The clock is ticking as the 90-day trade truce between Mainland China and the United States enters its last month. Amid uncertainty surrounding the outcome of the trade war, it has become a trend to talk about market diversification. Accordingly, Southeast Asia – which was somewhat divided during the Cold War era but is now well integrated into the Asian supply chain as a relatively peaceful and stable region – is a bright spot in a cloudy global economy.

Over the past decade, the Association of Southeast Asian Nations (ASEAN) has continued to register impressive economic development. Its aggregate nominal GDP has nearly doubled from US$1,597 billion in 2009 to an estimated US$2,891 billion in 2018 (Figure 1). Collectively, the 10-country bloc is ranked as the world’s fifth largest and Asia’s third largest economy.

Individually, Laos and Cambodia were the best performers in the past five years in terms of average real GDP growth. Both countries posted annual growth of at least 7% during the period. However, as they started at an extremely low point, their economic sizes remain very small and cannot be compared with those of Indonesia and Thailand, the largest economies in ASEAN (Table 1).

Economic outlook in 2019
Although trade tensions continue to pose downside risks to global trade and output, ASEAN, with a total population of 650 million, should generally be able to maintain relatively fast economic growth in 2019 as a result of robust domestic demand (Figure 2). 

In Indonesia, President Joko Widodo has announced a 10% increase in government spending to a record high of US$169 billion in 2019, as he seeks to boost his chances of re-election in April. This will add impetus to domestic demand, while the recent relaxation of foreign-ownership rules in numerous economic sectors could attract more FDI inflows. 

Thailand’s growth this year is expected to be softer than last year’s, as its trade-dependent economy might be dragged down by spillovers from the trade war. That said, the government’s construction projects and a series of economic stimulus measures will underpin domestic demand.  

Malaysia, which is also dependent on foreign trade, will likely see a marginal economic slowdown this year amid an expected moderation in global demand for exports. Meanwhile, the expansion of the U.S. shale industry and its resulting downward pressures on oil prices are no welcome news to Malaysia’s oil and gas sector. For the first 11 months of 2018, oil-related products accounted for about 20% of the country’s exports.

As one of the most export-reliant countries in the world, Singapore’s economic growth is poised to soften in 2019 and the city-state will unavoidably feel the brunt in the event of a significant global slowdown. 
In contrast, the Philippines, similar to Indonesia, is not so dependent on trade. This puts it in a better position than others when facing external headwinds from the trade war. Private consumption, the main driver of growth, is likely to remain strong due to the country’s burgeoning middle class. 

Hong Kong-ASEAN ties
Given the expectations that ASEAN’s prospects as a whole remain promising in the near term, as well as the conclusion of a Free Trade Agreement and an Investment Agreement between Hong Kong and the bloc, it is not surprising that Hong Kong businesses will continue to strengthen their ties with the region, regardless of the current trade spat. 

In fact, Hong Kong businesses have all along acknowledged the importance of the ASEAN market and tapped into the arising opportunities. As a group, ASEAN was Hong Kong’s second largest trading partner in merchandise trade in 2017, after Mainland China. Total merchandise trade between Hong Kong and ASEAN amounted to HK$982 billion in the first 11 months of 2018, representing 15% year-on-year.

Collateral damage?
Will ASEAN be a safe haven from the trade war? Tit-for-tat protectionist measures will weigh on global demand and threaten both output and trade growth.  Few countries would be immune from this, but some are likely to feel more pain. 

Among the major member countries of ASEAN, those with trade contributing a higher share of GDP – such as Singapore, Vietnam and Malaysia – are more directly exposed to a potential slowdown and collateral damage resulting from the trade war. In fact, many ASEAN countries produce intermediate goods for Mainland China to assemble and export to western markets. 

On the other hand, some ASEAN countries could benefit as companies attempt to hedge against the risk of tariff measures by relocating their manufacturing plants from Mainland China. This “trade redirection” would benefit Vietnam, Malaysia and Thailand the most, because they produce and export goods that compete with products from economies affected by the tariffs, according to recent findings of the Asian Development Bank. By industry, the electronics and clothing sectors in ASEAN will be most likely to benefit. 

In other words, the net impact of the trade war on ASEAN may be ambiguous. While the strategy of market diversification makes sense, businesses should be aware that ASEAN countries, except Singapore, still exhibit many emerging-market characteristics. This is despite the fact that they have generally become financially stronger, with larger foreign reserves and better external positions, compared to the time of the Asian Financial Crisis.

For example, their currencies are still more volatile. Figure 3 shows the trend of five ASEAN currencies. Since 2015, the Philippine peso, Malaysian ringgit and Indonesian rupiah have lost at least 15% of their values (some of you may be reminded that economic development is no guarantee of currency stability, as the British pound now performs like an emerging market currency). 

While currency weakness might act as a buffer for individual countries to cushion external shocks, exchange rate volatility could also evaporate business profits away easily.

The strong and sustained economic growth in ASEAN over the past several decades was propelled by the end of the Cold War, which has gifted Southeast Asia with peace and stability. But now, the rules-based multilateral trading system is subject to unprecedented uncertainty and the world might be divided by a new “economic iron curtain”, as described by former U.S. Treasury Secretary Hank Paulson. 

The world’s two largest economies both have significant stakes in Southeast Asia. With them in dispute in so many areas – including  trade imbalances, currency values, technology transfer and market access – will ASEAN countries be able continue their rapid development if they are forced to take sides, like during the Cold War when they had to choose between capitalism and communism? 

For those who expect the current trade truce to be temporary only, perhaps this is the real question that needs to be asked. 

Wilson Chong is the Chamber’s Senior Economist. He can be reached at [email protected]