Research and analysis

SE Asia's Economy: Losing its Shine?

Published 9 December 2014

This research and analysis was withdrawn on 1 August 2016

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk

0.1 Summary

Economic growth has slowed in several SE Asian countries but this region of over 600 million people continues to perform better than most. Slower growth may even help spur reforms which would ultimately benefit these countries and our commercial interests. Report from the SE Asia Economic and Trade Policy Network.

0.2 Detail

Cloudier skies in SE Asia

The IMF recently lowered their 2014 growth forecast for SE Asia to 4.7%, citing the weaker global economy and stalling domestic demand in several countries. The region’s largest economy, Indonesia, risks dipping below the 5% growth level – partly the result of deliberate policy measures to tackle the large current account deficit, indicative of the structural flaws in Indonesia’s previously well performing growth model. Thailand, SE Asia’s second largest economy, is starting to recover. But the rebound in the economy has been weaker than expected. Growth in the Philippines, previously one of the star performers in Asia, slowed to a rate of just over 5% in the third quarter. Global developments and domestic restructuring have led to lacklustre growth in Singapore. Lower international oil prices threaten the outlook for oil export-dependent Brunei.

Reasons to be cautiously optimistic

It’s not all bad news. Malaysia’s growth rate has accelerated to well over 6%, impressive for one of the richer members of ASEAN – though lower oil prices may harm this net oil exporter. Growth is ticking up in Vietnam, although remains well below potential. The frontier emerging markets Burma, Cambodia and Laos continue to grow at 7-8% per annum. Although other economies in SE Asia are slowing, most are still outperforming the majority of global emerging markets. The IMF predict growth in the region will rebound to 5.4% in 2015, assuming the global economy recovers. The region’s long-term potential remains impressive.

Slowing growth could also be a blessing in disguise, forcing some governments to grasp political and structural reform nettles – especially as many of them have limited scope to use fiscal and monetary policies to reignite their economies (though the drop in international oil prices helps by reducing inflationary pressure). The financial volatility that hit much of the region in the second half of 2013 was also a reminder of the lingering risk of significant capital outflows as monetary policy in the US changes – another incentive to reform.

Indonesia’s new president, Joko Widodo, has set out an ambitious reform agenda . This includes expediting Indonesia’s business licensing processes. Popular but wasteful fuel subsidies have recently been cut substantially in Indonesia and removed altogether in Malaysia. Several countries, most notably Indonesia and Thailand, have rolled out grand plans for increased (public and private) spending on infrastructure. The Philippines has taken some steps to liberalise its banking sector.

Ongoing trade negotiations may also help spur domestic reform and improve countries’ export performance in the short to medium-term. If negotiations on the Trans-Pacific Partnership (TPP, includes the US but not China) conclude soon that would provide a boost to member countries Singapore, Malaysia, Vietnam and Brunei. The expected implementation of the EU’s agreed FTA with Singapore and conclusion of negotiations with Vietnam in 2015 offer large potential economic gains to those countries, as does the Philippines’ expected accession to the EU’s Generalised System of Preferences Plus (GSP+) tariff scheme in early 2015. The resumption of EU FTA negotiations with Thailand and Malaysia would also help but is unlikely to happen soon. There are plenty of other FTAs in the works as well, although some commentators question whether the Regional Comprehensive Economic Partnership (RCEP, includes all of ASEAN and China but not the US) will meet the targeted end 2015 timeframe.

The potential economic gains from the region’s single market agenda, the ASEAN Economic Community (AEC), are also very large. But they are unlikely to be realised by the end 2015 deadline.

UK impact

Slowing economic growth is a concern. If this diverse region was a single country it would be the 7th largest economy in the world, just behind the UK and ahead of Brazil. UK exports to ASEAN are over three times those to Brazil, twice those to India and 50% more than to (much larger) Japan. ASEAN is an increasingly important investor in the UK and major source of overseas students and tourists.

We are already seeing the negative impact on our exports to several SE Asian markets. But if the slowdown helps spur structural reforms that would ultimately be good news.

0.3 Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.