Major Asean economies should be able to survive volatile market swings in 2023 following similar turmoil last year thanks to the region's strong fundamentals, says Singapore-based United Overseas Bank (UOB).
Asean countries rode out volatile markets in 2022, beset by lingering effects of the pandemic, Russia's invasion of Ukraine, US-China tensions, sharp price spikes and supply disruptions of energy and commodities, inflation spikes around the world, aggressive interest rate hikes by the Federal Reserve and other central banks and a US dollar rally, said Enrico Tanuwidjaja, an economist at UOB Asean.
Asean economies were resilient last year, which should help them as risks loom for recessions in the US, the UK and Europe, tightening financial conditions, further straining of US-China relations and the Russia-Ukraine conflict, among others, he noted in the bank's first-quarter global outlook report.
First, GDP growth for most economies rebounded strongly in the second and third quarters of 2022 on the back of export demand and increasing domestic demand as Covid-19 restrictions have mostly been lifted across Asean. Malaysia topped the list with the fastest growth rate in Asean in the quarter to September.
Secondly, except for Thailand, national output is now back to pre-Covid levels as Asean benefitted from export demand and reopening of the economies boosted domestic demand.
The export and manufacturing sectors in the region were the main beneficiaries, especially during the pandemic period, though global demand is expected to soften in the coming months as rising interest rates globally dampen spending and business activities.
Lifting of Covid-19 restrictions and reopening of domestic economies across Asean since mid-2022 added to recovery momentum as visitor flows surged and services sectors rebounded. These factors are expected to be the main pillar for various Asean economies this year.
As China further relaxes its zero-Covid policy and reopened its borders, it will be a further boost to tourism-related sectors regionwide.
At the same time, inflation rates in Asia, including Asean, have generally been at lower levels relative to the developed markets in 2022.
Besides, the region has benefitted from the supply chain shift as the US pursued various measures to counter China's rise, with Asean positioning as a manufacturing and export hub.
"Supply chain shifts are also accompanied by investment inflows, leading to a surge of foreign direct investment [FDI] inflows to the region. Despite the pandemic conditions, FDI inflows to Asean jumped by 44% in 2021 to a new record high of US$175.3 billion, above the previous record set in 2019. The region is now the world's third largest destination of FDI inflows, after the US and China," the report said.
Meanwhile, the buildup in foreign reserves since the Asian financial crisis has allowed for a greater buffer against financial market volatility.
Despite the depletion over the past 12 months in view of the strong US dollar, the volume of reserves on hand remains substantial compared to the levels seen in 1997. These will continue to serve as a buffer against sharp capital outflows from domestic markets, the report added.
Furthermore, most Asean members have a relatively small amount of short-term external debt relative to their reserves, except for Indonesia and Malaysia, which are still below 10% of their foreign reserves. This keeps the economies in a good position to withstand the pressures of the strengthening dollar and rising global interest rates.
Nonetheless, given the export-oriented nature of Asean economies, the possibility of spillovers from several remaining risk factors cannot be ignored.
Overall, GDP growth rates around the world will be lower in 2023 with developed markets such as the US, Europe and the UK experiencing full year declines, major Asean economies are expected to see growth slowing to around 5% this year from above 6% in 2022, said Mr Tanuwidjaja.