Trade credit insurer Atradius has published a new economic research report analysing the impact of a potential trade war on the economies of Southeast Asia.
With a trade war seemingly escalating between China and the US, Atradius reports that trade across Southeast Asia has already been moderately impacted, with increased risk aversion in international financial markets. However, strong domestic demand and counterbalancing policies are supporting GDP growth and these economic fundamentals make a financial crisis unlikely. Nevertheless, some underlying weaknesses in the region’s economy remain, making it vulnerable to the stronger US dollar and higher interest rates.
The Atradius report, entitled Southeast Asia; coping well with headwinds, analyses the economic outlook for five of the biggest economies in the region. It is the latest in a suite of economic research papers designed to equip businesses with the insights and tools essential to doing business in a changing global economy.
Highlights from the report include:
- Indonesia: Export growth is slowing substantially this year. As China is Indonesia’s most important destination for good exports, China’s shift towards a more consumption-orientated economy has a negative impact on Indonesian exports. However, exports account for just 22% of Indonesia’s GDP enabling strong domestic demand to compensate the drag from net exports. Election-related spending will support private consumption and business investments continue to grow strongly. Monetary policy tightening to cushion the economy from the impact of market turmoil is expected to have just a minor impact on domestic demand.
- Thailand: The economy is weathering the trade war reasonably well. While export growth will slow, no dramatic shifts are expected as a result of the US-China trade war. Chinese import demand is cooling but strong service exports in the form of tourism mitigate the impact on export growth. Real GDP will be supported by public infrastructure investments and private consumption. Domestic weaknesses include the potential for political tension to re-emerge which is an ongoing risk for international trade.
- Malaysia: The highly open economy is more susceptible to weaker external demand, more specifically from China, and is one of the most vulnerable countries to the US tariffs imposed on Chinese exports. Export growth will slow after a strong performance in H1. The domestic economy keeps GDP growth at a reasonable rate with buoyant household spending, boosted by fuel subsidies and a lower sales services tax. However, household purchasing power is set to decrease over the next year due to rising domestic borrowing rates. Meanwhile, the Malaysian ringgit, is vulnerable to worsening market sentiment.
- Philippines: Economic growth will slow gradually over the next two years but this is only partially attributed to exports losing momentum. Growth in imports of goods and services will stay high, resulting in a negative contribution of net exports to GDP growth. Domestic demand is, again, bolstering the GDP growth rate. Government expenditures will rise because of extensive infrastructure programmes and private consumption remains strong as remittances still support household incomes.
- Vietnam: Amongst the five bigger Southeast Asian economies, Vietnam is forecast to maintain the highest growth rate this year and next; contributed to by relatively strong export growth. The US-China trade skirmishes will have a negative impact on exports to China. However, Vietnam should benefit by gaining larger market shares in export markets at the expense of China, especially in the readymade garments sector. If Chinese companies decide to move production to other countries, Vietnam is the best position to accommodate. Domestic demand shows healthy grown because of growing tourism and strong labour market conditions.
Mike Rowan, Regional Manager for Atradius UK’s North Region, said “For many years, the emerging economies in Asia have been the main growth engine of the world economy. Next to the big economies of China and India, the Southeast Asian countries have made strong contributions to global GDP growth. This year, several developments have potential to impact the growth outlook for the region. This includes the escalating trade war between the US and China, monetary tightening by the Fed and rising risk aversion to emerging markets which will all leave their mark. However, as things stand there is no significant cause for concern thanks to other prevailing factors, not least strong domestic demand.”
“Any exporter needs to make it their business to stay abreast of global economic developments and the potential impact that these can have on the markets and individual customers that they are trading with. It’s all part of having a comprehensive risk management strategy where knowledge and staying informed can be the difference that enables a business to not just survive but also thrive. As a trade credit insurer, Atradius offers more than protecting businesses from the risk of non-payment. We position ourselves as a trade partner to businesses, equipping them with the insights and tools to trade safely no matter what the risk.”