Over the past month, central banks in Malaysia, Vietnam and Indonesia have each raised interest rates, following a series of similar measures by the Federal Reserve. Higher credit costs are intended to cool inflation and discourage capital flight, but they will also slow ASEAN’s economic growth. An imminent slump in Chinese orders for goods produced in the region will add to the damage, economists said.
“The environment is getting worse,” said Trinh Nguyen, senior economist at Hong Kong investment firm Natixis.
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Higher US interest rates are pulling investment away from places like Southeast Asia, while the stronger dollar makes imported products like oil more expensive. Over the past year, the dollar has risen about 14 percent against a basket of other currencies.
Since the Fed began raising interest rates, ASEAN’s largest economy, Indonesia, has experienced net capital outflows in five of the past seven months, according to data from the Institute of International Finance, an industry group. Investors have withdrawn money from Malaysia in each of the past three months.
Heavily indebted countries could also struggle as the Fed continues to raise interest rates. Thailand’s external debt, for example, has risen to nearly $195 billion, from about $166 billion before the pandemic, according to the Bank of Thailand. The country borrowed heavily to make up for lost tourist revenue, with just a quarter of the pre-pandemic number of foreign visitors expected this year.
“If the Fed persists in raising interest rates, Thailand will be in a very difficult position,” Nguyen said.
Thailand could face a lose-lose decision: raise interest rates and make debt repayments harder for businesses and consumers or allow the currency to fall further against the dollar, which would make imports more expensive and exacerbate inflation.
But even with the recent surge in consumer prices across the region, inflation in many fast-growing ASEAN countries is lower than in the United States. In October, Vietnam reported that prices rose 4.3 percent year-on-year, while US prices rose 7.7 percent last 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 was 12 percent 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 mounting challenges, economic conditions are not expected to feature prominently at Saturday’s ASEAN summit or a separate meeting between Biden and a wider group of Asian leaders on Sunday. The president’s ASEAN discussions will focus on global governance, human rights and the ongoing crisis in Myanmar, US officials said.
In particular, ASEAN leaders are unlikely to complain to Biden about the strong dollar, as the president has no direct control over the currency’s value.
“It’s not something the leaders will discuss with each other,” said Josh Lipsky, an analyst with the Atlantic Council.
The region’s central banks are better positioned today to weather the financial turbulence than during previous bouts of market turmoil, including the “taper tantrum” of 2013 when the Fed’s efforts to shrink its balance sheet through US Treasuries to sell, sparked a bond market riot.
Investors sold Treasuries, sending bond yields skyrocketing and investors exiting Asian markets. When regional currencies fell against the dollar, central banks were forced to raise interest rates to punishable levels.
Today, many ASEAN central banks have enough financial firepower to defend their currencies.
Bank Indonesia, Indonesia’s central bank, reported earlier this month that its financial reserves exceeded $130 billion. That’s enough to finance 5.8 months of imports, almost double the international standard, or 5.6 months of imports plus interest payments on the government’s external debt.
Meanwhile, the global economic situation looks increasingly grim. Europe is suffering a major energy crisis as a result of the Russian invasion of Ukraine. The United Kingdom, which is its third prime minister since September, is in the early months of a recession that the Bank of England says will be the longest in a century. And the United States is struggling with its highest inflation rate in nearly 40 years.
Even China, which has been the engine of global growth for decades, is expected to grow just 3 percent this year, up from more than 8 percent in 2021, the IMF said.
“The global economy itself is in some pretty murky water,” said Neil Shearing, chief economist at Capital Economics in London. “I still think ASEAN will be a relative bright spot. But if the global economy slows, Southeast Asia cannot simply sail on. It is not immune.”
The IMF said last month that ASEAN’s annual economic growth — which surpasses the global average — would slow to 4.7 percent next year, from 5 percent this year. The 10-country group of developing countries includes commodity producers such as Indonesia and Malaysia, as well as fuel importers such as Thailand and export power Vietnam.
But if the global slowdown worsens, the economic toll — especially in Vietnam, Singapore and Cambodia — could be more severe, with individual countries’ growth rates dropping by up to an additional full percentage point, the IMF said.
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For much of this year, ASEAN members such as Indonesia, Malaysia and Vietnam have avoided the worst effects of the misery of the larger economies.
Government subsidies protected consumers from the full effects of higher energy costs. And Chinese manufacturers continued to source numerous ASEAN-made parts to use in making consumer electronics and industrial equipment for customers in the United States and Europe.
Now both relationships are changing.
Government subsidies for energy products prove unaffordable. As oil prices soared after Russia’s invasion of Ukraine, Indonesia spent about $34 billion in subsidies for fuel, natural gas and electricity in the first eight months of this year, up from $14 billion last year.
In September, the government cut subsidies and increased sales prices by 30 percent, a decision that sparked widespread protests.
The region’s exports to China, ASEAN’s largest trading partner, are also likely to decline. With Europe in recession and the US economy likely to weaken next year, Chinese exporters will need fewer parts from ASEAN suppliers, Nguyen said.
Chinese factories already shipped fewer products to the United States and Germany in September. If that decline continues, as economists expect, China will soon begin phasing out its orders from suppliers in countries such as Vietnam and Malaysia.
“Every part of the global economy is likely to slow down in the coming months,” Shearing said. “Everyone has headwinds.”