ASEAN Economies: Challenges and Responses Amid the Crisis

What began as credit turmoil in the United States has intensified into a global financial crisis, leading to protracted slowdown and severe financial deleveraging in many countries. Like other regions in the world, ASEAN is not immune from this downturn. Since the crisis further deepened in September 2008, the region has been confronted with many challenges arising from slowing growth, tighter external financing conditions, volatile capital flows, and increased vulnerabilities. In response to the deepening crisis, many countries in the region have put in place various policy measures to recapitalize and inject liquidity into financial institutions, in addition to huge stimulus packages being implemented in some economies to firm up domestic demand.

ASEAN Has Not Decoupled from the Global Downturn …

Faced by increasingly difficult external conditions, the economies of ASEAN have slowed in 2008 (see Figure 1). Preliminary figures for the first three quarters of 2008 suggest that the region grew by 5.5 per cent, down from 6.2 per cent registered in 2007.¹ Two factors account for this downward shift in regional growth. First is the deeper-than-expected financial crisis and second is the severe recession in advanced economies. Together, these headwinds moderated growth in global economy last year (estimated at 3.4 per cent by the IMF versus 5.2 per cent in 2007), and exerted significant spill over to the region, in terms of sharp decline in export growth and tighter financial conditions.

Although the impact of the crisis on the real economy of ASEAN was not so severe, available growth indicators point to deceleration in economic activity particularly in the Philippines and Singapore where growth rates fell markedly from a year ago. After growing by an average of 8.5 per cent in the first three quarters of 2007, Singapore managed to grow by 3.1 per cent during the same period in 2008. In the third quarter alone, output did not grow at all, as output of manufacturing, construction and services sectors plunged. In the Philippines, growth also slowed significantly to 4.7 per cent for the first nine months, from 7.5 per cent during the same period in 2007, on weak consumption and exports. In Indonesia, Malaysia and Thailand, growth continued but at a decelerated pace and signs of further slowdown have become more evident recently.

Net exports have been quite resilient, certainly by past performance, despite the turmoil in global credit markets and threat of global recession. Growth in net exports increased to 4.8 per cent after contracting a year ago. Developments across countries, however, varied. Net exports turned around strongly in Malaysia and the Philippines, moderated in Indonesia and Thailand, but contracted sharply in Singapore. But in terms of contribution to growth, net exports performed poorly and contributed negatively (–0.1 per cent) to overall GDP growth rate of ASEAN as at end-September 2008.

Nonetheless, domestic demand, particularly private consumption, remained a key driver and an important source of growth, contributing 5.6 per cent to the region's overall growth. Over the last ten years, private consumption contributed on the average between 2 per cent and 4 per cent to output growth in Indonesia, Malaysia and the Philippines. In 2008, despite the weakening economic prospects, it added between 3 per cent and 5 per cent to growth in GDP in these countries, with the highest contribution in Malaysia (4.8 per cent). In Thailand, however, the contribution of private consumption to growth (1.4 per cent) remained below its average over the last eight years (4.6 per cent) as political uncertainty continued to weigh on consumer confidence; while it rose slightly in Singapore at 1.8 per cent. With rising unemployment and falling incomes, the contribution of private consumption is expected to diminish in the coming months.

Private investment has held up steadily, contributing to around 2.2 per cent of the region's domestic output growth, with notable performance in Singapore (where fixed investment accounted for 5.6 per cent of GDP growth) and in Indonesia (contributing 3 per cent). But with increasing risk aversion among investors, and...