CPI edged up 0.2%, taking the increase over the past 12 months to 1.7%. Weaker than expected July nonfarm payrolls which increased by 162,000, pushed the unemployment rate down to 7.4% from 7.6%. Initial jobless claims fell to its lowest since 2007, sending 10-year yields surging to two-year highs at 2.83%. The improving jobs market has raised higher expectations for Augusts nonfarm payrolls, and that a September taper is still on track. Asia: Unexpected swings hit investor confidence in China An unexpected swing in Shanghai Composite Index, threatened to further erode confidence in the nation's stock market. The index experienced a price swing of more than 6% ranging from a loss of 1% to a gain of 5.6% within two minutes. The violent swing compounds the negative sentiment of investors who have already punished the Shanghai composite Index with an 8.8% loss compared with a 9.8% gain in the MSCI All World Equity Index. China's performance contrasts with Hong Kong's which beat expectations in investments and consumer spending, leading the government to raise full year forecasts. Hong Kongs economy expanded by 3.3% in the second quarter. EU: The violence in Egypt hit travel firms hard Thomas Cook Group saw a 9.9 percent drop and was off UBS list of preferred stocks. Europes largest tour operator, TUI Travel, backtracked 4.6 percent. But most European markets still closed in positive territory at the end of last week, when Germany led a slight rebound in exports after three disappointing months. Positive data from the US also gave the European markets an extra boost. Italian banks rallied and led gain in the Stoxx 600, boosting investor and consumer sentiments.

ISSUE 43 19 AUGUST 2013

IN COLLABORATION WITH

PROUDLY SUPPORTED BY

1710

S&P 500

309 308 307 306 305 304 303 302

STOXX Europe 600

57.5 56.5 55.5 54.5

MSCI AC Asia Ex. Japan

1690

1670

1650

ASEANs Energy Architecture: Needs, Challenges and Solutions (Part 1)

By Tan Kwan Hong, Singapore Management University
The lack of access to electricity constitutes a major challenge faced by millions of rural households in ASEAN. The region also faces a steep surge of demand in the next two decades, so much so that despite having a considerable amount of coal and gas in the region, more will still need to be imported. The usage of oil and coal will remain as the dominant source of energy till 2030, and will continue to contribute to global warming. The evaluation of nuclear power as an energy option is a top research focus of several ASEAN countries, and will be discussed and analyzed in this article. Although the push for renewable energy has been spearheaded throughout ASEAN, renewable energy sources will contribute to only a small portion of overall energy requirements of the region, and will remain at best, a supplementary energy source. Apart from electricity production, ASEAN will witness a phenomenal increase in vehicle ownership over the next two decades, resulting in staggering demand for gasoline and diesel, most of which has to be imported. Adopting bio-fuels as a substitute transport fuel is touted to be slow and controversial. Mega ASEAN initiatives such as the regional power and gas pipeline networks are remarkable intentions, but progress on a regional level has been slow. Finally, energy efficiency and local energy problems faced by individual countries are causes for concern. These national issues will affect how energy cooperation will pan out on a regional level. ASEAN Energy Supply and Demand Balance Analysis Energy remains the vital enabler that allows countries to provide key essentials food, water, education, health care and national security to their citizens. A fully functioning society thus requires an abundant and affordable supply of energy to sustain urbanization, modernization and development. Despite its crucial importance, stunning insights emerge from current supply and demand balance. First, electrification rates in ASEAN remained stunningly low. ASEAN, with a population of 567 million people, comprises of a startling proportion of 160.3 million people who do not have access to electricity, using twigs and leaves to cook their food. Electrification rates vary widely throughout the ASEAN region, ranging from 10% in Myanmar to 100% in Singapore (Table 1).

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Table 1: Electrification Rates of ASEAN Countries

Source: International Energy Agency Electricity Access Database With a projected GDP growth rate that is expected to supersede that of the world and of advanced economies till 2016, ASEAN is expected to increase its reliance on coal and reduce its reliance on oil till 2030. Additionally, energy derived from biomass and waste will grow by more than 10% per annum. However, despite these growth rates, growth in total final energy consumption is expected to stabilize beyond 2015, resulting in a major reliance on coal and gas by 2030 (Figure 1).

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Figure 1: ASEAN Power Generation (Percentage Share), 2007 and 2030 Compared, IEA Reference Scenario

Source: IEA, World Energy Outlook 2009 (Reference Scenario) The energy resource types utilized by different ASEAN member countries vary widely, as shown in Figure 2. Figure 2: ASEANs Energy Resources

Source: Energy Studies Institute

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Despite so, the regions reliance on Oil and Gas as a total share of energy demand is likely to remain constant from 2020 to 2030. ASEANs dealings with nuclear energy remained insignificant in 2009 (Table 2), and is expected to remain so till 2030. Table 2: Production, Imports and Exports of Nuclear and Renewable Energy in the ASEAN Region in 2009

Source: International Energy Agency, Energy Balances of Non-OECD Countries, 2011, Paris International Energy Agency Electricity Generation in ASEAN ASEAN relies heavily on coal to generate electricity and this reliance on coal is expected to rise over the next decade. Coal is currently still the most affordable and convenient fuel to satisfy the expected rise in electricity demand. However, the environment will be compromised. The burning of coal releases more carbon dioxide per unit of energy than oil and natural gas. The lifecycle of coal from mining, transportation and burning of coal leads to major environmental and health hazards, from smog and acid rain production, to mercury pollution in rivers, and even to asthma and other respiratory ailments. The region will increase its reliance on natural gas for electricity production over the next decade. Singapore and Thailand currently import large quantities of natural gas, while Malaysia, Brunei and Myanmar export it (Table 3).

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Table 3: Production, Imports and Exports of Fossil Fuels in 2009

Source: International Energy Agency, Energy Balances of Non-OECD Countries, 2011, Paris International Energy Agency According to forecasts done by the International Energy Agency (IEA), unconventional natural gas will provide for 40% of the increase in global energy supply. IEA also estimates that total recoverable conventional gas resources can support 120 years of current consumption globally. Natural gas is also more environmentally friendly than coal. The ASEAN region will also rely less on oil for electricity generation over the next decade. Oil is the most expensive method of electricity production, and highly polluting. It is thus wiser to refine the oil and utilize these petroleum products in the transport sector. Cambodia currently 6 Copyright 2012 SMU Economics Intelligence Club

depends heavily on oil for electricity generation via diesel generators because it has yet to utilize coal or oil powered plants. Finally, when electricity generation is concerned, nuclear power plants remain a questionable alternative. Nuclear power does not contribute to global warming and climate changes, and can be a potential energy source as ASEAN currently lacks adequate domestic coal, gas and oil. Also, many ASEAN governments are currently subsidizing the cost of electricity and thus bear the burden of volatile fossil fuel import prices, and nuclear energy could be a way out of this predicament. However, nuclear power plants simultaneously pose a series of concerns high cost to develop, long lead time for construction of these plants, a lack of skilled technicians, difficulties in disposal of nuclear wastes, and need for constant maintenance. Terrorist attacks on these plants or during the transportation of radioactive materials are real issues, along with theft of radioactive or nuclear materials that could potentially occur. Incidents at these plants or during the transport of radioactive materials could release undesirable amounts of radioactive materials to the environment. As of the post-Fukushima era, Vietnam will continue on its plans to construct nuclear power plants. Agreements with Russia and Japan to build two 1000 MY reactors has been firmed up. Russia will embark on building the first plant in 2013. Indonesia, Malaysia, Singapore and the Philippines all continued studies on this option. Only Thailand has placed its nuclear projects on hold. Part 2 of this ASEAN energy series will look at the fuel subsidies in ASEAN and possible alternatives that ASEAN could consider.

Sources: 1. International Energy Agency 2. Energy Studies Institute 3. Paris International Energy Agency

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Wealthy & Healthy Or Not?

By Vera Soh, Singapore Management University
As ones BMI creeps higher, the risk of chronic diseases such as hypertension, diabetes, and heart disease soon follow. In the United States, a staggering 35% of the population is obese1. Americans are burning a whopping US$147 billion annually on obesity related healthcare expenditure instead of burning calories. Moreover, the medical expense of an obese employee is 42% higher than an average person. Holman Jenkins, a member of the Wall Street Journal editorial board, poignantly noted in Coke and the Calories Wars, that as the median person gets fatter, it becomes increasingly socially acceptable to be fat. Obesity in Singapore Numerous studies have shown a positive relationship between a countrys economic growth and its populations Body Mass Index (BMI). Although the obesity statistics in Singapore is not as chucky as in the US, the obesity rate here has more than doubled from 5.1% in 1992 to 10.8% in 2010 (National Health Survey). Figure 1 below shows the disturbing phenomenon of Singapores ever increasing obesity rate where a larger proportion of Singaporeans are at a higher risk of developing otherwise preventable chronic diseases. Today, at least 1 in 4 Singaporeans over the age of 40 suffer from at least one chronic disease. Figure 1: Prevalence of population who are obese (BMI equal or more than 30 kg/m) by age-group and year of NHS survey

It is common that people working in developed counties like Singapore and the US tend to be less physically active due to the demands of their daily job. Long hours of sedentary work, increased mental stress, greater car ownership and convenient public transport are some inevitable lifestyle changes that come with modernization and improved economic status. The 2010 National Health Survey (NHS) showed that only 19% of Singaporeans exercised at moderate to vigorous intensity regularly. Moreover, about 60% of Singaporeans eat out at least four times a week at hawker centers, food courts and fast food restaurants. These dining areas sell cheap meals often loaded with oil and sodium, while deprived of dietary fiber. The 8 Copyright 2012 SMU Economics Intelligence Club

reduced daily physical activity combined with a calorie dense but nutritionally sparse diet results in the piling on of extra body weight and fat. Consistency of F&B Industry & Populations Dietary Needs The expenditure on Food & Beverages (F&B) in Singapore expanded from US$8.3 billion in 2006 to US$11.4 billion in 2011s although the world went through a period of financial turmoil. This is reflective of not only the value that Singaporeans place on dining, but also the power of the F&B industry to influencing what we put into our mouths. However, the profit seeking goal of the F&B industry is often at odds with the populations nutritional needs. To maximize profits, many hawkers and restaurants use Monosodium Glutamate (MSG), to replace traditional, more tedious and expensive cooking methods. MSG is able to trick the taste buds into believing that the food is actually tasty. MSG comes at a fraction of the cost of wholesome ingredients. Most importantly, MSG helps the hawker minimize cost and maximize profits, as some consumers remain oblivious to its widespread use. Scientists have suggested that MSG, while also messing with the bodys appetite regulation, encourages overeating because the food now tastes better. Another common ploy is to have consumers filled up on oil and refined carbohydrates allowing the hawkers to skimp on meat and vegetables - yet another economic advantage for the food seller at our expense. Income Gap & Obesity Singapores Gini Coefficient2, after adjusting for government transfers and taxes, stands at a disturbing 0.459 in 2012. The city-state spots a similar trend to the US, where the problem of obesity is more prevalent among the less wealthy. 14.3% of individuals from Singaporean households with a monthly income of less than S$2000 are obese, compared to 8.8% of those who earned at least S$6000 per month. Refer to Figure 2. Figure 2: Obesity rate in lowest and highest income households in Singapore

Obesity Rate
16% 14% 12%

10%
8% 6% 4% 2% 0% < S$2000 > S$6000

Obesity Rate

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A simple explanation for this trend is that empty calories have become so cheap while healthy, wholesome foods are now more expensive. Nutritionally void and artificially flavored processed foods are now mass manufactured and thus much cheaper and affordable for low income families, compared to fresh nutritional produce. Healthier foods also carry a higher price tag. For example, the average retail price of ordinary white bread costs S$1.46 while the high-fiber option costs S$2.20. Since lower income families have a higher marginal propensity to save3, the high Glycemic Index (GI), nutritionally sparse white bread is considered the more practical food choice. Although such minute daily dietary choices might appear insignificant, these decisions accumulate over the years. Families in the lower socio-economic group often have other competing priorities such as housing, bills and education, causing healthy living to take a backseat. The way Singapores social safety net is structured also demands that lower income families save for rainy days and retirement, leaving little for the healthier and more expensive foods choices. As many adults in the lower end of the socio-economic scale work long hours or even hold a second job, food preparation and exercise become luxuries. The opportunity cost4 of spending time preparing healthy meals and exercising is extremely high. Lean Government Results in Lean Citizens? As Globosity hits, it is gaining more attention worldwide. Fat nations like the US and UK have been taking drastic and desperate measures to rewind the situation. Singapore, although not spared by the obesity disease, is faring much better. As seen in Figure 3 below, Singapore is high on the per capita GDP scale, yet relatively lower in terms of mean BMI. Figure 3: Relationship between Per Capita GDP and Mean BMI across countries

Source: Economics and Human Biology Despite being in a good global standing, that the obesity rate in Singapore has doubled since 10 Copyright 2012 SMU Economics Intelligence Club

1992 means that Singapore needs to continue the fight against obesity. Although there have been tremendous efforts by the government in keeping Singaporeans lean, the emphasis on individual responsibility for healthcare has also played a large role in helping us make healthy lifestyle choices. Indeed, the Singapore government is capable of keeping itself & its citizens lean.

1 Obese

Defined as a Body Mass Index (BMI) of 30 and above

2 Gini

Coefficient The Gini Coefficient is a measure of income inequality, with 0 being total income equality and 1 reflecting total inequality.
3 Marginal

Propensity to Save Proportion of total income or an increase in income that consumers save rather than spend on goods and services
4 Opportunity

Cost The loss of potential gain from other alternatives when a choice is made.

Sources: 4. Singapore National Health Survey 5. Yearbook of Statistics, Singapore 6. Singstat.gov.sg, Key Household Income Trends, 2012 7. The Singapore Family Physician, Vol. 38, A/Prof Goh Lee Gan, Dr Jonathan Pang, Obesity in Singapore, Prevention and Control 8. Global Conference on Business and Finance Proceedings, Volume 8, Tahereh Alavi Hojjat , The Economic Analysis of Obesity 9. Economics and Human Biology, Garry, Egger, Swinburn Boyd, and Islam F.M. Amirul. Economic Growth And Obesity; An Interesting Relationship With World-Wide Implications. 10. China Research and Intelligence

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What happened to the Indian Economy?

By Henry Chan, Singapore Management University

After Bernankes speech on May 22 hinted at the withdrawal of Quantitative Easing, the Indian rupee experienced a downward spiral, hitting an all-time low of 61.80 against the greenback early August. The currency lost a shocking 11% in less than 3 months; reminiscent of the 2008 post-Lehman crisis currency devaluation. Figure 1: USD-INR Exchange Rate

Source: Bloomberg The Indian government soon announced a series of draconian measures employing a mix of import control, foreign exchange control, economic opening and a tighter domestic money supply in a bid to defend the rupee. Former IMF Chief Economist, Raghuram Rajan, was appointed governor of the Bank Of India while Finance Minister Chidambaram reaffirmed Indias commitment to cut its current account deficit from 4.8% of GDP, USD 87.8 billion in fiscal year 2012 (April 2012 to March 2013) to 3.7% of GDP, USD 70 billion in the current fiscal year. Despite these measures, the rupee still hovers near its all-time low, while near term prognosis of the currency and the economy remains poor. For a country that was not so long ago hailed as another rising Asian economic power, poised to become the third largest economy by 2035, this crisis is indeed a black swan event to many observers. Indian economists divide the country's economic history to two distinct periods: preliberalization from 1947 to 1991, and post-liberalization from 1991 onwards. In the pre-liberalization period, economic policy carried the signature of Premier Nehru, a stalwart of the postcolonial Non-Aligned Movement, where industrialization was based on import substitution, economic interventionism, a large public sector and strong central planning. Economic growth hovered around 3-3.5% per year and per capita GDP grew at 1% 12 Copyright 2012 SMU Economics Intelligence Club

annually. This performance though steady, pales in comparison to that of other dynamic East Asian countries. Although some policy shifts toward liberalization were adopted in the late 1970s, the subsequent government policy of Fabian socialism in the 1980s hampered this process, worsening the current account deficit and sending the country into an even deeper fiscal deficit. The collapse of Soviet Union, the major trading partner of India at that time, along with the Gulf War in the early 1990s caused a surge in oil prices, throwing the Indian economy into its worst crisis in 1991. India was forced to pledge its gold reserves to secure a USD 1.8 billion bailout loan from IMF. The post liberalization period marked the dismantling of most of the license system; reducing tariffs, cutting interest rates and ending many public monopolies. Although contentious issues such as labor law reform, reducing agricultural subsidy and privatization of the remaining government monopoly were not tackled, the country had substantially reduced state control over the economy, enabling a move towards a free-market economy with increased financial liberalization. GDP growth rate since liberalization has average close to 6%, with an accelerating trend since 2005. It is noteworthy that the country's GDP growth rate exceeded 9% in 5 of the 7 years between 2005 and 2011. Even during the global financial crisis, India managed growth above 6% in 2008/9. The following graph of Indias GDP clearly indicates the takeoff in growth post 1991, and the exponential acceleration post 2005 A notable point is that even in the pre-liberalization era, India's economic growth though low, is relatively stable. Figure 2: India GDP

The graph below depicts the relatively balanced growth between investment and savings in recent years. India was able to mobilize domestic resources to finance its economic expansion, keeping a stable investment-savings gap. The government's official external debt is less than 25% of its GDP, and its debt-to-GDP ratio is less 7%. Most of the domestic macroeconomic indicators also remained relatively stable in the post liberalization era until 2008.

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Figure 3: India Investment & Savings as % of GDP

India Export & import growth rate What then, is the cause of Indias foreign exchange crisis today? Indian Finance Minister Chidambaram provided the answer to the present currency crisis in his speech before Peterson Institute for International Economics on April 19, 2013. In his speech, Chidambaram identified three problems: (1) The present current account problem can be traced to the excessive stimulus packages adopted in quick succession, post 2008 Lehman crisis. He characterized the first package as necessary; the second as questionable; and the third as avoidable. Though the stimulus packages stabilized the economy, allowing India to enjoy two years of good growth in 2010 and 2011, their side effects entailed economic instability in succeeding years. The excessive stimulus caused the spiraling government deficit, and a high inflation. (2) Extended periods of loose monetary policy in the US resulted in an avalanche of cheap speculative capital inflow to India. India's investment is well provided for by its domestic savings and much of the inflow from the Feds QE went into financing unproductive spending, fueling Indias current account deficit. The country's foreign debt surged as India became addicted to the inflow which was used to finance its current account deficit. Data showing the top 10 Indian conglomerates owing USD 100 billion in foreign debt revealed the dark side of easy money. That the finance minister had voiced deep concern on QE withdrawal in the April speech is an ominous sign. (3) India had a deep rooted problem on the supply side of the economy. Project implementation is the weak link and India failed to build up its infrastructure to channel the speculative inflow to productive ventures.

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Figure 4: India Government Budget

Source: Trading Economics Figure 5: India Current Account

Source: Trading Economics Figure 6: India Inflation Rate

Source: Trading Economics

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Figure 7: India External Debt

Source: Trading Economics India faces USD 172 billion of public & private debt due this fiscal year which would require refinancing, and obtain $280 billion in foreign exchange reserves to finance 7 months of import. India's USD 2 trillion dollar economy, in a stable macroeconomic environment would have no problem handling the current foreign exchange adjustment. However, under todays slower growth conditions and a depreciating currency, solving current account crisis lies in stemming capital flight of foreign holdings of debt, stock and bank deposit of non-resident Indian which totals USD 370 billion. With Indias relatively weaker manufacturing economy and an industrial share of GDP at approximately 27%, a depreciating currency, which typically boosts exports, would not be as beneficial for the economy. Likewise, liberalizing Foreign Direct Investment will bring long term benefit rather than plugging the short term current account deficit gap. Credibility of Indias economic team has now become an important factor in keeping money in the Indian economy. Recent measures have generated notable improvements in the fiscal and foreign trade area. An improvement in the trajectory of its current account and fiscal space, if capital flight does not occur, can be expected. Indias weakest link now appears to be its banks credit quality outlook. However, with 75% of bank asset in the state banking sector, it is unlikely that a banking crisis is in the horizon. The trajectory of USD rate increase will be an important factor in the adjustment process. A looming complication to Indias crisis will be the shift of US monetary policy that would reverse capital flows that India is heavily dependent upon to plug its large and persistent current account deficits. The three points identified by Minister Chidambaram are serious economic problems faced by developing countries. Investment bank Morgan Stanley identified "the fragile five" currencies that they consider the most at risk under QE withdrawal: the Brazilian real, Indian rupee, Turkish lira, South Africa rand and the Indonesian rupiah three of which are part of the BRICS, and Indonesia, an economic leader of ASEAN, accounting for almost 40% of the regional block's output. It is expected that the Fed will taper its monetary stimulus in the coming months. The spillover effects of rising interest rates in the US, and its impact on India and other developing countries, is one to watch.

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Sources: 1. Trading Economics 2. World Bank 3. Bloomberg

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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 / Writer) vera.soh.2011@economics.smu.edu.sg Singapore Management University Singapore Samuel Ong (Publications Director/ Editor) samuel.ong.2010@business.smu.edu.sg Singapore Management University Singapore Ng Yongxiang (Marketing Director) yx.ng.2011@accountancy.smu.edu.sg Singapore Management University Singapore Tan Kwan Hong (Writer) Undergraduate School of Economics Singapore Management University kwanhongtan.2009@economics.smu.edu.sg Ng Jia Wei (Vice President, Operations) jiawei.ng.2012@economics.smu.edu.sg Singapore Management University Singapore Yingyu Zeng (Liaison Officer) yingyu.zeng.2010@economics.smu.edu.sg Singapore Management University Singapore Darren Goh Xian Yong (Editor) darren.goh.2010@business.smu.edu.sg Singapore Management University Singapore Henry Chan (Writer) Postgraduate Lee Kong Chian School of Business Singapore Management University henry.chan.2012@phdgm.smu.edu.sg

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