In a world lousy with runaway populism, trade wars and surging oil prices, punters are scrambling to find shelter from the chaos. Southeast Asia is as good a place as any to look.
Odd, considering the region is known more for a heavy reliance on exports for growth than well-managed national balance sheets. But as Donald Trump’s tariffs tackle China, Southeast Asia is proving to be surprisingly resilient. Some are even calling the region a “safe haven.”
Case in point: manufacturing activity among the 10 members of the Association of Southeast Asian Nations, or ASEAN, is outperforming global growth. In May, ASEAN output improved or held its ground even as global activity slid to a three-year low, said Jane’s Information Group’s IHS Markit.
The JPMorgan Global Purchasing Managers’ Index compiled by IHS Markit came in at 51.2 in May from 52.1 in April. While north of the 50-level signaling expansion, conditions are deteriorating. But ASEAN is actually picking up pace, with five of the seven top regional economies reporting strengthening conditions.
Indonesia, the biggest, posted its best performance in nine months – 51.6 – as manufacturing gains steam. Thailand is enjoying a modest upswing in domestic demand and export orders, though consumer confidence is trending downwards. The Philippines saw the first rise in purchasing managers’ activity in six months to 51.2.
Vietnam saw a reading of 52 amid improving customer demand. Singapore operated at a 52.1 level. Malaysia was the straggler in May, coming in at 48.8. Yet even that reading marked a significant improvement from the start of the year. The latest purchasing managers’ signals suggest better output going forward.
What gives? There are a few common threads that explain Southeast Asia’s impressive perseverance.
One, recent election results in three of the region’s biggest economies benefitted incumbents – Indonesia, the Philippines and Thailand. Policy continuity often cheers investors. Even better if there’s a whiff of reform in the air.
There’s great hope, for example, that Indonesian President Joko Widodo will use his second term to accelerate structural reforms. In his first five-year term, Widodo put some big upgrades on the scoreboard: making better infrastructure a priority; cutting budget-busting subsidies; increasing accountability and transparency at government ministries. His tax amnesty plan is prodding tycoons to pull capital back home. Widodo’s second term is a chance to raise things to a new level.
Malaysia, too. Even as markets debate the effectiveness of Prime Minister Mahathir Mohamad’s first 13 months in office, waves of foreign direct investment are zooming Kuala Lumpur’s way.
FDI jumped 95% year-on-year in the three months to March. It’s a vote of confidence that Malaysia will continue reducing government debt, level playing fields and clean up the mess left by predecessor Najib Razak. Hence Finance Minister Lim Guan Eng’s efforts to position Malaysia as a haven from global chaos.
Two, monetary authorities have considerable latitude to stimulate growth. The last few weeks have seen extraordinary monetary activity around Asia – rate cuts from Kuala Lumpur to Manila to Mumbai to Sydney to Wellington. Even Bank Indonesia, which tightened six times in 2018, is telegraphing easing moves.
Officials in Jakarta must tread carefully, of course. Hefty current account and budget deficits mean the central bank will have to make any accommodative steps count. Yet Indonesia learned lots in late 2013 amid the Federal Reserve “taper tantrum.” Back then, Morgan Stanley included it on the list no nation wanted to be on. Its “Fragile Five” lumped Indonesia together with Brazil, India, South Africa and Turkey. Cutting rates too much might tank the rupiah as in 2013.
In Manila, Bangko Sentral ng Pilipinas may be cutting rates again in the weeks ahead. Last month, it cut its benchmark rate for the first time since 2016 to 4.5%. Since then, inflation cooled enough to allow the BSP to ease again.
Even so, this is no time for complacency. As United Overseas Bank Chief Executive Officer Wee Ee Cheong puts it, Southeast Asia has the scope to navigate around the worst of the US-China trade war. That is, if the world’s two biggest economies don’t push the global financial system into crisis territory.
Governments and central banks must act nimbly to shield economies from the worst. Multitasking is vital, too. Policymakers must reduce the imbalances and deficits leaving economies vulnerable to further market turbulence. Leaders from Mahathir to Philippine President Rodrigo Duterte need to keep their own populist instincts in check so as not to repel foreigner punters.
Yet Southeast Asia’s haven dynamic is an enviable one. With some heavy lifting on the reform front, there’s every reason to think the region can continue to confound the skeptics.