The COVID-19 pandemic has unprecedentedly challenged the global economy and people’s livelihoods in the past couple of years. The Southeast Asia region comprising many developing economies is not spared. In general, all countries are negatively impacted due to the containment measures imposed by governments worldwide. Nonetheless, the impact magnitude and recovery records vary by country.
Reopening the economy and relaxing pandemic restrictions in most countries has not yet fixed the global economic ecosystem wrecked by the pandemic. As the world reopens, it has spotlighted China’s importance in the global supply-chain network. With the Chinese Government’s persistence on its Zero-Covid Policy, many manufacturing economies, especially in Southeast Asia, struggle to cope with their orders. The policy’s containment measures, including constant city-wide lockdowns, have resulted in shortages and late shipments of intermediary goods supplies from China.
As a result, the reopening of the economic sector that significantly increases demand has failed to sync with the supply side. Since the pandemic, the logistics industry is also facing a shipment bottleneck, which adds to the supply chain disruption. It has affected not only intermediary goods but also end-products for consumption. Other than that, employers are also facing labour shortages attributed to partial travel restrictions still enforced in many countries, stricter employment regulations to prioritise and safeguards locals from unemployment, and the post-pandemic Great Resignation phenomena.
On the other hand, the Russia-Ukraine war has further exacerbated the challenges toward recovery. The war has a massive global ripple effect even on economies that have minimal trade exposure with both countries. The disruption of grain and fertiliser supplies from Ukraine and Russia has increased food production costs, leading to inflation in global food prices. With restrictions on Russian oil and gas, energy prices skyrocketed, leading to massive inflation in the Eurozone, UK, US, and ultimately the rest of the world. Oil-producing countries are also not spared from inflation due to the soaring energy prices.
The Fed’s responses to rising US inflation have made things worse for small and open economies in Southeast Asia. It has sharply increased the interest rate three times this year, with expectations of further increases until the end of the year. Southeast Asian countries, mainly relying on foreign direct investments (FDI), are now competing for investments as capital flows out from the region for higher yields for the US Bonds. As a result, regional currencies are facing downward pressure to depreciation. Although lower currencies can stimulate regional trade, it is a double-edged sword because the production cost to import intermediary goods increases too. Countries with trade deficits will also be more affected as the cost of imported goods increases, including food products. Furthermore, those with large foreign debt exposure will have to pay higher debt service charges.
There are indications that the US, UK, and EU are heading towards a recession. The US has technically entered recession after recording contraction for two subsequent quarters this year. However, looking at other economic factors, including thriving local consumption, a recession was not declared. If developed economies enter a recession, the impact will be felt in other parts of the world, including Southeast Asia. As manufacturing is among the significant export contributor for Southeast Asia countries, the reduction in demand for manufactured goods, especially electrical and electronic products, will affect factories operating in this region. The logistics sector will take the next hit as trades diminish. Governments with more resources and reserves can withstand the pressure in the short run through higher fiscal expenditures to support the economy during difficult times.
Not withholding the conflict in Ukraine, the geopolitical tension closer to Southeast Asia between the US and China does not only risk derailing the region’s recovery trajectory but also risks pulling them into the conflict. Increasing military activities between China and Taiwan following Pelosi’s official visit to Taiwan jeopardises a full-scale US proxy war that can turn East Asia and the surrounding regions into volatile territories. Since both superpowers have a significant presence in the region, it can drag Southeast Asia countries into a difficult situation to take sides. On the other hand, maintaining neutrality will be challenging without damaging diplomacy and economic relations. Although there are prospects for investments’ relocation to Southeast Asia from the conflict, the current global economic crisis might have decreased investors’ appetite for the time being, looking for less risky and safe investments instead.
Fortunately, Southeast Asian countries are blessed with commodities and natural resources. Many countries in the region still rely on an extraction economy other than manufacturing. Commodities trade can cushion the economic impact of the inflation-induced decline in manufacturing goods demand. While the net demand for commodities will also reduce, commodities such as palm oil and crude oil will still see strong demand. The world has not yet significantly detached itself from oil reliance as its energy source, while palm oil is highly sought after to produce necessities such as foods and daily household goods. Palm oil is also currently the preferred substitute for sunflower oil which is in shortage by the Russia-Ukraine war.
Therefore, looking at the current situation, it is apparent that Southeast Asia’s current recovery trajectory is being challenged by many external factors on a global scale. Although some economists opined that the worst is over, governments still need to be cautious and not be complacent with their encouraging growth this year. Since all these external factors are beyond the control of Southeast Asian governments, they can have a severe spiraling effect if not properly monitored and handled. In times of crisis, being tactful is a must to steer out and away from the storm safely.
