There’s good news and bad news as media markets head into 2015. The bad news is that the broader economic landscape remains uneven, hampering growth across Asia-Pacific. A volatile macro environment in Brazil, Japan, Russia and the European Union isn’t helping, while currency headwinds may also resurface. The good news is that governments and policymakers across the region have implemented reforms to address structural weaknesses. The pace of reform needs to accelerate however, to drive continued economic expansion.

“We expect Asian growth as a whole to be steady in 2015, despite further deceleration in the Chinese economy,” says Andrew Tilton, an economist with Goldman Sachs. “India and Thailand should show the sharpest pick-ups in growth.

Inflation should ease in most of the region, except where fiscal adjustments push taxes or regulated prices higher.”

A combination of lower oil prices, broader momentum across developed markets, and easier financial conditions worldwide, should support growth in emerging Asian markets. The onus on structural economic reforms is critical, however.

“Policymakers in several countries are taking advantage of lower commodity prices and global liquidity conditions, to keep monetary policy easier than they might have otherwise,” Tilton suggests. “The extent to which policymakers do this, and conversely their willingness to accept the short-term pain of structural reforms in exchange for the longer-term benefits they can provide, will be a key axis of differentiation among the region.”

China and India have the largest structural reform agendas, followed probably by Indonesia. However, implementation of these reforms is just beginning.

THE SHAPE OF FUTURE GROWTH

According to Media Partners Asia (MPA), net advertising revenues in Asia-Pacific grew 5.0% in 2014, after a 5.6% increase in 2013. “Ad spends from large multinational advertisers softened through much of 2014, partially offset by expenditure from domestic advertisers, but this dampened growth across Southeast Asia and other key markets,” says MPA director Vivek Couto. “Multinational advertising demand may return, but weakness across emerging and developed markets in other parts of the world may exert downward pressure on Asia.”

MPA projections indicate that net advertising revenues will grow by 5.7% in 2015, and expand at a 4.5% CAGR over 2014-19. Ex-Japan, Asia will grow at a 6.0% CAGR over the next five years, while Southeast Asia, China and India will grow at an aggregate CAGR of 7.4%.

Free-to-air terrestrial spend remains robust across a number of markets, especially in Australia, Hong Kong, Japan and Southeast Asia (most notably in Indonesia, Philippines, Thailand and Vietnam).

Pay-TV’s share of the ad market should grow marginally, rising from 9% in 2014 to 10% by 2018. Pay-TV ad sales are on course for a 6.2% CAGR over the next five years, with China, India, Korea and Taiwan remaining the largest markets. Southeast Asia will grow at a 9.8% CAGR, but from a very low base, led by Malaysia.

The growth of broadband infrastructure, together with the accompanying rollout of over-the-top (OTT) and subscription video-on-demand (SVOD) services, represents both a challenge and an opportunity for TV companies. Competition is especially fierce in Australia, China and Japan, with momentum gathering in Hong Kong, Singapore and Malaysia.

Broadcasters that own their content, will likely capitalize on future OTT growth, although piracy and partial measurement are key barriers.

Broadband proliferation, anchored to next-generation telecom networks and the growth of smartphones and 4G mobile, is helping fuel spends and consumption across digital media. MPA research indicates that total digital advertising revenue (including search, display and mobile) should climb at a 11.1% CAGR over 2014-19, with aggregate market share growing from 23% in 2014 to 31% by 2019. Digital has already overtaken TV to be the largest ad medium in Australia; by 2019, it will also be the largest medium for advertising in China, Korea and New Zealand. In emerging online markets such as India, Indonesia, Malaysia and Thailand, digital will have a 10-20% advertising market share by 2019, versus 6-8% in 2014.

According to MPA, China will overtake Japan as Asia’s largest advertising market by 2016, while India will overtake Korea in 2017. By 2019, Asia-Pacific’s six largest ad markets will be, by order of size: China, Japan, Australia, India, Korea, and Indonesia.

Key catalysts for growth in China include rising GDP, continuing urbanization and higher consumer spending. Nonetheless, ad spend increases are expected to decelerate from earlier heights (a 12.4% CAGR between 2009-14) as the ad market stabilizes at 7-8% annual growth over the next five years. Digital will outperform, with double-digit growth.

Advertising in India has picked up through 2H 2014 and is expected to grow at a 10.1% CAGR over the next five years, buoyed by political stability and stronger market reform. “India is beginning a multi-year process of improving the business environment and private investment,” says Goldman Sachs’ Tilton. “The reform agenda is long, but even partial success would represent substantive improvement in the business environment and potential growth. Investors are impatient for progress, but there are already signs that confidence and growth are beginning to return.”

Southeast Asia meanwhile has endured a challenging 2014. A contraction in advertising across Malaysia, Singapore and Thailand, partially offset by robust though slower growth in Indonesia, the Philippines and Vietnam, means that net advertising revenues will grow at only 1.2% in Southeast Asia in 2014, the lowest rate in five years. A rebound is expected in 2015, to 7.2% growth.

Economic and advertising growth has fallen well short of expectations in Thailand this year, due to political volatility. Real GDP growth is expected to pick up to 3.5-4.0% in 2015, as the military government follows through with plans to rationalize subsidies and push infrastructure spending. Ad spend should rebound to almost 9% growth, driven by TV, which will retain more than 60% of the advertising market.

In Malaysia, the macro landscape has been hurt by the slowdown in China, as well as high fiscal deficits (about 4% of GDP). As a result, the government raised regulated fuel prices by about 10% in October, and plans to replace the current sales tax with a 6% GST tax in April 2015. Advertising should rebound in 2015, particularly over 2H, and will grow at a 3.9% CAGR over 2014-19, with digital easily outperforming. Radio and pay-TV should remain robust.

Indonesia’s new government has already started implementing big reforms, by reducing the burden of fuel subsidies on the government budget. Economists expect fuel subsidy costs (ex-targeted income transfers) to fall closer to 1% of GDP, from a peak of nearly 3%. President Widodo’s government can decide where to redirect the resulting funds. Infrastructure spending and direct aid for poorer households (affected by the fuel price rise) are strong candidates.

GDP growth may come under short-term pressure as the economy digests the subsidy cut, but should expand in 2H 2015 and beyond, driven by both infrastructure spending and domestic consumption. Ad growth moderated to 10.6% in 2014 from 12.6% in 2013, despite elections, largely due to a softer economy and cutbacks from multinational advertisers. Spends from domestic brands remain strong. A gradual recovery is expected in 2015, and economic growth should revert to 6% and above after 2016. The ad pie will expand by 12.3% in 2015, says MPA.

This article (Structural Reform And Strategic Shifts) also appears in the Q4 2014 edition of Media Business Asia magazine.