Grant Thornton IBR: Record ASEAN business confidence under threat from US rate rises in Q2 2018

Global survey finds ASEANbusinesses optimistic – but exchange rate concerns are growing

·      ASEAN business optimism increases to net 64% – arecord high

·      Significant quarterly increase in Malaysia (+24pp)

·      But concerns over exchange rate fluctuations alsoup across ASEAN to 36%, driven by worries over US Fed rate rises

Growing concerns over exchangerate fluctuations among South East Asian (ASEAN) businesses threaten to reversetheir positive outlook, according to new research from Grant Thornton’sInternational Business Report (IBR). The findings come as business optimismacross the region reaches the highest level ever recorded. The new high is theculmination of four quarters of consecutive growth in optimism and reflectsgreater regional economic cooperation in recent years.

Business optimism among ASEANfirms sits at net 64% in Q2 2018. This is up three percentage points from Q1and compares with net 46% a year ago. In Malaysia, business optimism has leapt24pp to net 52% in Q2, while in the Philippines it has increased 8pp to net82%. Indonesian businesses remain overwhelmingly optimistic at net 98% – thehighest among the countries surveyed.

But the research also finds thatbehind the confidence hides a threat. There are growing concerns about exchangerate fluctuations, driven by the prospect of further US Federal Reserve raterises this year. The proportion of ASEAN business leaders citing exchange ratefluctuations as a constraint on their ability to grow sits at 36%. This is asharp increase from 29% in Q1 and 26% in Q4 2017. In the Philippines, concernshave increased by 8pp this quarter, in Singapore by 14pp and in Malaysia by18pp.

The record levels of optimism aregreat to see. They are undoubtedly pushed upwards by the continued growth ofChina, a close trading partner for many of the region’s economies. But what’sreally encouraging to see is the greater focus on regional cooperation sincethe formation of the ASEAN Economic Community in 2015. Closer ties betweenbusinesses will provide the future fabric for growth in the region in the yearsahead.

It’s unfortunate that exchangerate concerns have recently emerged. With many businesses across ASEAN stillborrowing in US dollars, fears over rate rises could easily blow businessconfidence off course. US interest rates have gone up once this year and moreincreases look likely.

The IBR data reveals that despitethe overall increase in ASEAN business optimism, in Singapore it decreasedslightly from net 34% to net 32% and in Thailand from net 16% to net 2%.Furthermore, exchanges rates are not the only potential drag on confidence.Expectations for increased employment across the region have fallen from net37% to net 31% – the lowest since the end of 2016.

It’s not an easy situation for businesses.However, action can be taken to reduce the risks associated with a reliance onUS dollars. One option is to hedge and lock in a more predictable exchange ratefor a period of time.

Alternatively, firmsare faced with the decision to pass increased costs on to customers throughhigher prices, or absorb the costs themselves, impacting their profits.