Considering the size of the neighbouring giant economies in China and India, the Association of Southeast Asian Nations (ASEAN) is sometimes shadowed. But member countries have demonstrated impressive integration and are well on a path to becoming a serious powerhouse. By investing in each other’s economies they have maintained an enviable position in the face of the global financial crisis.
If they were taken as a single nation, the group would be the eighth largest country in the world, with a combined total of 600 million people milling around in the 10 existing member countries and boasting a seriously large US$2.5 trillion GDP. Their markets could offer an attractive alternative to those of China and India, especially as China begins to succumb to natural market cycles.
The member countries plan to have all their free trade agreements with China, Japan, South Korea, India, Australia, and New Zealand completed by the end of this year, on the way to forming the much more robust ASEAN Economic Community in 2015. However, because they have largely relied on excessive liquidity and exports to maintain their economies, a looming correction cycle could jeopardise their long term growth plans.
The problem is that over a long horizon, the economic tea-leaves for Southeast Asia are a mixed bag. On one hand the nations have mostly sound economic principles and robust political stability. While the rest of the world struggles with the aftershocks of financial crisis, the various members have pulled together to strengthen their commitment to cooperation and preservation of what they see as a useful economic tool for greater wealth.
They also appear to recognise the limits to cooperation. Given how many headaches the European Union is suffering presently, it is encouraging that few ASEAN elites in power talk about creating a glorious currency union. Public-sector budget deficits do go some way in offsetting the strong corporate sector savings. Malaysia and Thailand have budget deficits of about 4%, while Indonesia and the Philippines hover around 2% of GDP. And public debt-to-GDP ratios are not excessive.
On the other hand, the historic reliance on a precarious export-driven model for growth is producing worrying obstacles for the member states they would rather avoid. So long as foreign demand whips up repeating orders for cheap goods, Southeast Asia theoretically won’t feel the fiscal pinch. But apprehension is particularly widespread within regional ASEAN governments as reduced global liquidity and dropping consumer demand in China remind members of the ghosts of the 1997 Asian crisis.
The problems arise when, despite most ASEAN country’s efforts to reduce their dependence on trade by adopting a flexible currency exchange regime, their growth relies on a continued status quo in trade. Their standard of living presumes the booming growth in China will not tick around on the inexorable cycle towards a contracting bust any time soon.
Some analysts predict any slowdown in China will only marginally affect the economies in Southeast Asia, but the reality suggests the success of both China and ASEAN depends on at least their present market relationships remaining steady and unflustered.
Over the last decade, China was a destination close by to which the emerging economies of Vietnam, Malaysia, Thailand, and the Philippines could ship their cheap goods. The deep Chinese market appetite, seemingly insatiable, consumed everything it could purchase while the peripheral Asian export-driven economies obliged, maintaining a stable flow of commodities and raw materials into the Chinese growth machine.
Today, the ASEAN business model is largely superior in comparison to China and India, each of which depend far more on debt, with both experiencing much longer working capital cycles. Many companies in the association are able to self-finance much of their capital expenditure, leaving them less vulnerable to fluctuations in interest rates. The return on equity ranges from 10% in Malaysia, 11% in the Philippines, to 14% among the largest regional population of Indonesia.
As surely as night follows day, a natural economic correction in China is preparing to steady the booming cycle of their phenomenal period of growth. So as the Chinese machine eases back, the ASEAN countries may have a tough time finding alternative export markets.
It is true that consumption growth in Thailand consistently outmatches other non-ASEAN countries, such as South Korea and Taiwan, but supplying domestic demand is unlikely to assuage the expected gradual downward slide in export orders from China in the coming years. One such case is Indonesia’s account deficit which reversed since late 2011 as commodity prices fell and external demand withered for coal, palm oil, and copper – demand for which used to come from China in much greater numbers.
It is unclear what will happen if the global economy continues to recover, but any greater reduction in global liquidity could precipitate structural changes in Southeast Asian economies. Should the global economy contract again, it would add more pressure to the already tight domestic consumer markets in Southeast Asia.
Ultimately, ASEAN corporate sectors are in extremely good financial health, in stark contrast to the excess indebtedness of other Asian and global economies. However, sliding currencies and capital outflows are the result of a skewed dependency on trade in some countries. While some corrections have been made, many Southeast Asian nations still expect higher growth and higher global liquidities to maintain investment flows, neither of which can be assumed in the rapidly evolving financial environment.