SMU Political-Economic Exchange

AN SMU ECONOMICS INTELLIGENCE CLUB PRODUCTION - ASEANs Energy Architecture: Needs, Challenges and Solutions (Part 2) - A boom or a bubble? A look at Myanmar Real Estate Sector - The Danish Model
The Fortnight In Brief (19th August to 1st September) US: Q2 GDP revised up, Obama looks to Congress US 2nd quarter GDP grew at an annualized 2.5 percent, up from an initial estimate of 1.7 percent, buoyed by the largest gain in exports in over two years. Though the second quarter expansion was markedly quicker than the first quarters 1.1 percent, the economy needs in excess of 3 percent to make up for lost ground. While fiscal tightening continues its drag on the economy, corporate spending grew at a 9.9 percent annualized rate. Consumer confidence for August also fell from a six-year high as Treasuries continued its 4-month decline, and concerns brewed over Middle-East tensions. Asia: Depreciation of Rupee does little for current account deficit The Indian Rupee has led the decline in emerging market currencies in the prior few months, dropping by more than 23% since the start of May. Reacting to the fall in currency, India reported an increase of exports of 11.6% YoY for July, the best increase in more than 12 months. However, the current account deficit for the nation still stubbornly remains above 9% of GDP, indicating that the depreciation of the Rupee has had no substantial impact, at least in the near term. With the CPI of 9.6% in July, gains for exporters from currency depreciation are diminished. The prospects of Indias Trading Partners, namely China, also seem grim. While structural problems are recognized by the government, national elections are due next year and it is unlikely that politically charged reforms will be undertaken. EU: High unemployment despite improvement in sentiment Confidence among business managers rose for the fourth consecutive month by 2.7 points to 95.2 underlining the recovery in the Eurozone. Meanwhile, Eurostat, EUs statistics agency, predicted an annual CPI of 1.3%, lower than the 1.6% in the prior month, led by a drop in energy prices. This can potentially put the Eurozone in a path of stronger recovery as households have more spending power. However, despite the positive sentiment, unemployment remains stubbornly high at 12.1% in July, with more than 1 in 4 unemployed in Greece and Spain.
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ASEANs Energy Architecture: Needs, Challenges and Solutions (Part 2)

By Tan Kwan Hong, Singapore Management University
In the previous issue of SPEX, Kwan Hong presented his analysis on ASEAN Energy Supply and Demand Balance. This week, he considers fuel subsidies in ASEAN and possible alternatives that ASEAN could adopt. Transport Fuel Utilization in ASEAN The transport sectors of Indonesia, Malaysia, Singapore, Thailand, Vietnam and the Philippines accounted for 17-35% of total energy consumption in 2009 (Exhibit 1). Exhibit 1: Energy Usage in the Transport Sector

Source: International Energy Institute, 2011 Transport consumption is positively correlated to economic growth, and vehicle population for several ASEAN countries (Indonesia, Malaysia, Singapore, Thailand, Vietnam and the Philippines) combined are expected to grow from 10 million vehicles in 1990, to 79 million in 2030 (Exhibit 2). Exhibit 2: Vehicle Population of several ASEAN Countries (Indonesia, Malaysia, Singapore, Thailand, Vietnam and the Philippines) Combined till 2030

Source: Asia Pacific Energy Research Centre, APEC Energy Demand and Supply Outlook 4th Edition, 2009 2 Copyright 2013 SMU Economics Intelligence Club

The projected transport sector consumption of energy of these same countries combined is estimated to rise from 87 Mtoe in 2007 to 176 Mtoe in 2020, and to 299 Mtoe in 2030 (Exhibit 3). Exhibit 3: Projected Transport Sector Consumption of Energy of several ASEAN Countries (Indonesia, Malaysia, Singapore, Thailand, Vietnam and the Philippines) Combined till 2030

Source: Institute of Energy Economics, 3rd ASEAN Energy Outlook, Japan 2011 Correspondingly, the share of energy due to transport consumption is estimated to rise from 24.6% in 2007 to 29.2% by 2020, and will rise marginally once more to 31% in 2030. In per capita terms, this translates to a surge from 26 vehicles per 1000 persons in 2010, to 127 vehicles per 1000 persons in 2030, a massive 492% increase (Exhibit 4)! Exhibit 4: Vehicle Population Per Capita

Source: APERC, APEC Energy Demand and Supply Outlook, 4th Edition Heavy Reliance on Petroleum Product Imports Apart from the growing energy demands from transport that ASEAN has to cope with, ASEANs reliance on petroleum product imports sees a rising trend. Around 1999, ASEAN went from being a net exporter to a net importer of petroleum products (Exhibit 5). 3 Copyright 2012 SMU Economics Intelligence Club

Exhibit 5: Import-Export of Petroleum Products

Source: International Energy Agency (IEA), 2011 And among all ASEAN countries, Cambodia and Laos have to import all their required refined products due to the non-existence of refineries in their country (Exhibit 6). Thus, these countries are most exposed to price volatilities of refined products, and energy security due to refined products remains a concern. Exhibit 6: ASEAN Refinery Capacities

Source: EIA Countries Data, 2009 Fuel Subsidies a Major Problem The provision of fuel subsidies by some ASEAN countries (Malaysia and Indonesia have the highest expenditures on fuel subsidies, while the Philippines and Thailand provide targeted subsidies for public transport) (Exhibit 7) might reduce the governments fiscal budget needed to fund alternative development programmes, especially those targeted towards the lower income group. Fuel subsidies also create a strain on government budgets, particularly in times of high fuel prices. These subsidies also distort economic prices, discourage energy efficiency improvements and promote wasteful consumption.

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Exhibit 7: 2010 Pump Prices (US$ Per Litre) in ASEAN Countries

Source: World Bank, 2012 Additionally, inequality in subsidies might also exist. In Indonesia, high income families benefit the most, as 40% of these high income families benefit from 70% of the fuel subsidies, while 40% of the lowest income families benefit from 15% of the subsidies. In 2011, fuel subsidies eroded about $14 billion or 11% of Indonesias state budget, far exceeding the $2.3 billion devoted to education and health combined. Exhibit 8: ASEAN Retail Prices of Gasoline and Diesel by Country, August 2009

Note: MOPS in Mean of Platts Singapore Sources: FACTS Global Energy, International Energy Agency, World Energy Outlook 2009 (Reference Scenario) Singapore is the only ASEAN country to dispense with fuel subsidies. However, diesel and gasoline prices are most expensive out of all ASEAN countries (Exhibits 7 and 8). Ending Fuel Subsidies Although many ASEAN countries have had intentions to reduce or eradicate fuel subsidies due to high oil prices that had put a strain on government expenditure, it has been difficult to do 5 Copyright 2012 SMU Economics Intelligence Club

so without arousing public objection. For example, in 1998, a rise in fuel prices in Indonesia sparked off student-led riots, which ended President Suhartos 32-year presidentship. Ten years later, in 2008, an oil subsidy cut in Malaysia triggered student protests, of which resulted in the ruling coalition losing a third of its parliamentary seats and control of five states to the opposition. More recently, in April 2012, weeks of protests forced the Indonesian government to overturn plans calling for an immediate surge in fuel prices. Strategies to End Fuel Subsidies Grasping the right timing to remove fuel subsidies is key when it comes to minimizing the impact of political fallout. In April 2012, the Taiwanese government, upon foreseeing no major elections coming up for the next four years, took advantage of that timing to eradicate fuel subsidies and raise petrol prices by 10%. Moments of relatively low oil prices could also constitute golden opportunities in the removal of fuel subsidies. In 2009, oil prices were at around $35 per barrel, compared to over $100 per barrel today. Regional Power and Gas Pipeline Networks Energy was identified as a key area of cooperation since the founding of ASEAN in 1967. Initially, cooperation was perceived as the best way of enhancing energy security. However, in recent years, the role of environment on this process is increasing seen as vital. These principles were significant in shaping ASEANs approach to energy security. In 1997, the Heads of State at the Second ASEAN Informal Summit in Kuala Lumpur envisioned an energyintegrated ASEAN, to be spearheaded by two ambitious projects: Exhibit 9: Map of the Proposed ASEAN Power Grid and Gas Pipeline Network Projects

Source: Aseanenergy.org

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Exhibit 10: Map of the Trans-ASEAN Gas Pipeline (TAGP)

Source: ASCOPE Secretariat Slow Progress on the APG and TAGP However, progress on such projects on a mega-scale has been slow, and is expected to remain slow going forward, given the complexity and scale of the task. For the APG, existing grid connections have been mainly driven by bilateral arrangements, signifying that full-fledge electricity trading on an ASEAN level might not materialize in the near term. Furthermore, progress on the TAGP did not turn out as expected, as most developments achieved to date are on bilateral arrangements. Transformations in the natural gas market coupled with technological advancements have caused impediments to the expansions of the TAGP and its development plan as previously envisioned. Finally, the flexibility of transporting and storing Liquefied Natural Gas (LNG), a substitute to pipeline transportation of gas, would most likely win over governments in the region. The Potential Role of Renewable Energy While energy cooperation might be an uphill task due to both the increasing demand pressures for energy consumption and to the numerous challenges expounded upon throughout this article, a silver lining exist for an environmentally-friendly ASEAN: Several major ASEAN countries have pledged to reduce carbon emissions and energy intensity (Exhibit 11). Of which, Indonesia has shown the greatest potential for adopting renewable energy sources by 2030 (Exhibit 12). Indonesia and the Philippines will possess large geothermal reserves.

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Exhibit 11: Carbon and Energy Reduction Targets of Selected ASEAN, ASEAN+3 Countries

Source: Energy Studies Institute Exhibit 12: Strong Renewable Energy Potential at Selected ASEAN Countries

Source: International Energy Agency (IEA), 2011 However, despite the large potential of renewable energy sources, wind, solar, geothermal and hydropower sources of energy can at best, play a supplementary role to fossil fuels, as the latter will remain the undisputed primary energy source for ASEAN. The demand for bio-fuels is also expected to soar in meeting the increasing demand for private vehicles. Additionally, the decline in the regions oil reserve, and the huge reliance on oil imports that result in worsening trade balances and an outflow of foreign exchange reserves are divers in increasing bio-fuel demands in the region. If this pans out well, countries will reduce their risks and exposure to the rising prices of oil, and governments can even reduce oil subsidization to improve their fiscal position over the long run. The development of the bio-fuel industry to meet the soaring demand can also potentially lift thousands of rural residents out of poverty.

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Currently, ASEANs major bio-fuel produces are Indonesia, Malaysia, Thailand and the Philippines, and will likely remain so. Despite the large potential for bio-fuels as an energy source, governments will need to mitigate the side effects that come with its usage. Deforestation, soil and water depletion, loss of biodiversity and farmland, eutrophication and haze are all potential risks. The potential reduction of overall carbon dioxide emissions is also questionable, given the high-energy consumption of bio-fuels. Further, the first generation of bio-fuels is food crops. Increasing demand for these crops can put undesired pressure on oil prices and even exacerbate poverty. The Fifth Fuel: Energy Efficiency Finally, enhancing energy efficiency is an often-overlooked factor in ASEAN energy policy developments. Several ASEAN countries face high transmission and distribution losses of electricity (Exhibit 13). This adds on to wasted resources, and to the cost of energy production. Exhibit 13: Poor Energy Efficiency in ASEAN

Source: Energy Studies Institute ASEAN must therefore convey the right message that emphasizes how energy efficiency can contribute to economic growth, diverting more attention to such important issues apart from climate change mitigation. Countries will also need scale up energy efficiency via technological improvements and adopt energy-saving best practices. A two-pronged strategy of regulatory best practices and financial incentives are needed to promote energy efficient market transformations, and their exact composition will vary from country to country. Governments could also tap into carbon financing as a major financial incentive to help scale up energy efficiency in markets.

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Conclusion and Outlook Before large scale ASEAN energy initiatives can be implemented successfully, it is recommended that countries have their respective challenges fixed on the national level first and foremost, before the benefits of regional cooperation can be materialized. ASEAN countries face vastly different national energy challenges, from improving rural electrification in Myanmar to reducing energy subsidies in Malaysia and Indonesia (Exhibit 14). The success of major programmes adopted by individual countries towards improving access to electricity is vital (Exhibit 15). Thus, policies, programmes and challenges on a national level will affect multilateral energy cooperation on a regional platform. Exhibit 14: Key Energy Challenges in Each Country

Source: International Energy Agency, World Energy Outlook 2009 (Reference Scenario) Exhibit 15: Major Programmes and Targets for Improving Access to Electricity in ASEAN

Source: International Energy Agency, World Energy Outlook 2011 10 Copyright 2013 SMU Economics Intelligence Club

To build momentum for future energy projects on a mega scale, ASEAN can start by leveraging on each countrys common goal for environmental well-being and carbon emission reduction. This will get countries to start of at the same page so as to build momentum for deeper cooperation in subsequent meetings. Countries should also jointly recognize price volatilities of current major sources of energy, as well as the increasing demand for energy in the next decade. Such a common recognition will help to better facilitate closer cooperation towards the diversification of energy sources, sharing of expertise for enhancing energy efficiency, and for creating a joint energy pool. The co-development of new energy technologies for efficient energy production is also another commonly overlooked avenue for cooperation that has scope for improvements. Beyond the realm of energy policy-making, helping to expedite the development and urbanization of underdeveloped countries, especially Myanmar, will be an imperative for the successful implementation of future ASEAN energy policies. Having member countries that are more urbanized and developed can lead to more regional economic and trade benefits, for example, by raising intra-regional trade through increased import consumption due to increased income. Any hopes for an ASEAN joint energy market where energy can be traded through an integrated platform, and where financial instruments can be utilized for risk mitigation, risk transfer, hedging and transactional purposes, can thus be built upon this foundation. The private sector operating in the energy sector also has a major role to play. Increasingly, these businesses will have to shift from a pre-dominantly localized mindset into a more regionalized mindset. For example, cooperate development strategies and market segmentation strategies will increasingly have to bear into consideration the ASEAN customer base (not just the local customer base), ASEAN stakeholders, rules and regulations of ASEAN countries etc. Have a regionalized mindset that is acutely aware of the specific energy needs of individual markets will allow companies to adapt to the increasingly integrated ASEAN energy market in the next two decades. Finally, ASEAN needs to recognize that the most favorable time for energy cooperation is NOW. Opportunities presented due to technological developments and new energy best practices are aplenty. The region also has the potential to leapfrog to the newest energy technologies, and not go through the inefficient and environmentally degrading industrial and energy revolutions that the rest of the world went through. Fostering a greater energy interdependence will also lead to greater economic and security interdependence, thus paving the way for more intimate joint cooperation via an enlightened leadership in the future. Sources: 1. International Energy Institute 2. Asia Pacific Energy Research Centre 3. Institute of Energy Economics 4. International Energy Agency 5. EIA Countries Data 11 Copyright 2012 SMU Economics Intelligence Club

6. World Bank 7. FACTS Global Energy 8. ASCOPE Secretariat 9. Aseanenergy.org 10. Energy Studies Institute

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A boom or a bubble? A look at Myanmar Real Estate Sector

By Myat Thiha, Singapore Management University
Myanmar, an emerging economy with a population of 60 million, has, under the current government opened up to the outer world, creating opportunities for those willing to acquaint with the once-pariah country. While its fairly large consumer market is a major attraction for businesses, Myanmars skyrocketing real estate prices in major cities, like Yangon, pose as one of the big obstacles for some businesses to break into its consumer market. Until recently, Myanmars real estate sector had remained relatively passive compared to its neighbors and did not look like the attractive investment it soon became. As its economy opens, the once-sluggish real estate market quickly skyrocketed in value within a couple of years. Today, the price per square foot for commercial office space in some prime areas of Yangon has even surpassed that of New York. Exhibit 1: Comparison of property prices in some areas of Yangon (base time = 2011 August price per sqft)
2000% 1800% 1600% 1400%
1200% 1000% 800% 600% 400% 200% 0% 2011 August 2012 July 2013 August Note: Timeline is drawn to scale Bahan Township Hlaing Township

North Dagon

Source: Local Property Journals Why the surge in real estate market prices Several reasons could explain the skyrocketing real estate market, the most important three are: 1. a sudden increase in land and property demand and slow expansion of urban area; 2. speculation; and 3. implementation of a five-year property tax holiday. Myanmars dramatic economic reform has attracted many foreign investors to do business there. Along with the foreign investment law, which allows foreign businesses to operate without the need for a joint venture with local businesses, increasing amounts of investment capital are flowing into Myanmar as foreign investors look to break into this economy. As the demand for land and office area rapidly increases, expansion of urban areas in these big cities, especially Yangon, has been unable to keep up. The time required for cities to absorb the suburbs as well as budget limitations on infrastructure are putting a lid on the supply of available space. 13 Copyright 2012 SMU Economics Intelligence Club

As Myanmars real estate market grows consequent to the countrys economic liberalization, speculation has also become a big contributor to the skyrocketing prices. Expecting that the real estate market would be increasingly profitable, investors who could afford a piece of land quickly flocked to the market to get in on the action. After an announcement by the Burmese government to build a bridge connecting Yangon to the Dala region, investors rushed to grab any available land on either sides of the Yangon River, on expectation that the once remote Dala would soon see development. Dala saw real estate prices surge more than fivefold. Cautious of such booms, the bridge building project has been suspended until the end of the current administration in 2015. Also, the governments implementation of a five-year property tax holiday from 2007 to 2012 not only attracted investors but also of those with dirty money in need of laundering. In the five years of the property tax holiday, money launderers and tax evaders managed to get in on Myanmars lucrative real estate. Although a buyer-side 30 percent transaction tax and 7 percent stamp tax was implemented August last year, huge amounts of black money had already entered the market. Should the government intervene in the real estate market? The proponents of government intervention are basing their arguments on the greater equality by redistributing the wealth to improve equality of opportunity and outcome. Their suggestions include the progressivity in the tax system, implementation of property taxes and imposing higher taxes on property buyers who cannot disclose the source of their income. Those on the other side of the debate, however, believe that government intervention would only make the real estate sector worse, and that a free market would best determine prices. In fact, some economists have urged the government to allow the market to fluctuate freely on supply and demand forces, without any intervention. Conclusion The sky-high prices in Myanmars real estate sector is one of the big obstacles to its development. Many businesses are beginning to look past Myanmar due to its extremely high prices along with the lack of basic infrastructure such as electricity and water. If the wrong decisions are made in attempt to cool the property market, the consequence to Myanmars development could be dire. The real estate market in Myanmar is currently driven by a high demand for housing and office space in the big cities. Although these prices are too high to be sustainable in the long run, the government should not directly intervene to cool it down. Instead, its focus should be turned to facilitating the real estate market through expansion of cities into suburban areas and shoring up Myanmars infrastructure to sufficiently support these growing cities. In the long run, be it through gradual cooling down of a boom or the eventual burst of the property bubble, the current demand-driven real estate market should settle down to a sustainable state. Sources: 1. International Business Times 2. Property Report

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The Danish Model

By Akshay Maheshwari, Singapore Management University

Denmark has a diverse economy, which relies mostly on its human resources. It has scarce mineral resources comprising of a few oil and gas assets in the North Sea. With an economy the 32nd largest in the world, Denmark has the worlds lowest level of economic inequality and highest minimum wage, making it the happiest country in the world. Flexicurity To understand how Denmark attained its happiness, it is important to understand the Danish economic model. The Danish model is also known as the flexicurity model. The term flexicurity model was first coined by the Danish PM in 1990s. The Danish flexicurity model is described as a golden triangle combining a flexible labor market with low dismissal protection, a relatively generous social security system (notably in unemployment benefits and social assistance), and active labor market and education policies (Madsen, 1999; Bredgaard et al., 2005). It is very important to understand that flexicurity was only identified as the national strategy in a retrospective analysis. This means that the intention was never to make something called a flexicurity model, instead it was just to solve certain aspects of the economy at a given time and it is only by chance that the combination of measures turned out to become a flexicurity model. The Path to Low Inequality Denmark developed as a welfare state through the interwar period but accelerated after WW2 with expanded social benefits and free education. In 1956, universal coverage of retirement was approved for people over the age of 65, independent of former employment and income (Jrgensen, 2008). In 1973, a compulsory health insurance program funded through government tax revenue replaced sickness funds and other forms of health insurance. An extensive safety net became the norm. By the late 20th century, Denmarks comprehensive welfare state also sought to promote social cohesion and equality through maternity and paternity leave, childcare, and extensive cultural and educational programs. This is how the flexicurity model came to be. As a result, Denmark is the worlds most equal developed country, measured by the Gini coefficient of income distribution. Exhibit 1: Denmark Indicators Income Equality (Gini Coefficient) .25 Days to start a business 6 Corporate Tax rate Income Tax and Social Security 55% Union Density Collective Bargaining Coverage 87% Trade as % GDP 54%

25%

70%

Note: All data as of 2011 extracted from The World Bank The Danish Model There are few important things to understand about this Denmark model: 15 Copyright 2012 SMU Economics Intelligence Club

Even though there are substantial unemployment benefits, people in Denmark are not disincentivised to work because there are other pleasures and benefits that one receives from working, for example, a feeling of satisfaction to be giving back to the society. The Income tax rate in this welfare state ranges from 40%-63%, depending on income. This helps in redistributing the wealth amongst everyone in the economy and has primarily shaped the minds of all Danes in the same way of helping others in the society. One of the major drawbacks of the model that is now being realized is that even though there is a very high turnover rate in the market, there is more of a structured unemployment problem where people cannot easily move across different sectors in their economy. But the government has made opportunities available to people to study and improve their skills in various sectors to obtain gainful employment. Why then, can this model not be copied by most of the other nations in the world? This models true strength lies in the fact that most people in Denmark are Danish i.e. they come from the same background, same religion and have been affected similarly by events in the pasts like wars etc. This gives them a unity like no other. This is what drives their belief in helping each other and progress together. Immigration has been low, thereby not affecting the basic mix of the population. It is difficult to find such similar situations in other economies. The outgoing head of LO argued in a speech at the annual party congress in 2007: When I was young, security meant having a good, solid job. This was not very excitingbut in a way, it was very safe. This security disappeared as globalization emerged. Security is no longer to hold on desperately to the same job throughout your life. Security is to stay cool when you hear rumours of outsourcing from the boardroom. Because deep down you know that you have solid skills and that you will quickly be able to find a new job if the old one is relocated. Security is not to be able to stay on. Security is to be able to move. It is precisely this new security through training and education that we have now embarked on creating for every worker . The above quote explains well the way the Danes approach the market in todays world. The whole idea of job security is different from what people around the world think it to be. It is because of such small but important differences in perception that has built a strong, prosperous economy like Denmark. Conclusion The rest of the world needs to learn and adapt such an attitude from the Danes and other Scandinavian countries. This along with a successful (and possibly different) version of flexicurity model may help in improving the welfare of the people along with economic prosperity.

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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) 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 Myat Thiha Undergraduate Lee Kong Chian School of Business Singapore Management University tkmyat.2010@business.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 Akshay Maheshwari (Writer) Undergraduate School of Economics Singapore Management University akshaym.2011@economics.smu.edu.sg

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