Over the past month, the central banks of Malaysia, Vietnam and Indonesia each raised interest rates, following a series of similar moves by the Federal Reserve. Higher borrowing costs are intended to calm inflation and discourage capital flight, but they will also slow ASEAN’s economic growth. An impending drop in Chinese orders for goods produced in the region will compound the damage, economists have said.
“The environment is getting worse,” said Trinh Nguyen, senior economist at investment firm Natixis in Hong Kong.
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Rising interest rates in the United States divert investment from countries like Southeast Asia, while the strong dollar makes imported goods like oil more expensive. Over the past year, the dollar has risen around 14% against a basket of other currencies.
Since the Fed began raising rates, ASEAN’s largest economy, Indonesia, has suffered net capital outflows in five of the past seven months, according to data from the Institute of International Finance. , an industrial group. Investors have withdrawn funds from Malaysia in each of the past three months.
Highly indebted countries could also struggle as the Fed continues to raise interest rates. Thailand’s external debt, for example, has soared to nearly $195 billion, from around $166 billion before the pandemic, according to the Bank of Thailand. The country has borrowed heavily to make up for lost revenue from tourism, with only a quarter of the number of pre-pandemic foreign visitors expected this year.
“If the Fed continues to persist in raising rates, Thailand is in a very difficult position,” Nguyen said.
Thailand could be faced with a lose-lose decision: raise interest rates and make debt repayment more onerous for businesses and consumers or allow its currency to fall further against the dollar, which would make more expensive imports and aggravate inflation.
Yet even with the recent increase in consumer prices in the region, inflation is lower in many fast-growing ASEAN countries than in the United States. In October, Vietnam reported that prices rose at an annualized rate of 4.3%, while US prices rose 7.7% over the past year.
As a result, interest rates in ASEAN countries are not expected to rise as much as in Latin America or Eastern Europe, according to the International Monetary Fund. In Brazil, where annual inflation topped 12% earlier this year, the central bank has raised borrowing costs by more than 10 percentage points since the spring of last year.
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Despite growing challenges, economic conditions are unlikely to figure prominently at Saturday’s ASEAN summit or a separate meeting between Biden and a broader group of Asian leaders on Sunday. The ASEAN president’s talks will focus on global governance, human rights and the ongoing crisis in Myanmar, US officials said.
In particular, ASEAN leaders are unlikely to complain about dollar strength to Biden, as the president has no direct control over the value of the currency.
“It’s not something the leaders will raise among themselves,” said Josh Lipsky, an analyst with the Atlantic Council.
The region’s central banks are now in a better position to weather the financial turmoil than they were during previous episodes of market turmoil, including the 2013 “crisis crisis”, when the efforts of the Fed to reduce its balance sheet by selling US government securities sparked a bond market revolt.
Investors sold Treasuries, sending bond yields soaring and forcing investors out of Asian markets. As regional currencies slumped against the dollar, central banks were forced to raise rates to penalizing levels.
Today, many ASEAN central banks have enough financial firepower to defend their currencies.
Bank Indonesia, Indonesia’s central bank, announced earlier this month that its financial reserves exceeded $130 billion. This is enough to finance 5.8 months of imports, nearly double the international norm, or 5.6 months of imports plus interest payments on the government’s external debt.
The global economic picture, meanwhile, looks increasingly bleak. Europe is suffering from a major energy crisis, resulting from Russia’s invasion of Ukraine. The UK, now in its third prime minister since September, is in the early months of a recession that the Bank of England predicts will be the longest in a century. And the United States is grappling with its highest inflation in nearly 40 years.
Even China, which has been an engine of global growth for decades, is expected to grow just 3% this year, compared to more than 8% in 2021, according to the IMF.
“The global economy itself is heading into some pretty murky waters,” said Neil Shearing, chief economist for Capital Economics in London. “I still think ASEAN will be a relative bright spot. But if the global economy slows down, Southeast Asia can’t keep sailing. It’s not immune.
The IMF said last month that ASEAN’s annual economic growth – which exceeds the global average – will slow next year to 4.7%, from 5% this year. The group of 10 developing countries includes commodity producers such as Indonesia and Malaysia, as well as fuel importers such as Thailand and the export powerhouse of Vietnam.
But if the global slowdown worsens, the economic toll – particularly in Vietnam, Singapore and Cambodia – would be more severe, with each country’s growth rates declining by up to an additional percentage point, according to the IMF.
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For much of this year, ASEAN members such as Indonesia, Malaysia and Vietnam have avoided the worst of the fallout from the woes of major economies.
Government subsidies have shielded consumers from the full effects of rising energy costs. And Chinese manufacturers have continued to purchase many ASEAN-made parts for use in manufacturing consumer and industrial electronics equipment for customers in the United States and Europe.
Now these two relationships are changing.
Government subsidies for energy products are proving unaffordable. As oil prices soared after Russia invaded Ukraine, Indonesia spent an estimated $34 billion on fuel, natural gas and electricity subsidies in the first eight months this year, compared to $14 billion last year.
In September, the government cut subsidies and allowed a 30% hike in retail prices, a move that sparked widespread protests.
The region’s exports to China – ASEAN’s largest trading partner – are also expected to fall. With Europe in recession and the US economy likely to weaken next year, Chinese exporters will need fewer parts from ASEAN suppliers, Nguyen said.
Already, Chinese factories in September shipped fewer products to the United States and Germany. If this decline continues, as economists predict, China will soon start cutting orders from suppliers in countries like Vietnam and Malaysia.
“Every part of the global economy is likely to slow in the coming months,” Shearing said. “Everyone faces headwinds.”
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