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Crises come fast and furiously these days, as we discuss in Annual Outlook 2023: Managing polycrisis. In the midst of a host of exogenous shocks, the ASEAN-6 bloc’s resilience will be put to test in 2023. In our view, key themes that are likely to dominate the narrative next year include: a) domestic growth momentum vs slowing trade; b) maintaining macro stability; c) impact of China’s economic reopening, as the economy is a key trading partner as well as investor for the bloc.

• Softer economic expansion as reopening tailwinds normalise and trade cools

The region benefitted significantly from the shift to endemicity and economic reopening in 2022, particularly contact-intensive services. Most economies have seen their headline real GDP in absolute terms exceed pre-pandemic 4Q19 levels, with lagging Thailand set to reach there by late-2022/early-2023.

The road ahead is likely to be forked.

Domestic consumption-oriented economies are likely to have a higher buffer vs those that are export reliant. While private consumption is likely to normalise on the passage of pent-up demand and reopening boost, nominal wage increases, subsidies to offset energy price increases over the course of the year, off-peak inflation, and improved labour market conditions are expected to support household incomes.

Some remnant reopening boost will still help. International tourism and travel are likely to stay supportive for the region in the coming year. Outbound tourism started to rebound over the course of 2022 as travel resumed over the removal of border restrictions, including testing and quarantine requirements. That said, monthly foreign visitor arrivals across the region are still below pre-pandemic levels, ranging from 30% to 63% vs December 2019’s numbers, with room for further improvement. Thailand would be the primary beneficiary of the foreign tourism upturn, allowing growth to pick up further in 2023 and buck the regional moderation. Chinese tourists remain key to a full recovery of the region’s tourism sector, and attention will be on any relaxation of China’s COVID-zero policy.

A weaker global growth outlook and rising external headwinds stand to dampen the region’s growth prospects via the trade/exports channel. Highly trade-dependent economies especially Singapore, Vietnam, Malaysia, and Thailand are likely to be more impacted.

ASEAN-6 goods export growth is likely to cool in 2023 after a relatively stellar performance in 2022. ASEAN-6 exports (on a PPP-weighted basis) expanded at double-digit rates of 15.2% YoY (on a three-month moving average basis) through October 2022, outperforming the Asian region, but the expansion is cooling. This is seen in slowing electronics shipments and correcting commodity prices, as we head into 2023.

ASEAN-6 goods exports are exposed to the US, Europe, and China’s demand. Those three in total are sources of between 30% and 60% of each economies’ exports. Contribution of the US and EU to individual ASEAN-6’s headline export growth in Jan-Oct 2022 vs 2021 has been resilient, while China’s share narrowed. While the upcoming slowdown risks in the West are well-documented, China’s reopening dynamic would be a wildcard. Assuming the Covid-related restrictions are completely unwound by 2H23, China’s reopening tailwinds will benefit the ASEAN-6 bloc. Here too, the composition of the export basket will matter, with electronics-heavy counterparts likely to see a smaller boost than the raw material/ commodity players. Signs of a slowdown in electronics/ semiconductors from South Korea and Taiwan are less than comforting.

Beyond the cyclical fluctuations, ASEAN is set to make continued progress in trade integration with the Asian region over the medium-term. The Regional Comprehensive Economic Partnership trade pact (RCEP) would lend a helping hand. Except for the Philippines, ASEAN-6 members have ratified the agreement. Other major economies, which are part of the 15 members in RCEP include China, South Korea and Japan, as well as Australia and New Zealand.

The move towards a large unified market would bode well for ASEAN’s medium-term trade prospects amid improved efficiency and regionalisation of supply chains, coupled with modest gains from goods tariffs reduction.

China’s trade ties with ASEAN-6 look likely to grow, even after expanding significantly over the past two decades. ASEAN-6’s trade share with China is catching up with the sizeable intra-ASEAN trade share, which has stood sturdy at above 20% over the years.

ASEAN-6’s investment growth is likely to be on the slow burner as the cost of financing has risen and there are considerable demand uncertainties on the horizon. Public capex support might help, but narrowing fiscal deficits are likely to keep the governments’ hands from putting forth any sizeable recovery stimulus, outside of Vietnam which has already outlined specific measures.

After a strong recovery in 2022 buoyed by economic reopening and resilient trade dynamics, ASEAN-6’s expansion is set to soften in 2023 on dissipating pent up tailwinds and moderating trade momentum. Our base case forecasts see ASEAN-6 growth (PPP-weighted basis) easing to a still-respectable 4.8% in 2023 from 5.8% this year.

• Peak inflation and monetary policy

After experiencing multi-year high inflation in 2022, headlines appear to have peaked in Indonesia, Malaysia, Singapore, and Thailand.  We expect headline inflation to average lower in most of ASEAN-6 in 2023, except for Singapore and Vietnam.

Correcting global commodity prices, easing supply chain bottlenecks, and a reversal in downside currency pressures vs the US dollar would provide some relief to regional headline inflation, considering that the weights of fuel and food account for at least 50-60% of consumer price inflation baskets across the bloc. Core inflation should be contained by easing cost pass-through, some let up in pent-up demand, and feed-through from monetary policy normalisation that would anchor inflation expectations.

As central banks have tightened/normalised interest rates in 2022, the ASEAN-6 have lagged the US Fed’s aggressive hiking cycle (375bps increase since March), as inflation was generally less acute in the region vs the US.  Indonesia, Thailand, and Vietnam joined the hawkish bandwagon in 2H22 and saw their policy rates climb close or slightly above pre-pandemic rates. This modest pace of tightening and incomplete pass-through to banks’ lending rates would contain the severity of interest rate shocks to households and businesses.

Philippines was among the most hawkish in the region, lifting its benchmark rate 1% above pre-covid levels, reaching 5% in November, to cement its inflation fighting credibility, as headline prints have been on a persistent uptrend amid second-round effects. This rapid pace of monetary adjustment could subsequently dampen economic activity. Singapore, which adopts an exchange rate-based monetary policy, undertook five rounds of tightening since October 2021 to also contain accelerating inflation. Looking into 2023, the Monetary Authority of Singapore will become more data-dependent in future policy decisions, as risks on growth rise.

We see most ASEAN’s hiking cycles at their last leg in early-2023 before settling into a pause. Policy makers would aim to balance between rising growth headwinds, yet err on the side on inflation, especially efforts to keep inflationary expectations anchored.

• Macro stability to be paramount

Macro stability will assume importance in a year of high US interest rates and tight liquidity. We discussed the fiscal dynamics of ASEAN-6 economies in detail in ASEAN-6: Return to fiscal consolidation, as most economies barring Vietnam are expected to consolidate public finances in 2023.

Current account imbalances are also expected to narrow as oil prices stabilise (Thailand runs the largest net oil import gap), and tourism earnings pick up. Indonesia by contrast is likely to see the surplus slip into a small deficit in 2023 as commodity gains moderate and higher domestic demand perks imports. Philippines’ very wide deficit is likely to narrow, driven by a smaller goods trade gap as import growth cools on slower growth and easing commodity prices.   While a return to pre-pandemic balances will take another two to three years, we see minimal risks of further deterioration in current account balances vs 2022 amongst the ASEAN-6 economies.

Lastly, foreign reserve stocks have fallen across the board owing to valuation effects (USD rally and EUR/ JPY depreciation) as well as active intervention by the respective central banks to support their currencies, eating into key buffers, including import coverage, ratios vs short term external debt (residual maturity).

We tap the gross external financing ratio (GEFR) as a gauge for vulnerability. These show that buffers are either on par (Indonesia, Malaysia, Thailand) or weakened (Philippines, Vietnam) vs the tumultuous period of 2013. While the financing mix (capital account) has seen foreign direct investment flows (FDI) provide some cushion against choppy portfolio inflows, yet the overall balance of payments has been under pressure. As capital inflows return to the region, central banks are likely to be keen to rebuild their reserve stocks rather than to allow their currencies to strengthen significantly. Besides mopping up dollars, maintaining bilateral FX swap windows between central banks will also provide a backstop in the event of unexpected shocks in the global financial system, which could cause ripples in the regional markets.     

As a base case, narrower current account balances, some fiscal consolidation, and intention to rebuild foreign reserve buffers bode well for macro balances next year. A sharp rally in energy commodities or renewed portfolio outflows coupled with drying up of FDI inflows could upset the apple cart in the region, and hence remain key risks.

• Political volatility ahead

Thailand and Indonesia face elections in 2023-2024. In Malaysia, the November elections resulted in a hung parliament, which was eventually resolved through the king’s proposal of a unity government and appointment of Pakatan Harapan’s leader, Anwar Ibrahim, as the Prime Minister on November 24. PM Anwar will face a vote of confidence when parliament resumes on December 19. Going forward, he would also likely have to balance between the various interests of component coalitions within the unity government.

Thailand is likely to garner attention in 1H23, as the race to the upcoming general elections heats up. The government’s term and that for the 500-member House of Representative will end in late-March. Thailand’s Election Commission has tentatively scheduled the elections on May 7, but polls could be called earlier by the PM. The country endured political volatility in 3Q22 when PM Prayut Chan-O-Cha was suspended from office from August 24 to September 30 due to a term limit review. Thailand’s political environment is likely to stay fluid. In the event of inconclusive elections, the government’s transition could be hindered, undermining sentiment.

In Indonesia, Presidential and few regional elections are due to be held in February 2024, ahead of which the finalisation of number of seats as well as counties will be done in February 2023 and registration of the President and VP candidates will take place in Oct-Nov 2023. Amongst the frontrunners are reportedly current Defense Minister Prabowo, Governor of Central Java Ganjar Pranowo, and former Governor of Jakarta Anies Baswedan. Clarity is awaited on which party, including the lead party PDI-P in the ruling coalition, will support the candidates, influencing their probability of gaining an upper hand at the polls.

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