Review of Southeast Asian Economic Developments

Introduction and Summary

Southeast Asian economies are integrated into the world economy through multiple channels and remain sufficiently exposed to the G-3 (European Union, Japan, United States) economies that they could not escape a substantial hit from the global financial crisis. Our views can be summarized as follows:

• • What is striking about the regional economies then was their surprising resilience — GDP growth is on track for a robust rebound, reversing the global impact fairly quickly. We believe that this improved resilience springs from important structural changes in the region since the Asian financial crisis of 1997-98. In particular, policy changes have strengthened macroeconomic frameworks and banking sectors while also allowing some degree of diversification of the economic base.

• • The regional economies are thus poised for a strong rebound, even with a global environment that is likely to remain troubled and occasionally subject to financial stresses. However, these global level risks are not likely to result in a double-dip slowdown in Southeast Asia — external demand is recovering and the lagged effects of monetary and fiscal easing will support growth.

• • The real challenge in Southeast Asia is to build economic resilience and prepare for a global economy that will be substantially different from the pre-crisis era.

Impact of the Global Crisis

(a) Global Crisis Hurt but Region Displayed More Resilience Than Expected

Two features of the performance of Southeast Asian economies in 2009 stand out: First, the crisis showed how intricately integrated the region is with the global economy and, in particular, with the United States, European Union, and Japan. Second, despite this, their economies have developed greater resilience to external shocks as seen in the speed with which their economies have rebounded.

As Table 1 shows, most Southeast Asian economies suffered a sharp deceleration in economic growth as the global crisis spread. However, the recovery came fairly quickly, meaning that the recessionary impact of the global crisis on Southeast Asia was mostly limited in duration.

Table 1.

Economic Growth during the Global Financial Crisis

This initially severe impact of the crisis suggests little evidence for the decoupling that many had hoped for. This is seen in the multiple transmission mechanisms through which the global crisis hurt Southeast Asia:

• • The first and immediate impact was felt through the financial channel. As the enormity of the financial crisis in the United States and European Union became evident, there was a sharp fall in risk appetites among global investors which precipitated a withdrawal of funds deployed to bonds and equities in "riskier" emerging markets. This in turn led to sharp falls in asset prices (Figures 1 and 2 for example) as well as a liquidity crunch in several economies as capital flowed out. Exchange rates came under pressure as well. Trade financing weakened sharply as well; much of the trade finance in the region was provided by European banks which had been hurt by the crisis. Risk-averse banks became wary of engaging even in the relatively less risky funding of export and import transactions.

  Figure 1.

  Sharp Falls in Assets Markets ...

  Figure 2.

  ... Reflected Immediate Financial Impact of Crisis

• • Second, as businesses in developed economies became alarmed at the credit crunch in their economies, they did everything they could to conserve cash, including retrenching workers, liquidating inventories, and slashing orders for imported goods from developing economies. Not surprisingly, Southeast Asian exporting nations saw a precipitous fall in export orders from late 2008 onwards, causing exports to fall sharply (Figure 3). Intra-Asian trade also fell sharply, bringing out clearly that a large proportion of intra-Asian trade was really trade in components that were eventually assembled in Asia for final consumption in the G-3.

  Figure 3.

  Exports Plunged ...

• • Third, as global demand fell, other factors affecting household incomes in Southeast Asia also came under pressure. Export-oriented manufacturing companies and companies affected by the financial turmoil, such as banks, reduced payrolls while...