Evolving Trends in Trade and Growth in Southeast Asia

By Paul Tierno and Linda True

In this episode of our series Rethinking Asia, we spoke with Frederic Neumann, Managing Director and Co-Head of Asian Economics Research at HSBC. Currently based in Hong Kong, Fred previously taught graduate level courses at schools in the United States and holds a Ph.D. in International Economics and Asian Studies from the Johns Hopkins School of Advanced International Studies.

Fred guided us through the complex economic dynamics at play between China and ASEAN members. We learned why intra-Asian trade is expected to increase as more trade agreements are signed within Asia, and how China’s Belt and Road infrastructure investment can best help Southeast Asian economies. Some of our main takeaways from our exchange with Fred include:

  • An earlier period of fierce competition between China and Southeast Asia has given way to an era of greater complementarity with many areas of mutual benefit in the region including increased trade and tourism and integrated supply chains.
  • However, as many ASEAN economies now have lower average wage costs than China, supply chains are diversifying into Southeast Asia and increasing intra-Asian trade.
  • U.S. reluctance to join the two major multilateral trade agreements in Asia is accelerating regionalization, or regional engagement and integration fueled by greater economic codependence within Asia.
  • Chinese Belt and Road investment in Southeast Asia can alleviate domestic constraints in engineering know-how and capital availability to improve infrastructure and link markets, particularly if it steers clear of prestige projects.
  • A rapidly aging Northeast Asia will raise labor costs and domestic savings, thus paving the way for more foreign investment to flow into relatively younger Southeast Asian economies.
  • Across Southeast Asia, macroeconomic fundamentals remain sound overall; however, current account deficits in Indonesia and the Philippines appear most vulnerability to global threats.

Transcript

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Paul Tierno:

Welcome to Pacific Exchanges, a podcast from the Federal Reserve Bank of San Francisco. I’m Paul Tierno.

Linda True:

And I’m Linda True. We’re analysts in the Country Analysis Unit, and our job is to monitor financial and economic developments in Asia. Today, we continue our series, Rethinking Asia, as we consider noteworthy and unusual trends in Asia in finance and economics. Today we sat down with Fred Neumann, who is managing director and co- head of Asian Economics Research at HSBC and is based in Hong Kong.

Paul Tierno:

We spoke with Fred about the current state of ASEAN, or the Association of Southeast Asian Nations, and the relationship of member states as well as the dynamic between ASEAN and its bigger neighbor to the north China.

Linda True:

It was interesting to hear Fred talk about how Southeast Asian countries balance cooperation and competition on different sovereign or regional priorities. I thought it was also interesting to hear how the nature of the relationship between ASEAN and China has changed from one of competition in the past to one of co-dependency.

Paul Tierno:

Great, well let’s get to our conversation with Fred.

Paul Tierno:

Thanks for being with us today, Fred.

Fred Neumann:

Thanks for having me.

Linda True:

We’re really glad to have you here. So, to kick off, as the elephant on the map, China tends to dwarf its neighbors in ASEAN in nearly all categories. In fact, the population of some ASEAN countries are smaller than some of China’s larger provinces. How can ASEAN compete economically with China, considering its size, resources, and centralized mobilization? And how do you see ASEAN and China? as economic competitors, or codependents?

Fred Neumann:

Well, the relationship is really evolving over time. At the beginning in the 1990s, when China emerged on the map, China was really a competitor to ASEAN, competing in some of the low-end manufacturing goods, exporting to western economies. In fact, at the time, the competitive pressure from China sort of contributed to the Asian financial crisis. If you remember, in the mid 1990s, China at some point devalued its currency. That gave Chinese exports an extra leg up and put even further pressure on exporters from ASEAN.

Since then, the relationship has really evolved. Back then, they were really head to head competitors. And then in the 2000s, we saw China increasingly buying raw materials from Southeast Asia. So, the relationship became a bit more complex. I would say today, there is many more areas of complementarity. It’s not just an area of being full-on competition between the two. And we see many ASEAN countries actually now benefiting from China’s continued growth. The example is Thailand’s tourism sector, for example. But even if we think about the integration of the manufacturing sectors, Vietnam exports a lot of manufactured goods to China. All of that really suggests that the relationship has become one that is more complementary in terms of the two sides working together and benefiting mutually, rather than being necessarily just competitors outright.

Linda True:

Just out of curiosity’s sake, if we just look back at the competitor relationship, could you describe some of the competitive advantages that Southeast Asia has over China, since most people tend to think about China as having the competitive advantage over Southeast Asia?

Fred Neumann:

Well, one way to illustrate this is to look at wage costs or per capita income. Now, China is a very large economy and there’s a lot of variation there between coastal provinces and inland. But if you just take the average per capita income in the year 2000, China and Indonesia had roughly the same per capita income level. Today, China’s per capita income is twice as high as Indonesia’s. And so, if you just think in terms of the competitiveness of Indonesia, in some sense, Indonesia now has more competitive labor costs. And that should in principle allow Indonesia to then compete with China, again, on manufactured products.

Now, there are many other aspects to this. Indonesia would have to adopt better infrastructure, a more competitive regulatory environment to capitalize on this. But I think to some extent, the change in wage structures has given ASEAN, again, a bit of an edge. Thailand is another example. In the year 2000, China’s per capita income was half that of Thailand. Now China’s per capita income as one third higher than Thailand’s. And so, we already see Southeast Asia again being able to, at least at the margin, being able to compete on wage costs. That’s not the be all and end all for international competition, but it certainly helps. And so, in some sense China has opened up a bit of breathing space for ASEAN where it can now again compete on price, and not just on sort of on selling natural resources to China.

Paul Tierno:

You got to it in your response to the first question, but I wanted to dig a little deeper. As industrial coastal China diversifies away from heavy manufacturing industries, given rising wages, are industries actually moving into the Chinese interior, or do we actually see them moving into Southeast Asian neighbors?

Fred Neumann:

We see actually both, to be really frank. It’s not an either or. But there are good examples. One example we have one of China’s biggest apparel makers that used to be based in coastal China. In fact, not far from Hong Kong, where I currently sit across the border in Guangdong Province. And that apparel maker has started to shift a lot of production into Southeast Asia. So, into Vietnam, for example, back in Indonesia. Some of the biggest sneaker makers are coming back to Southeast Asia. So, not all of it is going inland. Where we see some production moving inland into China, that has been in the technology sector. Some of the biggest technology electronics assemblers have moved further inland to Chengdu, Chongqing, for example, and even beyond to take advantage of cheaper labor costs.

But even there, there are some signs that Southeast Asia, particularly Vietnam, Malaysia, and Thailand, actually have regained a bit of competitiveness. And it’s not just multinational firms moving partly production back into Southeast Asia, but it’s even Chinese companies who are doing that as well. So, both is happening. But I think the pie is almost large enough, so that at least at the margin, Southeast Asia could still benefit.

Paul Tierno:

And another global economic trend that we’ve been sort of following is the ramping up of trade tension between the US and China. Conventional wisdom also suggests that no one wins in a trade war, right? But is there a silver lining for Southeast Asia in terms of diversifying the supply chains further into Southeast Asia, and further expanding intra-Asian trade?

Fred Neumann:

Yeah, that’s a good question because it really follows up to what we just discussed on choices that companies have when they try to evade higher labor costs, or they move further inland to China, or actually move to Southeast Asia. And to the extent that there is policy uncertainty around exporting from China to the US, some companies at the margin may then decide to avoid supply chain concentration risk in China and move part of their production into Southeast Asia. So, yes, one would think that the tariffs generally are negative for growth and therefore curtail global trade. But there is a silver lining here, in that really, to some extent, multinationals in particular feel that it’s just too risky to leave a big chunk of production in China and move some of it therefore, into Southeast Asia.

Now, there’s still policy risk. One doesn’t know whether perhaps some of the Southeast Asian countries might be next on the list from being targeted. That’s obviously one big uncertainty out there. But there’s a clear sense that even if China and the US were now to come to a swift agreement, a big deal being reached between the two, in some sense, the damage has been done. That is that a recent episode, the last six months really drove home to many companies, the supply chain concentration risk, and they’re looking for diversification. And to the extent that Southeast Asia offers an alternative platform for production that’s still within the region that has relatively competitive labor forces, some of the Southeast Asian countries should certainly see a bit of a tick up in foreign investment coming in.

Linda True:

So, continuing on trade and along the similar lines of thinking, the US is missing out on both of the major multilateral free trade agreements involved in Asia. Namely the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the RCEP (Regional Comprehensive Economic Partnership). What does this mean for the trade dynamics between the US, China, and Southeast Asia?

Fred Neumann:

Well, one term that comes to mind is regionalization. I think what’s been unusual in the last two or three decades is that really, we had a very strong, integrated Trans-Pacific economic relationship where a lot of intra-Asian trade was even in some sense tied to exports to the US. We had a lot of supply chain trading in Asia. But really the engine for that was ultimate demand by US consumers and companies for Asian products. But with these deeper integration projects like the RCEP, or the CPTPP, that could really drive more genuine regional growth. And in some ways, it cuts out the US. It cuts out the Trans-Pacific leg if you will, and really draws together the Asian economies. And to some extent that China’s involved, it will really tie most of the other Asian economies closer to China.

So, it’s a hub and spokes model here for Asia where China sits at a center, particularly for the RCEP, and then the other countries start to trade mostly with China. And so, regionalization is really the key term here. In Europe, that very much exists. You have the European Union, you have most trade actually occurring within the EU, rather than between the individual countries in the EU with outsiders. And so, something similar might happen in Asia.

What’s interesting is that we have competing integration frameworks here. The RCEP is Asia wide, includes China. And the CPTPP is led by really Japan, but excludes China. And so, we see two sort of different systems being enacted. But I would think that ultimately, inevitably, China will play a role in all of these agreements. It’s not inconceivable that the CPTPP ultimately will also start to encompass China, because it’s the biggest market in Asia and most economies here will look to see more growth opportunities in China, especially if China continues to grow with the pace it has in recent years.

Linda True:

Out of curiosity, usually FTAs have rather complicated rules of origins, which affect their utilization rates.  You just discussed two very complex multilateral FTAs that are coming up.  Do you see both of them being utilized?

Fred Neumann:

Well, it does create a bureaucratic mess, if you will. You’re right. The rules of origins, for example, will have to be meticulously administered, and to have two rival multilateral agreements also leads to a lot of inefficiencies. But one could argue that ultimately, there’s a clear economic logic to harmonize these two competing agreements in some form, or even to merge them in some sense.

We already saw some economies that are in the RCEP applying for or considering joining the CPTPP. Korea is one example here that has voiced interest in joining this. Thailand, Indonesia, all these countries have actually expressed interest in joining the CPTPP. So, we might actually see one of the two standards sort of becoming a bit more prominent. And ultimately, I would argue that we’ll see some sort of harmonization of these two agreements, either by countries joining one or the other, or there being explicit harmonization at some point in the future. But I think the concern is right. That at least for the time being, it does bring with it a lot of distortions as well as trade liberalization, because you sort of create two slightly competing regimes.

Linda True:

I was always surprised that ASEAN didn’t do more to leverage off of its dialogue partners, especially beyond its plus three partners, namely China, Japan, and Korea. Beyond the free trade agreements that ASEAN has with each individual dialogue partner, do you see anything coming out of these relationships?

Fred Neumann:

Well, the individual free trade agreements are already fairly substantive, to some extent. ASEAN is hedging its bets and is not putting all the eggs in the Northeast Asian basket, but is trying to engage other regions of the world as well. It’s not just ASEAN overall, it’s also individual ASEAN members, which is Indonesia and Australia, for example, sign a free trade agreement. We have Vietnam and Europe also contemplating a much deeper trade relationship.

I think the way forward will probably be to deepen those free trade agreements. So, very often when we say there’s a free trade agreement in place between ASEAN and Europe, that’s really very superficial in many ways. And the strategy for the way forward with these dialogue partners will probably be to build on these FTAs and make it much more meaningful and deeper, so that we actually expand trade. Particularly in the world where perhaps the US is being seen as a less reliable trade partner, some of the Southeast Asian countries and ASEAN as a block as well, will want to look to other regions to deepen relationships. So, building on FTAs, I think, is important.

Beyond that, there’s still a lot that could be done in terms of know-how transfer be it attracting FDI, working, collaborating on technology development in terms of bringing in infrastructure investment, funds, for example, from Europe, Australia into Southeast Asia. So, I think the potential here exists to deepen it in many facets. The question is perhaps why it hasn’t happened before. I think to some extent, the perceived withdrawal of the US from the region kind of might act as a catalyst to spur closer engagement between ASEAN and other dialogue partners. Because there’s a sense here that perhaps ASEAN needs to look to other regions to kind of strengthen this international profile, particularly when the US becomes a somewhat less reliable partner in the trade realm in particular.

Paul Tierno:

I actually wanted to follow up with a question on ASEAN, and intra-ASEAN specific cooperation. So, we asked you earlier about how ASEAN and China are competitors or codependent, but specifically for ASEAN. They’re neighbors, but they’re also competitors, right? So, what are the nuances of this dynamic? How do the competing interests of what are sovereign governments, how do they impede broader cooperation on things like trade and banking? Because in many ways, you can see them as having interests that are aligned, but also as individual sovereign nations, they have their own strategic interests. I just wanted to see what you thought about how that dynamic plays out.

Fred Neumann:

Yeah. I think you’ve put your finger on it. This has essentially been the dilemma for ASEAN that there is value in cooperation. But there’s also sort of … because all countries really, are trying to drive an export-led development strategy. There’s also an element of competition between these countries. And so, we have this dual dynamic within ASEAN that is perhaps to some extent has also hindered closer intra-ASEAN integration. I think over time, there is a logic for further integration within ASEAN. But the reality is, it’s been very slow. It’s been very slow, in part because they’re competitors as you say, but it’s also been slow because generally there’s a huge difference in the level of development in individual ASEAN economies, stretching from Singapore all the way to Laos, in terms of per capita income, and just bring everybody on board particularly in a consensus style decision making process, very, very difficult.

I think over time, we’ll see probably more in terms of integration, particularly as China becomes an even more potent market in its own right. And so, it makes sense for ASEAN to band together and create a more genuine internal market to attract investment from the outside. But, ASEAN hasn’t fulfilled its potential in this regard, and it’s hard to see that issue being resolved very, very quickly. That even comes down to very mundane things. It’s not just that there are competing interests to some extent between countries. But there’s even a sort of a perceived reluctance to give the ASEAN Secretariat more staff. Now, this sounds very mundane, but in reality, you need a very strong staffing of the ASEAN Secretariat to drive the agenda, to do feasibility studies, to advocate for change. And until we have a more robust bureaucratic structure in place in ASEAN, it’s hard for ASEAN to really take the leap into ever closer economic integration.

They are making progress. I think often, people don’t appreciate enough how much individual countries are actually pushing for integration. But in reality, the progress has fallen well short of some of the ambitious targets they’ve set over the years, and probably will remain the case that we’ll have very, very gradual integration indeed over time.

Linda True:

As a follow up question on that, do you think the ASEAN countries, or their governments, will ever be willing to concede extra sovereign concessions that you would need for a strong multilateral organization and regional integration?

Fred Neumann:

I think at the current juncture, there’s very little appetite for that. That’s partly a function of just diversity of ASEAN in terms of political structures, in terms of development level, et cetera. It’s perhaps a bit too much to ask right now that countries sort of give up the veto rights over policies. And to some extent, everybody compares ASEAN with the European Union, where this has occurred to some extent. But I think the historical experience in Europe with the Second World War was a very important catalyst to actually get sovereign nations to surrender some of their sovereign rights.

Obviously, we don’t have, thankfully, such a traumatic historical experience in ASEAN, and therefore, there’s a sense that perhaps individual countries may well retain some of their sovereignty, and are more reluctant to give it up. And that’s very understandable from a historical context. And so, I think that’s not very likely we’ll see that happen. But having said that, even if you had say, a more beefed up ASEAN Secretariat, or if you had more of an opt-out options for certain treaties, whereby you get essentially countries not giving up the sovereign right. But essentially, you’d set up some of the treaties that countries could opt to stay out of certain measures for a time. I think that would give you a bit of a path towards ever closer integration. Because then you could have those countries that really generally want to press ahead actually move ahead on some of these issues. Now, it wouldn’t be the ideal case. But it’d certainly be, to some extent, a way forward.

Paul Tierno:

I wanted to go back to one of your responses from earlier, when we were talking about US and China trade tensions. You reference that it’s possible that some multinationals might diversify their supply chain into Southeast Asia. But then in an earlier response, you even said that they would need to be sort of improvements to infrastructure. This leads me to a question that I planned on asking you regarding the Belt and Road. That seems like an obvious boon, right? If you have countries that are going to be experiencing a shift in the supply chain, but they need infrastructure, Belt and Road can seem like the perfect policy to fill the gap.

However, there’s been some backlash recently to the Belt and Road, specifically some countries like Pakistan or Sri Lanka I’m thinking of, or Malaysia. There’s been some buyer’s remorse. What has changed across Asia regarding that initiative?

Fred Neumann:

While you were asking that question, I was just thinking to myself that, yes, the Belt and Road Initiative is important terms of delivering more infrastructure. But it’s actually quite remarkable that a lot is happening on the infrastructure front, even domestically outside the Belt and Road scheme. Just think about Duterte’s infrastructure put in the Philippines, Jokowi in Indonesia certainly made some headway in terms of ramping up infrastructure. In Thailand, you have a lot of infrastructure projects that are being implemented now outside of the Belt and Road. So, I just wanted to put that up there as well, because I think it’s often forgotten how much actually is being done locally as well.

Now, in terms of the Belt and Road as well, there has certainly been a lot of headlines of late, I think, with regards to Southeast Asia, in particular, Malaysia was in focus with the election of Prime Minister Mahathir. There’s been a review of the Belt and Road projects, and perhaps generally sort of a sense that it may be advisable to apply more scrutiny to individual projects then in sort of the earlier phase of the Belt and Road rollout. And so, that’s, I think, some important points of being raised there, which is to look at the financial sustainability of these projects and our ability of how quickly we roll them out.

But what I would say is that despite these headlines that we see in the news, it’s hard to see the Chinese themselves completely swerve away from the Belt and Road. And we’ve seen some signs of late that they are reassessing their own approach as well. They have indicated, for example, that they’re keen to work more with multilateral development institutions. In part, to kind of learn a bit more about how to roll out projects in emerging markets and make them more sustainable, make them more acceptable, making them integrate better into local infrastructure. And so, I think there’s a recognition even from the Chinese side that we can’t go in all guns blazing, we need to sort of assess individual projects in a much more meticulous manner.

The overall desire by the Chinese is to keep on integrating the region economically and Belt and Road will be a key part in this. Now on the receiving end as well, I do think, yes, there has been perhaps in some occasions some buyer’s remorse. But overall, there is a huge gap in infrastructure still in Southeast Asia. And if the region really wants to capitalize on its emerging competitive niche, vis-a-vis China. Because remember, China, for almost two decades has been sort of a competitive force. It was very hard to counter for Southeast Asia. Now that wages are going up in China, this opens up this niche where ASEAN could breathe again. But we need to raise infrastructure. I think that realization is there in Southeast Asia as well.

So, I would see Belt and Road being recalibrated, maybe the sequencing of these projects as being slowed down, but it’s hard to see that disappear entirely. Both from the Chinese side, as well as from recipient countries.

Paul Tierno:

It’s interesting that you started by saying that there’s a lot of infrastructure actually being undertaken domestically, as well as through the Belt and Road Initiative. Is there capacity in each of these countries to fulfill all of these projects in terms of labor and then also as well as capital?

Fred Neumann:

That is a clear constraint. I think. And in the Philippines, for example, we’re now arguably seeing, to some extent, these constraints starting to bite, because there has been a very impressive roll out of infrastructure. But the absorptive capacity of the economy can’t really sustain that without leading, at least at the margin, to an increase in inflation, and the wider trade deficit come through. So, there is a limit in, in terms of capacity. But I think that is actually to some extent an argument to keep the Belt and Road initiative engaged. Because what the Belt and Road initiative does is by bringing in Chinese infrastructure investment, you’re also essentially tapping into China’s capacity to build this, China’s experience to build these projects.

One example is that in some countries we actually lack just simply the planning and engineering know-how, how to roll out very complex projects, and the Chinese have tremendous experience in doing this. When it comes to just purely the labor, that’s obviously a very contentious point, because ideally, you want to employ local labor. But to the extent that there are shortages locally, one might also use some of the Chinese workers. Either by prefabricating some of the components within China, or by bringing in some of the engineers that are otherwise lacking in these countries.

So, to some extent, yes, going full throttle on infrastructure, the absorptive capacity is not there. We need to be very careful on how we sequence this. We need to stay away from prestige projects, and really look at things that directly improve the productivity of individual economies. But I would argue that this is not necessarily an argument to reject Chinese investment wholesale, because Chinese investment actually helps alleviate to some extent these constraints in terms of know-how, in terms of capital availability, et cetera. So, it needs to be very judicious process. It needs to be a highly coordinated process as well.

One possible avenue is to perhaps give multilateral institutions a bigger coordinating role in all of this, in order to make sure that we don’t overburden the capacity of local economies to actually build out the infrastructure.

Linda True:

I wanted to just shift the conversation a little bit to the demographic story in Asia that everyone’s looking at. Asia has a wide range in demographics with countries in Northeast Asia aging rapidly, while those in South and Southeast Asia are relatively younger. How do you expect these differences to play out in the coming decades in terms of flow of capital, labor, and fiscal consequences? Is Southeast Asia likely to capitalize on the demographic dividend?

Fred Neumann:

Yeah. I think that’s one of the big trends that is often not sufficiently discussed, really, is the shifting demographics in Asia. The backdrop to this is really a rapid aging of the populations in Northeast Asia. Everybody knows about Japan’s rapidly aging population. But Korea this year, according to Korea’s Central Bank, is actually starting to see its working age population contract, which is a very critical transition phase. China’s population is aging rapidly. Hong Kong, Taiwan, all these economies see rapidly aging populations.

What this should mean in principle is an increase in the labor costs in Northeast Asia as workers become scarcer. But it should also lead to build up and savings in Northeast Asia. Because aging populations, particularly in the early stages tend to save more as people prepare for retirement. And so, the increase in capital availability in Northeast Asia and the rise in labor costs should actually mean that more money, more foreign investment, could flow into Southeast Asia where these demographics aren’t quite as binding. So, we see we discuss before that already, Southeast Asia is very competitive on wage costs vis-a-vis China, and this will probably just become an even bigger argument in the coming years to invest in Southeast Asia.

From that perspective, overall, Asian aging should be relatively positive in the near term for Southeast Asia. But if you look at ASEAN itself, there’s also a huge discrepancy in terms of demographics within individual countries. You have the Philippines on the one hand being a very young population, and to some extent dream demographics, if you think in terms of the availability of labor. But you’ve got other economies like Thailand, where you also already see some aging kicking in. And in fact, by the early 2020s, Thailand will also see its working age population start to turn negative. And the demographic turn across Southeast Asia is perhaps somewhat delayed compared to Northeast Asia, but it’s happening as well. Vietnam is another economy where over the next 10 years, the demographics are favorable but then suddenly start to shift.

There’s a clear sense here, therefore, that ASEAN overall, perhaps except for the Philippines and Indonesia, has sort of a limited time, perhaps 10 to 15 years, with which to capitalize on relatively favorable demographics to advance growth. That’s why I do think there’s a lot of urgency here, as we discussed, even to roll out infrastructure to capitalize on growth opportunities to essentially develop economies before the aging really starts to kick in. So, the demographics in the near term should be positive for Southeast Asia. But we shouldn’t be so complacent and think that demographics alone will carry Southeast Asia. And definitely because you can almost see over the next 10, 15 years in some countries in Southeast Asia demographics becoming binding as well.

Linda True:

Looking at more economic vulnerabilities – while Southeast Asian economies share many similarities like export dependence, they also have very different economic structural characteristics and components. What do you think is the Achilles’ heel in each economy?

Fred Neumann:

It’s hard to kind of generalize across Southeast Asia as you hinted at. Individual economies have a different Achilles’ heels. And perhaps one starting point, particularly if you consider the recent financial jitters in emerging markets over the last six months, one starting point is the current account balance. Two countries in Southeast Asia have current account deficits, Indonesia and the Philippines. We see countries with current account deficits essentially experiencing potentially greater financial vulnerability in times of global stress. That’s just the reality. And it’s therefore not surprising that both the peso and the rupiah have been among the weakest performing currencies in Southeast Asia. And, by, in turn also seen those two countries … actually, those were the two countries where the central banks’ actually hiked rates the most in response to weakening exchange rates. Partly to reassure global bond investors, partly to stem the inflationary consequences from weaker currency.

So, that presses the Achilles’ heel in those two countries. We still think the fundamentals are relatively sound. The Philippines is doing a great thing in terms of infrastructure ramp up. Indonesia has a very low average leverage. So, they ticked the boxes in many cases. But if you ask for an Achilles’ heel that global investors tend to focus on at the moment, it’s current account balance. Now interestingly, current account surplus is not always positive. Thailand is a good example where you have a very high current account surplus, but to some extent, that reflects weak domestic demand. That is a consequence of policy uncertainty over the last years. It’s perhaps also we see the beginnings of demographic shifts playing out here. And the Achilles’ heel, therefore, in Thailand isn’t the external balance. It’s really the fact that domestic demand remains extraordinarily weak. That’s the bugbear for Thailand.

And then if you look at Vietnam and Malaysia, here the external sectors are very dynamic. Vietnam in particular is a sort of star performer when it comes to increasing its market share globally in electronics exports, manufactured exports. And even in Malaysia, we see now a revival in the manufacturing export sectors come through after the country relied on natural resources for quite some time. But in both Malaysia and Vietnam, the Achilles’ heel really is the fact that the domestic economy is still relatively dominated by state linked entities, corporations, and perhaps a relatively loose budget constraint in both cases that have led to relatively high levels of public debt. And perhaps to some extent on the domestic side, somewhat inefficient spending as well.

So, externally, they’re both quite impressive. But domestically, it’s sort of that loose fiscal budget constraint that is presenting some challenges, and which could become an Achilles’ heel further down the line. So, it’s really a mixed picture. One of the joys of following Southeast Asia, such a varied region, is there’s something in it for everybody. And so, even when it comes to economic vulnerabilities, these economies score differently. But I would say just to conclude that, that if you look at a global context, emerging markets, which is Latin America, Eastern Europe, the Middle East, Africa, Southeast Asian economies by and large still have very impressive fundamentals. Though there are concerns over the Federal Reserve raising interest rates, stronger dollar, trade wars for lack of a better term, Southeast Asia still should stand tall in the coming years.

There are no real fundamental problems. Growth might suffer at the margin, but it’s hard to really see any major balance of payments problems develop in any of these economies for the time being.

Paul Tierno:

Well, great, Fred. This has been excellent, and we appreciate your time today.

Linda True:

Yeah. Thank you, Fred.

Fred Neumann:

Thank you very much.

Paul Tierno:

We hope you enjoyed today’s conversation with Fred. For more episodes like this, you can find us on iTunes, Google Play, and Stitcher. If you like what you hear, please do leave a review. Feedback from listeners like you will help more people find us. And for even more content, look up our Pacific Exchange blog available at frbsf.org. Thanks for joining us.


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