Inclusive, Balanced, Sustained Growth in the Asia-Pacific

4. Southeast Asia: Achieving Sustained Growth

78 Michael Plummer 4 Southeast Asia: Achieving Sustained Growth Michael Plummer I. HOW THE CRISIS AFFECTED SOUTHEAST ASIA Southeast Asia was not heavily invested in high-risk “toxic” assets, but it is dependent on external demand for economic growth especially since the Asian crisis of 1997–98. The crisis also affected balance sheets and created a general liquidity shortage, especially with respect to trade finance, which abated slowly. The large drop in commodity prices during the crisis and the drop off in foreign direct investment (FDI) further contributed to Southeast Asia’s downturn. Thus, while the current crisis is far less devastating than the Asian crisis of 1997–98 for most countries, it has taken a high toll. The more externally dependent Southeast Asian economies were the hardest-hit (Figure 4.1 and, in a comparative context, Figure 1.1 of Chapter 1). The “dynamic Asian economies” of Malaysia and Thailand are both expected to contract by 3 per cent in 2009 (ADB Update 2009).1 Indonesia, which is less open compared to the other Southeast Asian economies and whose growth in consumption compensated for the drop Southeast Asia: Achieving Sustained Growth 79 FIGURE 4.1 GDP Growth (%) ASEAN Countries (1987–2008 and Projections 2009–10) Notes: 2008 data for Brunei Darussalam and Myanmar are IMF estimates. 2009 and 2010 data are IMF forecasts. Source: IMF, WEO, April 2009 -15 -10 -5 0 5 10 15 20 25 Brunei Darussalam Cambodia Indonesia Lao People's Democratic Republic Malaysia Myanmar Philippines Singapore Thailand Vietnam 80 Michael Plummer in external demand, was able to make it through 2009 with only a slight reduction in growth. Vietnam’s growth has fallen to about 3 per cent in 2009, and that of the Philippines to less than 2 per cent (ibid.). Growth trends in some of the transitional ASEAN economies are less clear; there is evidence of a significant contraction in Cambodia (–1.5 per cent projected for 2009) but in the less open economies of Lao PDR and Myanmar, growth is being sustained (e.g., at 5 per cent in Lao PDR). The outlook for Southeast Asia depends to a large extent on the larger PECC economies avoiding an early exit from fiscal stimulus programmes. But ASEAN countries need to foster growth in internal demand as well. The stimulus packages of the ASEAN economies varied considerably and generally corresponded to the degree of economic contraction, with Malaysia, Thailand and the Philippines embarking on far more aggressive fiscal policies than Indonesia and, of course, the transitional ASEAN economies (see, for example, Figure 1.4 of Chapter 1). There has been criticism of these packages, particularly in terms of the delay in disbursement of funds. But the “time inconsistency” problem will likely not materialize; signs are that the ASEAN countries are continuing their fiscal push. Monetary policies also tended to be expansionary in the originalASEAN countries in order to combat the crisis, but the degree of expansion was limited, given inflationary considerations and the fact that monetary independence in these developing countries is relatively limited particularly in the context of crisis. Coupled with the “flight to safety” threat that these economies face in uncertain times, overly aggressive cuts in interest rates could have led to capital flight and greater exchange rate volatility. Stricter capital controls to prevent this could have led to even greater uncertainty and potential destabilization, though this was chosen as the lesser of two evils by some countries. Thus, Southeast Asian monetary policy-makers had to follow the (U.S.) lead: After a considerable jump following the Lehman Brothers collapse, Southeast Asian interest rates were pushed down significantly through 2008, with the yield curve falling impressively for most countries, with the notable exception of Indonesia. As of endAugust 2009, yields had come up significantly to what would be more “normal” levels — again with the exception of Indonesia, whose yield curve was lower end-August than it was in December 2008 — and pretty much in line with the movement of the U.S. yield curve (Asian Bond Monitor, September 2009).2 Southeast Asia: Achieving Sustained Growth 81 Inflation had been a problem in just about all ASEAN countries (save Brunei and Thailand) in 2008. As a region that has prided itself on conservative monetary policies, this presented a key policy challenge, especially in the first half of 2008 when the price of primary commodities increased significantly. The reduction in international and...