[ASEAN] Southeast Asia's economic recovery: carving out a third way in a difficult balance
Author: Rui-Chen Yuan is an Assistant Research Fellow at the Centre for ASEAN Studies, Peking University; Kun Zhai is Director of the Centre for ASEAN Studies and Deputy Director of the Institute of Regional and Country Studies, Peking University
Machine translated from: https://mp.weixin.qq.com/s/tBUPOtk3C8HQVnPDvWOMeg
With the spread of vaccines and the loosening of vaccination measures, most economies in Southeast Asia are showing stronger recovery momentum. According to the Asian Development Bank, Southeast Asian countries are projected to have an overall gross domestic product (GDP) growth rate of about 5.2% in 2022. Southeast Asia is the most dynamic and diverse region in the world economy, and ASEAN is expected to become the fourth largest economy in the world by 2030. The centre of gravity of global value chains is beginning to shift towards Southeast Asia as its value chain position gains prominence and its share of internal value added continues to rise.
But Southeast Asian economies are characterised by openness and vulnerability. Since the outbreak of the epidemic, the world economy has gone through a back-and-forth from recession to recovery and then to a double-dip recession. To reverse 40 years of unprecedented hyperinflation, major central banks in Western countries, such as the Federal Reserve, have initiated aggressive interest rate hikes, which may slow down global economic growth and spread the recessionary trend to more developed and emerging economies. Countries in South East Asia are facing the task of maintaining a balance between safeguarding people's livelihoods and sustaining recovery as they recover from the imported inflation crisis and another recession, hence the urgent need to open up a third way.
Facing a complex internal and external situation
The situation facing the economies of Southeast Asia includes the following.
First, the epidemic has caused widespread and deep shocks to the economy, compounded by additional, unnatural disruptions to the economy from ultra-loose fiscal and monetary policies in the US and Europe. In the real economy, severe restrictions on the movement of people and commodities in countries within and outside the region, and continuing in some countries to date, have led to supply chain disruptions and demand setbacks. In the virtual economy, the rapid spread of the epidemic increased investment uncertainty and financial and capital markets in South East Asia were shaken significantly. In response to major systemic risks, the US and Europe launched unprecedented fiscal and monetary stimulus in early 2020, which played an important role in supporting businesses, stabilising employment and boosting consumption, but it was too strong and sustained for too long, leading to monetary flooding and economic overheating. The supply recovery in Southeast Asia has not kept pace with external demand, and global inflationary pressures have been imported, instead dragging down regional real demand and creating additional abnormal disturbances to the Southeast Asian economy.
Second, the escalation of the crisis in Ukraine led to a sharp rise in energy and food prices and further contributed to the restructuring and rebalancing of the world economic landscape, especially the industrial division of labour pattern. The escalation of the crisis in Ukraine not only triggered a humanitarian crisis, but also hit Russia's wheat, oil and gas and fertiliser exports as well as wheat production in Ukraine. The US and European sanctions against Russia further disrupted the supply chains of the global industrial chain, with the current accounts of oil-importing countries in South East Asia being the most affected and regional countries generally facing food security problems. In addition, world economic developments and the geopolitical situation are highly interlinked, with the escalation of the Ukraine crisis driving the formation of a new East-West confrontation, triggering a restructuring and rebalancing of the world economy, particularly in terms of energy supply and demand. The rising influence of national security and values factors has exposed Southeast Asia to higher frictional costs in integrating and promoting globalisation.
Third, the introduction of unprecedented austerity policies by US and European central banks could trigger a regional or even global recession. Inflation levels in the US and Europe have been rising since this year, touching a near 40-year high. in March, the Federal Reserve urgently launched a cycle of interest rate hikes, and has so far raised rates by a cumulative 300 basis points, the largest intensive rate hike since 1981. The European Central Bank also changed its stance of not raising interest rates during the year and the European Deposit Facility Rate was positive for the first time in 10 years. Central banks in the US and Europe are risking recession to curb inflation, and higher borrowing costs are dampening investment and consumer spending. The world economy is slowing in tandem and the outlook for recovery is worrying. The International Monetary Fund (IMF) has cut its world growth forecasts three times this year, projecting that the loss of global output between now and 2026 could be as much as US$4 trillion, the size of the entire German economy. The economies of South East Asia are facing the combined effects of capital outflows and sluggish external demand, and the recovery process continues to be delayed as the region's wealth is again harvested by the US dollar.
Struggling to maintain the balance of recovery
As Southeast Asia enters 2022, it is mired in a severe inflation crisis, with people having to tighten their belts on everyday spending. Singapore's inflation rate continued to hold at 7.5% in September, the highest since June 2008, with food, housing, transport and entertainment costs leading the way. Inflation in Laos has soared to 34% in September, the highest level since the turn of the century, with the main pressure coming from food, medicine and fuel prices. The immediate causes of the current round of inflation are the continued disruption of global supply chains by the epidemic and the escalation of the Ukraine crisis which has exacerbated food and energy price increases; the underlying causes are the export of inflationary and bubble pressures by the US since the outbreak by virtue of the US dollar's status as the international reserve currency and the subsequent sharp interest rate hikes which have caused capital outflows and local currency depreciation in Southeast Asian countries and higher prices for imported goods, triggering secondary imported inflation.
The repeated worsening of inflation led to a surge in household debt pressure in Southeast Asia, with consumers cutting back sharply on non-essential spending and corporate profits coming under significant pressure. Regional inflation was compounded by external interest rate hikes, and pressure to tighten monetary policy continued to grow. On 22 September, the State Bank of Vietnam unexpectedly announced a sharp 100 basis point increase in refinancing and deposit rates. Vietnam has been easing its monetary policy for the past 10 years to provide sufficient impetus to its growth, and at one point tried to stay put in response to the current round of interest rate hikes by the Federal Reserve. But with the VND exchange rate at a record low since 1993, Vietnam's central bank has had to step in to support the exchange rate to curb inflation. Most countries in Southeast Asia are now in the path of interest rate hikes. In addition to reversing inflationary momentum, the rate hikes will also help to reduce resource mismatches and economic distortions and strengthen the foundations for long-term growth, given that the continued easing of the previous policy may have led to capital flows to inefficient sectors and enterprises.
However, in an unfavourable context of stagnant external demand growth and rising recessionary risks, interest rate hikes could further weaken domestic demand for goods and services and shake the fragile foundations of Southeast Asia's recovery. Despite the encouraging performance of Southeast Asia's previous relatively good recovery, demand for commodities and manufactured exports has shown signs of weakening. Especially since the third quarter, the manufacturing sector in Europe and the US has accelerated its decline and the risk of recession may be transmitted to Southeast Asia through the value chain. Whether the Southeast Asian economy can sustain a steady recovery will also depend on the spillover effects of the Fed's interest rate hike, geopolitical conflicts and the impact of the epidemic. However, from the current situation, it is difficult to see any significant improvement in these factors in the short term, coupled with the fact that many central banks are working individually and collectively raising interest rates too hard, the probability of the world economy remaining low and volatile is higher. The recovery-price equilibrium of the Southeast Asian economy has begun to tilt to the right, and it is becoming increasingly difficult to anchor a sustainable recovery, and there is an urgent need to find a third path.
A collaborative and empowering recovery model is possible
History has shown that cooperation is the basic principle on which the international community has been built to deal with major crises. The 1997 Asian financial crisis made Southeast Asian countries realise the importance of strengthening regional cooperation, giving rise to the ASEAN-China-Japan-ROK (10+3) cooperation, which has helped to enhance regional risk management and crisis response capabilities by strengthening dialogue on economic, trade and financial matters, helping Southeast Asia has been relatively successful in averting the external shocks of the 2008 global financial crisis.
In the author's view, in order to overcome the difficult balance between maintaining recovery and safeguarding people's livelihoods at this stage, Southeast Asia can adopt a recovery model of cooperation and empowerment by promoting regional integration to comprehensively enhance regional economic resilience, including the economic transformation and risk-resilience of countries. Strengthening cooperation with China is crucial in this regard. With the rise of China's value chain, Southeast Asia has begun to assume some of the functions of the "world factory", while becoming more dependent on China for industrial division of labour and value-added exports, promoting an expanded version of the China-based "world factory". By deepening cooperation with China, Southeast Asia will be able to keep prices down and boost growth in the short term, while enhancing the resilience and security of the region's internal market in the long term. This is the third path to a stable and predictable economic recovery in Southeast Asia.
The first is to deepen openness and cooperation as a driving force for mutual development. This includes: activating the overlapping effects of the Regional Comprehensive Economic Partnership Agreement (RCEP) coming into force and implementation and the launch of the construction of China-ASEAN FTA 3.0, and launching the RCEP upgrade process at the right time; making good use of important platform mechanisms such as the China-ASEAN Expo and the China-ASEAN Business and Investment Summit The China-ASEAN FTA should be further enhanced by expanding high-quality cooperation in emerging areas such as the digital economy, green economy and blue economy; giving full play to the potential of the new international land and sea corridors, using multimodal transport channels to drive the integrated development of supply chains in cross-border industrial chains, and enhancing the resilience of regional supply chains.
Second, strengthen macro policy coordination and control policy spillover effects. This includes strengthening the transparent sharing of policy information, coordinating the objectives, strength and pace of fiscal and monetary policies, strengthening financial regulatory coordination, and jointly maintaining the stability of regional financial markets and industrial chain supply chains; expanding the functions of the 10+3 Macroeconomic Research Office (AMRO) institution to gather international consensus to promote regional economic and financial governance; and collaborating with institutions such as the Asian Development Bank and the Asian Infrastructure Investment Bank to Prevent systemic risks.
Thirdly, we should promote balanced and inclusive development and fully stimulate growth potential. The first is to accelerate negotiations on China-ASEAN international development cooperation agreements, focus on the urgent needs of Southeast Asian countries, and promote practical cooperation in key areas such as poverty reduction, food security and industrialisation. The second is to vigorously develop a China-ASEAN development knowledge network, conduct joint research, exchange seminars and capacity building on major development issues of common concern to both sides, and fully explore development theories and practices appropriate to their respective national conditions.
General Secretary Xi Jinping stressed that in the turbulent waves of the global crisis, countries are not riding in more than 190 small boats, but in one big boat with a common destiny. Small boats cannot withstand the wind and waves, but a giant ship can withstand the turbulent waves. China and Southeast Asia are in the same boat together, so that we can navigate through the turbulent waves and sail towards a bright future.