Dimming Southeast Asia growth outlook adds to risks for China
China’s slowing economic growth is denting demand for goods and natural resources from Southeast Asia which, in turn, is hitting demand for Chinese exports in the Asean region, the biggest market for China outside the United States and Europe.
This loop effect has dimmed prospects for a second-half recovery across Southeast Asia, with currencies at multi-year lows and depressed stock markets squeezing income and investment. It also complicates China’s efforts to revive growth in its economy, the world’s second-largest.
The region’s exports have dragged as Chinese demand for Indonesian coal, Malaysian electronics and Thai car parts has slumped, with China heading for its weakest growth since 1990.
Sentiment was already very fragile in Southeast Asia going into the China turmoil
The 10 economies in the Association of South East Asian Nations took nearly US$160 billion of China’s exports in the first seven months of the year, according to Chinese trade data - around the same as Japan, South Korea and Taiwan combined.
Sharp falls in stock markets and capital flight from Southeast Asia are further battering confidence and pushing up funding costs, hobbling growth in a region where recent expansion has been fuelled by cheap debt.
“Sentiment was already very fragile in Southeast Asia going into the China turmoil,” HSBC’s Fred Neumann said. “Global financial volatility and higher funding costs are exerting a bigger drag on growth than many people had anticipated.”
The Philippines was the bright spot, with annual GDP growth picking up to 5.6 per cent in the second quarter from 5 per cent in the first. But growth slowed across the region’s four other main economies.
Capital Economics, a consultancy, calculated that annual growth among Southeast Asia’s five main economies slowed to 4.3 per cent in the second quarter from 4.4 percent in the first.
“It’s the weakest since Q3 of last year, which doesn’t sound that bad, but Thailand’s growth was still being dragged down by the political crisis back then,” economist Dan Martin said.
As growth slows, governments are feeling the pressure.
Less than a year after taking charge of Southeast Asia’s largest economy, Indonesian President Joko Widodo has reshuffled his cabinet, replacing his chief economy minister and dismissing the trade minister.
At a six-year low of 4.67 per cent in the second quarter, growth is far from a campaign pledge of 7 per cent, and the authorities are struggling to prop up the rupiah, which is down 12 per cent against the US dollar this year and is now at its lowest level since the Asian financial crisis.
Thai Prime Minister Prayuth Chan-ocha also came to power last year, after a coup, and promised investors stability. But with no sign of recovery he has installed a new finance minister and deputy prime minister to revive the economy.
Analysts say corporate balance sheets are, on the whole, sufficiently strong to absorb the shock. But Xavier Jean, director of Asia-Pacific corporate ratings at Standard & Poor’s, cautioned that weakening currencies would cause problems.
“If currencies continue to depreciate, you will see some defaults,” he said, singling out Indonesian firms as particularly at risk because of their greater currency mismatches and refinancing requirements.
