Within the past month, central banks in Malaysia, Vietnam and Indonesia each raised interest rates, following a series of similar moves by the Federal Reserve. Higher credit costs are intended to cool inflation and discourage capital flight, but they will also slow ASEAN’s economic growth. A looming slump in Chinese orders for goods produced in the region will compound the damage, economists said.
“The environment is shifting for the worse,” said Trinh Nguyen, a senior economist with the investment firm Natixis in Hong Kong.
Higher U.S. interest rates draw investment away from places like Southeast Asia while the stronger dollar makes imported products such as oil more expensive. Over the past year, the dollar has risen about 14 percent against a basket of other currencies.
Since the Fed began raising rates, ASEAN’s largest economy, Indonesia, has suffered net capital outflows in five of the past seven months, according to data from the Institute of International Finance, an industry group. Investors have withdrawn funds from Malaysia in each of the past three months.
Heavily indebted countries also may struggle as the Fed continues lifting interest rates. Thailand’s foreign debt, for example, has surged to almost $195 billion, up from about $166 billion before the pandemic, according to the Bank of Thailand. The country borrowed heavily to make up for lost tourism income, with just one-quarter of the pre-pandemic number of foreign visitors expected this year.
“If the Fed continues to persist in raising rates, Thailand is in a very difficult position,” Nguyen said.
Thailand could be faced with a lose-lose decision: raise interest rates and make debt repayment more onerous for businesses and consumers or allow its currency to sink further against the dollar, which would make imports more expensive and worsen inflation.
Still, even with the recent increase in consumer prices across the region, inflation is lower in many fast-growing ASEAN countries than in the United States. In October, Vietnam reported prices rose at an annualized 4.3 percent rate while U.S. prices are up 7.7 percent over the past year.
As a result, interest rates in ASEAN nations are not expected to rise as much as in Latin America or Eastern Europe, according to the International Monetary Fund. In Brazil, where annual inflation topped 12 percent earlier this year, the central bank has hiked borrowing costs by more than 10 percentage points since the spring of last year.
Despite the mounting challenges, economic conditions are not expected to feature prominently in Saturday’s ASEAN summit or a separate meeting between Biden and a broader group of Asian leaders on Sunday. The president’s ASEAN discussions will focus on global governance, human rights and the ongoing crisis in Myanmar, U.S. officials said.
In particular, ASEAN leaders are unlikely to complain about the strong dollar to Biden, since the president has no direct control over the currency’s value.
“It’s not something the leaders will raise with each other,” said Josh Lipsky, an Atlantic Council analyst.
The region’s central banks today are better positioned to weather financial turbulence than they were during previous bouts of market turmoil, including the 2013 “taper tantrum,” when the Fed’s efforts to reduce its balance sheet by selling U.S. government securities triggered a bond market revolt.
Investors sold off Treasurys, sending bond yields soaring and causing investors to bolt from Asian markets. As regional currencies sank against the dollar, central banks were forced to hike rates to punishing levels.
Today, many ASEAN central banks have ample financial firepower to defend their currencies.
Bank Indonesia, the Indonesian central bank, reported earlier this month that its financial reserves topped $130 billion. That is enough to finance 5.8 months of imports, almost twice the international standard, or 5.6 months of imports plus interest payments on the government’s foreign debt.
The global economic situation, meanwhile, looks increasingly grim. Europe is suffering from a major energy crisis, resulting from Russia’s invasion of Ukraine. The United Kingdom, which is on its third prime minister since September, is in the early months of a recession the Bank of England says will be the longest in a century. And the United States is grappling with its highest inflation in nearly 40 years.
Even China, which has been an engine of global growth for decades, is expected to grow barely 3 percent this year, down from more than 8 percent in 2021, according to the IMF.
“The global economy itself is heading into pretty troubled waters,” said Neil Shearing, chief economist for Capital Economics in London. “I still think ASEAN will be a relative bright spot. But if the global economy is slowing, Southeast Asia can’t just sail on. It’s not immune.”
The IMF last month said ASEAN’s annual economic growth — which exceeds the global average — would slow next year to 4.7 percent, down from 5 percent this year. The 10-nation group of developing countries includes commodity producers such as Indonesia and Malaysia as well as fuel importers like Thailand and export powerhouse Vietnam.
But if the global slowdown worsens, the economic toll — especially in Vietnam, Singapore and Cambodia — would be more serious, with individual country growth rates declining by up to an additional full percentage point, according to the IMF.
For much of this year, ASEAN members such as Indonesia, Malaysia and Vietnam avoided the worst of the fallout from larger economies’ woes.
Government subsidies protected consumers from the full effects of higher energy costs. And Chinese manufacturers kept buying plenty of ASEAN-made parts to use in making consumer electronics and industrial equipment for customers in the United States and Europe.
Now both of those relationships are changing.
Government subsidies for energy products are proving unaffordable. As oil prices shot up following Russia’s invasion of Ukraine, Indonesia spent about $34 billion on fuel, natural gas and electricity subsidies in the first eight months of this year, up from $14 billion last year.
In September, the government reduced subsidies and allowed retail prices to rise by 30 percent, a decision that set off widespread protests.
The region’s exports to China — ASEAN’s largest trading partner — also are likely to dip. With Europe in recession, and the U.S. economy likely to weaken next year, Chinese exporters will need fewer parts from ASEAN suppliers, Nguyen said.
Already, Chinese factories in September shipped fewer products to the United States and Germany. If that decline continues, as economists expect, China will soon begin trimming its orders from suppliers in countries like Vietnam and Malaysia.
“Every part of the global economy is likely to slow in coming months,” Shearing said. “Everybody is facing head winds.”
David J. Lynch