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To save or not to save

Consumption is also a matter of how much income is put aside for savings, and the answer often depends on the interest rate consumers are offered. It works both ways. High interest rates will deter consumers from borrowing (i.e. to consume more), while it promotes saving since interest income from savings increases.

Given this dynamic, HSBC said the Philippines and Thailand would see the largest adjustment in economy-wide savings, while Malaysia should see the smallest adjustment. “We think Bank Negara Malaysia (BNM) will likely normalise rates to pre-pandemic levels, while the remaining central banks may raise rates high enough to make monetary policy relatively restrictive to rein in demand. At the top of the list is the Philippines. We expect the Bangko Sentral ng Pilipinas (BSP) to raise rates to as high as 250bp above pre-pandemic levels, which should take a toll on overall borrowing and consumption”, said HSBC.

True enough, ASEAN economies that will likely see monetary policy in restrictive territory are those that saw their economy-wide saving rate decline from 2020 to 2022, with Singapore an exception. Keeping interest rates high will be necessary to bring the saving rate back to pre-pandemic levels to narrow the current account deficits and promote macroeconomic stability – but at the expense of lower domestic absorption, including potentially consumer spending, as liquidity gets mopped up in the economy.

“Even at a household level, the saving rates in some ASEAN economies may have gone down. Households may have dipped into their savings due to pent-up demand from the economies’ ‘re-opening’ or to cope with the higher cost of living (as the purchasing power of workers deteriorated). For example, based on household surveys, households in the Philippines are finding it more and more difficult to put aside a portion of their income for savings”, added HSBC.

One interesting observation in Indonesia is that, despite the unleashing of pent-up consumption demand, household financial savings rose in 2022, but with a difference – moving away from deposits towards investment in long-dated bonds. This is key. HSBC believes policymakers took appropriate steps that kept the saving rate from falling too sharply, which would have contributed into a weaker external position. They started later than many other emerging markets but eventually raised policy rates by 225bp, pushing real rates into the neutral range. High rates, in turn, helped incentivise household saving (which did not fall despite an outpouring of pent-up consumption demand). And, a still low credit-to-deposit ratio kept a lid on deposit rates, moving savings towards government bonds, thereby supporting the bond market.

Fundamentals to “save” the day

The Philippines and Thailand will likely take the biggest hit as their central banks are taking a relatively hawkish stance to bring the economy-wide saving rate back up, striking a balance between consumption and macroeconomic stability. More so in the Philippines than in Thailand as Thailand’s prospects for both consumption and stability will likely be bolstered by the recovery of tourism.

To a lesser degree, Indonesia too may see consumption ease as the fiscal authorities lower oil subsidies, while monetary authorities keep rates high. However, the rise in real wages, supported by the commodity boom of 2022, should lend some much-needed support.

All data point to the Philippines slowing down the most – not favourable news for an economy so driven by private consumption (c70% of GDP). Nonetheless, its fundamentals too should help smooth household consumption or at least put a floor on how much it could slow. For instance, the Philippines has one of the most favourable demographic profiles. The fertility rate in the Philippines is the highest in ASEAN at 2.7, while the median age is only 25 years. Therefore, consumption will likely slow but not free-fall due to a rising working age population.

HSBC said remittances from overseas workers, which usually consist of more than 8% of GDP, can also smooth out incomes and consumption to some extent. Remittances usually rise in the Philippines during hard times. For instance, remittances in PHP terms grew significantly above trend in 2022 amid the current 14-year high inflation. With borders open this year, the number of overseas Filipino workers will likely continue to rise, ensuring a steady flow of remittances to help families back home cope with the challenges of 2023.