Bangkok--23 Dec--HSBC Thailand
The need for SOE reform is not unique to China: Vietnam, Malaysia, India, and Indonesia all have large public sectors
SOE reforms are needed across the region, but the necessary reforms vary by country: Asia has succeeded in the past
Such reforms will not only boost productivity growth, but also help curb financial risks and the inefficient allocation of capital
It should be no surprise that state-owned enterprises (SOEs) constitute an important share of economic activity in Asia. China and Vietnam, two former command-economies that underwent sweeping market reforms, come to mind first. Despite the rapid growth of the private sectors in both economies, SOEs still possess the lion's share of fixed assets and account for a significant chunk of industrial output. In Asia more broadly, we estimate that as much as 30% of asset ownership and up to 25% of investment can be attributed to SOEs - led by China and Vietnam (see page 2).
Yet it is less well-known that SOEs are very much prevalent in the rest of EM Asia, above all in Indonesia, India, and Malaysia. Even Singapore - a city state and financial hub known for high standards of corporate governance - government linked companies (GLCs) make up roughly a third of the local equity market, contribute to the budget, and are relatively isolated from government influence, thus offering a model for other countries to follow. At the opposite end of the spectrum, Korea, the Philippines, and Taiwan have relatively small public sectors, in part thanks to successful privatization programs implemented in the 1990s and 2000s, at times under the auspices of the IMF.
What is clear, however, is that where SOEs are prevalent and dominant, their low efficiency can weigh down overall productivity growth - which has been suffering in recent years (see: Frederic Neumann, Engine trouble: Asia's productivity challenge, 19 October 2016) and in the case of China's massive public sector, the implications resonate on a global scale, particularly in relation to commodity prices, but also growth and financial stability. Effectively privatizing or reforming SOEs is a key challenge for many Asian economies and not just China. Encouragingly, SOE reform is an area where policymakers can tangibly improve productivity by way of relatively straight-forward, albeit politically difficult reforms that crowd-in private investment (while also topping-up public coffers).
Fortunately, we don't have to look far for salient examples. Be it the privatization path taken by Korea and the Philippines, the holding company structure of SOEs in Singapore, or recent governance reforms in Malaysia, there are plenty of examples in our backyard. Here we attempt to: (1) size-up the footprint of SOEs in Asia, (2) study various reform suggestions, and (3) assess the reform progress by country. We think reforms could have the greatest impact on overall growth in Indonesia and Vietnam.