Asean poised for starring role in global economy this year: UOB

“Fundamental factors are supportive of [key] Asean economies to defend against the uncertain environment ahead in 2023, as risks loom for economic recessions in the US, UK and Europe, tightening financial conditions, further straining of US-China relations and Russia-Ukraine conflict,” the report says.

The key Asean economies it refers to are its six most developed: Thailand, Singapore, Vietnam, Indonesia, Malaysia and the Philippines.

Enrico Tanuwidjaja – lead author of the UOB report, and its senior vice president for global economics and markets research at its Indonesia unit – told Nation Thailand that 10 “fundamentals” would help the six key Asean countries weather global turmoil and withstand volatility.

Tanuwdidjaja said they are:

1. Strong momentum from the post-pandemic recovery

2. Output rising above pre-pandemic levels

3. Robust trade

4. Tourism recovery

5. Benign inflation

6. Supply chain shifts

7. Healthy investment inflows

8. Ample foreign reserves

9. Ability to pay imports

10. Low level of short-term debt

 

Asean rebounded strongly in the second half of last year as Covid-19 restrictions were lifted, Tanuwidjaja said. Surging exports, along with increased domestic consumption, drove economic growth, he said.

At the same time, inflation in Asean – and most of Asia – has been, in general, lower than in most developed markets because consumer prices are partially cushioned by administrative measures, Tanuwidjaja said.

Some Asean economies also benefitted from access to domestic supplies of energy, minerals, and agricultural products in 2022, the economist said.

"This means that regional central banks' policy tightening [has been] less aggressive than the [US] Fed's, giving the economy more room to expand," he explained.

Tourism will be the mainstay of some Asean economies this year because China has relaxed its zero-COVID policy and is reopening its borders, he added.

"It will provide a further boost to tourism-related sectors, such as retail, food and beverage, transportation, and lodging throughout Asean. Thailand, Malaysia, Singapore, and Vietnam typically benefit the most [from Chinese tourism]," Tanuwidjaja told Nation Thailand.

Southeast Asia is also benefitting from a shift of supply chains from China to the region that is accelerating due to rising tensions between Washington and Beijing, he said.

These structural shifts will be driven by US efforts to counter China, and will include drawing supply chains back to the US and "friendshoring," which refers to shifts of supply chains to countries with friendly ties to Washington. The structural shift to the world economy caused by de-globalisation and regionalisation of supply chains will benefit Asean by increasing manufacturing in the region and boosting exports, Tanuwidjaja said.

Supply chain shifts are also accompanied by investment inflows, resulting in an increase in foreign direct investment (FDI) to the region as businesses establish manufacturing plants, warehouse facilities, distribution networks, and other facilities, the economist added.

FDI into Asean increased by 44% in 2021 to a record US$ 175.3 billion, according to the UOB report. Asean is the world's third largest destination for FDI, trailing only the United States and China, the report notes.

It says that despite a depletion in foreign reserves over the past year due to the strengthening US dollar, the amount of reserves held by central banks is far higher than in 1997 – when the region experienced a financial crisis. These reserves will continue to act as a cushion against large capital outflows, Tanuwidjaja explained.

The ability to pay for imports is another indicator of confidence in Asean’s key economies, he said.

"Most Asean countries have more than enough reserves to cover three months of imports, which is considered an international ‘rule of thumb’," he said.

They also have relatively small amounts of short-term external debt relative to reserves, except Indonesia and Malaysia, Tanuwidjaja said.

This puts Asean countries in a good position to withstand pressure from a strengthening US dollar and rising global interest rates, he explained.

UOB concluded that global GDP growth rates would be lower in 2023 than last year. Full-year declines are expected in developed markets such as the United States, Europe, and the United Kingdom, while ASEAN's key economies are only expected to slow to less than 5% in 2023, down from more than 6% in 2022.

 

Clouds over Thai economy

Although Thailand is one of the few countries with high potential for economic growth in a year of global uncertainty, its challenges outnumber its advantages in 2023, Tanuwidjaja said.

Tourism will help Thailand meet or even exceed its growth targets in 2023, but its exports will lag those of its neighbours, while national output has yet to return to pre-COVID levels, he said.

His forecast was supported by Somprawin Manpraser, chief economist of the Economic Intelligence Center (EIC), Siam Commercial Bank, and Amonthep Chawla, chief economist of CIMB Thai.

Somprawin compared Thailand's economy to a cloudy day.

Tourism will contribute significantly to recovery, but inflation, the global recession, and political uncertainty inside and outside the country can easily stifle growth, he said.

"So, Thai businesses and people must be aware of and prepared for unexpected situations. We need a backup plan. We must also use this recovery period to identify new economic boosters and to upgrade our human workforce," Somprawin said.

Amonthep warned of currency speculation and prolonged inflation that would force western central banks, led by the US Federal Reserve, to keep raising interest rates.

He said this would reduce the number of tourists visiting Thailand and curb international spending.

He urged the government to address labour shortages in the service industry, which impede growth.

"Tourism will spur Thailand's growth this year, but not enough to sustain it in the long run. We must develop a new business model," he said.

Amonthep added that training Thai people in digital literacy and soft skills to nurture high-value emerging sectors and the green economy – sometimes referred to as the “S-curve economy” in Thailand – would undoubtedly help the country grow sustainably.