Regional Outlook: Southeast Asia 2010-2011

Regional Economic Outlook

65 REGIONAL ECONOMIC OUTLOOK By Sanchita Basu Das S฀outheast฀ Asia฀ has฀ been฀ at฀ the฀ mercy฀ of฀ the฀ global฀ financial฀ and฀ ฀ ฀economic฀ crisis,฀ generated฀ from฀ the฀ United฀ States฀ and฀ United฀ Kingdom,฀ for฀ the฀ most฀ of฀ 2009.฀ While฀ it฀ was฀ not฀ directly฀ hit฀ by฀ the฀ liquidity฀ crunch,฀ it฀ did฀ get฀ affected฀ by฀ the฀ collapse฀ of฀ demand฀ for฀ Southeast฀Asia’s฀exports.฀It฀further฀got฀a฀blow฀through฀reduced฀tourism฀ and฀ slower฀ demand฀ for฀ immigrant฀ labor฀ services฀ from฀ the฀ West.฀ In฀ addition฀to฀the฀real฀economy,฀the฀financial฀sector฀of฀the฀region฀suffered฀ from฀the฀loss฀of฀confidence฀and฀disruption฀in฀trade฀credit.฀ The฀ more฀ open฀ economies฀ —฀ Singapore฀ and฀ Malaysia฀ —฀ ailed฀ the฀most฀with฀the฀contraction฀in฀trade฀and฀subsequently฀in฀industrial฀ production.฀ This฀ was฀ mainly฀ because฀ the฀ firms฀ were฀ drawing฀ down฀ REGIONAL ECONOMIC OUTLOOK • 2009 economic growth for Southeast Asia is expected to dip sharply to 0.1 per cent before regaining a gradual and cautious pace in 2010 and 2011. • Inflation is likely to remain subdued in 2009 and is expected to pick up on gradual economic recovery in 2010 and 2011. • Current account surplus (as a percentage of GDP) for the region will be narrowed on higher imports, offsetting the moderate rise in exports in the next two years. • Several risks remain on the downside: hasty withdrawal of stimulus measures, the U.S. housing market, flu pandemics and rally in asset prices. 02 EcoOutlk p63-96.indd 65 12/22/09 3:23:07 PM 66 ECONOMIC OUTLOOK their฀ reserves฀ and฀ reducing฀ production.฀ The฀ problem฀ got฀ aggravated฀ as฀ the฀ domestic฀ demand฀ remained฀ weak฀ and฀ investments฀ trailed.฀ Unemployment฀ in฀ much฀ of฀ the฀ region฀ rose,฀ particularly฀ in฀ Singapore฀ and฀Malaysia.฀Thailand’s฀economy,฀besides฀its฀dependence฀on฀exports,฀ also฀ lost฀ confidence฀ amongst฀ consumers฀ and฀ investors฀ due฀ to฀ severe฀ political฀turmoil฀for฀most฀of฀the฀year. This฀ prompted฀ most฀ of฀ the฀ Southeast฀ Asia’s฀ governments฀ and฀ central฀ banks฀ to฀ implement฀ stimulus฀ measures฀ through฀ fiscal฀ and฀ monetary฀ expansion.฀ Households฀ were฀ given฀ tax฀ cuts฀ and฀ income฀ support฀to฀increase฀consumption฀and฀hence฀national฀income.฀Monetary฀ ฀ authorities฀ reduced฀ interest฀ rates฀ to฀ provide฀ liquidity฀ and฀ boost฀ expenditures฀ and฀ investments.฀ For฀ example,฀ Bank฀ Indonesia฀ brought฀ ฀ down฀ its฀ policy฀ rate฀ by฀ 300฀ basis฀ points฀ from฀ December฀ 2008฀ to฀ August฀ 2009฀ to฀ a฀ record฀ low฀ of฀ 6.5฀ per฀ cent.฀ Much฀ of฀ the฀ monetary฀ policy฀ easing฀ was฀ possible฀ as฀ the฀ region฀ remained฀ soft฀ on฀ inflation฀ and฀commodity฀prices.฀ All฀ these฀ measures฀ finally฀ arrested฀ the฀ decline฀ in฀ GDP฀ of฀ the฀ ฀ region฀ and฀ presented฀ some฀ “green฀ shoots”฀ of฀ growth฀ in฀ the฀ second฀ ฀ half฀of฀2009.฀For฀example,฀Singapore’s฀GDP฀emerged฀from฀a฀contraction฀ of฀9.5฀per฀cent฀year-on-year฀(y/y)฀in฀the฀first฀quarter฀to฀an฀expansion฀ of฀ 0.8฀ per฀ cent฀ y/y฀ in฀ the฀ third.฀ GDP฀ growth฀ in฀ Malaysia฀ posted฀ a฀ ฀ 3.9฀per฀cent฀y/y฀contraction฀in฀second฀quarter,฀a฀marked฀improvement฀ from฀ –6.2฀ per฀ cent฀ in฀ the฀ preceding฀ quarter.฀ Month-on-month฀ data฀ for฀industrial฀production฀indicated฀a฀V-shaped฀recovery฀for฀Indonesia,฀ Malaysia,฀Philippines,฀Thailand฀and฀Vietnam.฀This฀is฀generally฀to฀meet฀ domestic฀ demand฀ generated฀ by฀ the฀ government’s฀ stimulus฀ package.฀ The฀ deterioration฀ in฀ the฀ labour฀ market฀ was฀ also฀ stalled฀ as฀ industrial฀ production฀ picked฀ up.฀ In฀ Southeast฀ Asia,฀ retail฀ sales฀ picked฀ up฀ in฀ Malaysia฀ and฀ Vietnam.฀ Tourism฀ also฀ seems฀ to฀ have฀ come฀ out฀ of฀ its฀ worse฀in฀Malaysia. This฀ and฀ the฀ improving฀ global฀ economic฀ outlook฀ supported฀ the฀ Southeast฀Asian฀stock฀markets฀to฀edge฀higher฀(Figure฀1).฀The฀Singapore฀ stock฀exchange฀jumped฀70฀per฀cent฀by฀October฀from฀its฀low฀in฀February฀ 2009.฀Thailand฀stock฀market,฀SET,฀swelled฀more฀than฀65฀per฀cent฀since฀ March฀ 2009.฀ The฀ currencies฀ also฀ gained฀ confidence฀ from฀ the฀ growth฀ 02 EcoOutlk p63-96.indd 66 12/22/09 3:23:07 PM 67 REGIONAL ECONOMIC OUTLOOK Figure 1: Relative Performance of ASEAN-5 Main Stock Market Indices, 2005–2009 recovery฀with฀the฀Thai฀baht฀and฀Singapore฀dollar฀strengthening฀more฀ than฀4฀per฀cent฀and฀6.5฀per฀cent฀since฀the฀start฀of฀the฀year฀(Figure฀2).฀ ฀ However,฀ central฀ banks฀ in฀ the฀ region฀ intervened฀ to฀ ameliorate฀ any฀ significant฀appreciation฀pressures฀from฀capital฀inflows฀into฀the฀region’s฀ asset฀ markets.฀ This฀ is฀ because,฀ for฀ many฀ countries฀ in฀ the฀ region,฀ maintaining฀export฀competitiveness฀still฀remains฀a฀key฀priority. Given฀ these฀ facts฀ and฀ figures,฀ economic฀ growth฀ in฀ the฀ Southeast฀ Asian฀region฀is฀expected฀to฀slow฀to฀0.1฀per฀cent฀compared฀to...