7th June 2022

ASEAN: Framing a Future

Reopening driving recovery in first half

Reopening is lifting growth in the first half, but crosswinds threaten to douse the momentum by the second half. ASEAN is relaxing border controls after two long years of periodic lockdowns. Mobility indices have largely returned to pre-pandemic levels. Vaccinated visitors can enter without quarantine in all ASEAN-6 countries. Laggard sectors will catch up and support the recovery. Tourism revenue accounts for a large share of GDP in Thailand (11.3% in 2019), Vietnam (9.9%), and Malaysia (5.7%). But China’s zero-Covid strategy and stricter restrictions in Northeast Asian countries (Japan, HK and Taiwan) will cap the upswing. Open borders can cut both ways: more Singaporeans traveling abroad could reduce domestic spending. Rising commodity prices have an uneven impact, supporting commodity exporters Indonesia (gas, nickel, palm oil, coal) and Malaysia (oil, gas, palm oil) but hurting the rest.

Global headwinds dousing recovery in the second half

Emerging global headwinds because of the Russia-Ukraine war, China’s lockdowns and global monetary
tightening may roil the reopening tailwind and douse the recovery. Three major shocks – the inflation shock, impending interest rate shock and potential recession shock – will undercut ASEAN’s economic recovery in 2022-23. We forecast ASEAN-6 GDP to expand by +4.9% in 2022 (down from +5.4% at the start of the year), but the risk remains on the downside.

1 Inflation shock: Fuel subsidy cuts & reopening

ASEAN-6 inflation (+3.4% in March) has been climbing but remains low compared to developed and other emerging markets. Singapore is the exception because of its earlier reopening and strong recovery. But inflation is picking up quickly with higher commodity prices, reopening and fuel subsidy cuts. Thailand is tapering its diesel subsidy in May. Indonesia plans to raise fuel and LPG prices, and electricity tariffs. Malaysia is planning more targeted fuel subsidies. ASEAN’s labour market is recovering with the reopening. ASEAN-6 inflation is forecasted to rise to about +4.4% in 2H22 from +3% in 1Q.

2 Interest rate shock: Fed hikes may force premature tightening

The Fed will hike the fund’s rate to about 3% in 2022 and 3.3% in 2023, based on the futures market. The MAS has tightened and Bank Negara Malaysia has surprised with an earlier than expected +25bps rate hike. We expect other ASEAN central banks to tighten in the coming months, including the Philippines and Indonesia.

Rising US interest rates may spark capital outflows and pressure on ASEAN currencies, forcing ASEAN central banks to tighten more than otherwise despite the nascent recovery. A repeat of the 2003 taper tantrums and equity sell-off is however unlikely given larger FX reserves and lower foreign investor positions. The current episode represents a broader US dollar rally, impacting all other currencies and not just ASEAN. But tighter global monetary conditions and rising interest rates will dampen ASEAN’s economic recovery.

3 Recession shocks: War, China lockdown & an overzealous Fed

ASEAN faces potential recession shocks from Europe due to the Ukraine-Russia war; a China hard landing
because of extended lockdowns, and a US recession in 2023-24 if the Fed is overzealous in battling inflation. Our recession model, based on the US 3M and 10Y yield spread, is estimating the recession probability at 6% in Singapore and 5% in Malaysia over the next 12 months. The New York Fed model is forecasting only a 4% recession probability, but the odds will rise as the Fed hikes. A Fed funds rate above 3.5% will likely tip the US and trade-dependent ASEAN economies into recession.