Southeast Asian Economies: A Year of Exogenous Shocks

Southeast Asian Affairs 2006 SOUTHEAST ASIAN ECONOMIES A Year of Exogenous Shocks Cassey Lee, Boon-Huat Quah, and Marc Foo The year 2005 will likely be remembered by most Southeast Asian countries as the year of negative exogenous shocks. Exogenous shocks to the economy often receive less analysis in textbooks than they deserve. Nevertheless, such shocks can have significant and long-term economic effects, as the oil shocks in 1970s did. The most important of these shocks in 2005 was the tsunami that occurred on 26 December 2004 and claimed more than 100,000 lives across several countries. The slowdown in the global economy and the rise in oil prices further weakened growth in Southeast Asia during 2005. This article begins with an analysis of overall economic growth in the region in 2005.' It is followed by a more detailed analysis of the macroeconomic performance of Southeast Asian economies. Towards the end of the article the impact of the tsunami as well as the risk of a pandemic avian flu is discussed. Overall Growth The global economy went into a moderate cyclical slowdown in 2005 due to a number of factors — rising US interest rates, lower US and euro area growth, the rise in oil prices, and the catastrophic effects ofHurricane Katrina. Compared with the world's growth rate of5.1 per cent in 2004, a record high in the last three decades, the global economy grew at a rate of 4.3 per cent in 2005.2 While the slowdown affected both developed and developing countries, growth in the developing world continued to be strong, at 5.9 per cent. This growth rate was twice as fast as that estimated for developed countries.3 Growth in the Asia-Pacific region, at 6 per cent, was expected Cassey Lee, former Associate Professor at University of Malaya in Kuala Lumpur, is now Associate Professor, Nottingham University Business School, University of Nottingham Malaysia Campus. Boon-Huat Quah is Lecturer at Metropolitan College in Kuala Lumpur. Marc Foo is Lecturer at Taylor's Business School in Kuala Lumpur. 1 6 Cassey Lee, Boon-Huat Quah, and Marc Foo to be higher than growth in the developing world as a whole. This was partly due to vigorous exports and strong domestic demand in China and India.4 Southeast Asian economies grew at an estimated average rate of 5 per cent in 2005. This was lower than the economic growth rate of 6.3 per cent in the previous year.5 The export-driven nature of most of the Southeast Asian economies makes them sensitive to growth in the developed economies. The decline in Southeast Asia's gross domestic product (GDP) growth in 2005 was partly due to the decline in real GDP growth and real total domestic demand observed in the developed economies.6 Of the ten member countries of the Association of Southeast Asian Nations (ASEAN), only four — Indonesia, Brunei, Cambodia, and Laos — were expected to show improved real GDP growth rates in 2005.7 Indonesia showed an estimated real GDP growth rate of 5.5 per cent in 2005 compared with the previous year's 5.1 per cent. The sources of this improvement were the fairly robust growth rates in the manufacturing, construction, and services sectors as well as the revival in investment spending (due in part to a broad government campaign to improve the local investment climate). Despite earlier gloomy IMF projections, Cambodia was expected to improve on its 2004 real GDP growth rate by 1.75 percentage points to 6.3 per cent in 2005. Higher-than-expected garment exports — the country's single largest foreign exchange earner — were expected to contribute substantially to improvements in the economy. However, the expiry of the Multifiber Arrangement (MFA) had almost no impact on Cambodian garment exports as they no longer compete solely on the basis of price. Surges in tourism, construction, and telecommunications sectors and a less-than-severe drought also helped.8 Singapore's real GDP grew by 5.7 per cent in 2005 — a massive 2.7 percentage points below its performance in the previous year. The country's export sector encountered some difficulties at the beginning of 2005...