Editor's Note: This assessment is part of a series of analyses supporting Stratfor's upcoming 2019 Fourth-Quarter Forecast. These assessments are designed to provide more context and in-depth analysis of key developments over the next quarter.
The U.S.-China trade war has recently shown some signs of a truce that could sustain talks. But this has brought little refuge for global markets, given that a snap decision by the White House could swing U.S.-China tensions back into high gear. Because of their proximity to and deep integration with regional supply chains (and with China in particular), Southeast Asian countries are among the best-positioned to benefit from the manufacturers leaving China to escape U.S. tariffs. Indeed, Vietnam has emerged so far as the clear winner on this front, though even it isn't immune to the world's fraught economic outlook.
Smaller economies around the world have increasingly found themselves caught in the middle of the U.S.-China trade war. The manufacturing powerhouses of Southeast Asia have been placed at the forefront of this dilemma — trying to reap the benefits of the operations leaving China, while enduring a broader slowdown made worse by the influx of global trade uncertainty.
The strengthening U.S. dollar, for one, has roiled Southeast Asian currencies, while declines in global demand have sapped Southeast Asia's vital export revenue. The global headwinds also pose a challenge to the region's political orders built on delivering rising prosperity — forcing each country to balance benefits with risks to maintain its longstanding robust growth rates. That said, given their overall high levels of economic expansion, Southeast Asian countries still have a long way to fall before reaching crisis levels, though each has varying levels of risk because of their different degrees of development and export reliance.
Gathering Economic Storm Clouds
The uptick in trade tensions between Washington and Beijing over the past year has come amid broader trouble in the global economy resulting from a structural slowdown in China's economic growth, declines in overall global demand, uncertainty around the United Kingdom's looming exit from the European Union, and the brewing mini Japan-South Korea trade war, as well as commodity price declines and a cyclical drop in semiconductor prices.
Within this context, the Organization for Economic Cooperation and Development cut its global economic forecast in September by 0.3 percent to a decade-low of 2.9 percent growth in 2019. The World Trade Organization, meanwhile, has forecast merchandise trade volume growth to slow to 2.6 percent this year — a far cry from the robust 4.7 percent trade volume growth in 2017. Emerging markets in Asia, in particular, are now projected to grow at 6.2 percent between 2019 and 2020. And while this rate is still notably robust, it's down from the 6.5 percent projections made in mid-2018.
Where Southeast Asia Stands
Vietnam: Given its proximity to China's coastal industrial core and how its robust low-end manufacturing sector already is knitted into Chinese supply chains, Vietnam has become the top destination for companies looking to relocate their Chinese operations to evade U.S. tariffs. In a study of 33 companies that left China to avoid U.S. tariffs, the World Bank found 23 went to Vietnam. Vietnam's signing of the Comprehensive and Progressive Trans-Pacific Partnership, which came into effect for Vietnam in January 2019, has also given a boost to exports. And the EU-Vietnam Free Trade Agreement will likely do the same when it comes into force later this year. In the first half of 2019, Vietnam's gross domestic product (GDP) grew by 6.76 percent year-on-year. This is slightly slower than the 7.05 percent recorded growth in 2018, but is still better than the first half of GDP growth rates between 2011 and 2017.
But if the U.S.-China trade war escalates, or if Washington turns its ire toward Vietnam, Hanoi may soon find itself grappling with its own setbacks. Because of its exposure to both the Chinese and U.S. markets, any further deepening of trade tensions between the two great powers could be detrimental to Vietnam's export-dependent economy. Vietnam is particularly vulnerable to any changes to its U.S. trade relations, given that exports to the United States accounted for 26 percent of its GDP in the first half of 2019. But with the sixth-largest trade surplus with the United States, Hanoi now risks becoming the victim of the White House's next trade salvo. The risk of being labeled a currency manipulator under broadened U.S. definitions will also make Hanoi cautious to manage its currency volatility.
Malaysia: As with Vietnam, Malaysia’s robust manufacturing sector positions it to take on the operations fleeing China. But the country's deep economic ties with both the United States and China have instead dampened its economic outlook. In the first half of 2019, Malaysia’s overall exports dropped 0.2 percent year-on-year, compared with a 6.1 percent rise in exports during the same period in 2018. But there have been some bright spots. Malaysia's second-quarter GDP growth rose to 4.9 percent — making it the only Southeast Asian economy to see a comparative quarterly acceleration of growth. The country's strong growth in the first half of 2019 also recently prompted Fitch Ratings to elevate its 2019 annual GDP forecast from 4.2 to 4.6 percent, noting strong private consumption figures and an expected restabilizing of investment growth.
For Malaysia, infrastructure may be the key to sustaining this expansion. In July, the country announced it would continue with the previously suspended China-backed $10.5 billion East Coast Rail Link, and gave the green light to a rare earth processing plant to continue operations. The start of construction on the East Coast Rail Link and other Chinese projects should help Malaysia buffer some outside economic headwinds. The go-ahead for both projects has helped alleviate investor concerns regarding Prime Minister Mahathir Mohamad’s scrutiny of projects, though the potential for infighting within the government could prompt it to reexamine Chinese infrastructure projects.
Indonesia: Upon securing a second term in April, Indonesian President Joko Widodo pledged to boost economic growth, reduce inequality and spread development across the country. But the ambitious 7 percent growth he promised at the start of his first term has proven elusive. Although the country's large internal market provides some protection, Indonesia is still susceptible to global trade volatility. Moreover, unlike Vietnam, Indonesia has failed to capitalize on the manufacturing opportunities presented by the trade war: Of the 33 companies in the World Bank study, none had relocated their Chinese operations to Indonesia.
Amid the influx of global uncertainty, Indonesia had its slowest second-quarter GDP growth in two years in 2019. The country's hydrocarbon exports, in particular, are expected to reach a two-decade low this year as well. In 2018, Indonesia's GDP grew at 5.17 percent to hit $1.02 trillion and 2019 second-quarter GDP grew at 5.05 percent — the slowest in two decades. Indonesia’s central bank now projects that 2019 GDP would come in below the initial 5.2 percent forecast.
Over the past year, Indonesia's currency (the rupiah) has weakened substantially against the U.S. dollar, which has forced the government to cut rates twice in 2019. Indonesia's current account deficit of $7 billion will further limit its ability to manage this currency volatility. In the hopes of easing the current account deficit, the government recently announced it would impose a blanket ban on unprocessed nickel exports — initially scheduled for 2022 — before the year's end. In doing so, Indonesia is seeking to capitalize on high prices and motivate miners to build processing capacity in the country, which is the world's top nickel exporter (accounting for 8 percent of the global market). To further boost growth, the government is also planning record-high 2020 government spending of $178 billion, as well as reforms to raise foreign ownership caps and loosen labor laws.
Singapore: Given its role as a global trade and financial hub, Singapore has faced major economic challenges over the past year. However, the tiny country can still weather this relatively well thanks to its substantial wealth. Singapore's prominent position within Asian supply chains and reliance on goods shipping through its ports means it benefits greatly from robust regional trade flows — and suffers greatly when these slacken. Singapore's exports have been steadily dropping since the start of 2019. In July, the country's non-oil exports were down 11.2 percent year-on-year. The U.S.-China trade war's impact on global tech supply chains has hit the country's electronic exports particularly hard, which were down 24.2 percent.
In 2018, Singapore's GDP grew 3.23 percent and was initially projected to slow to 2.31 percent in 2019, according to the International Monetary Fund. Second-quarter GDP growth contracted by 3.3 percent quarter-on-quarter in 2019 compared with a first-quarter 3.8 percent expansion. Singapore’s government now projects a growth rate of between zero and 1 percent. The country's dimming economic fortunes could award votes to its monolithic People’s Action Party in upcoming elections by prompting voters to opt for the safer and steadier choice. Should the long-ruling party further solidify its grip amid a gradual generational leadership transition, it could enhance Singapore’s profile as a stable and secure investment market, as nearby Hong Kong continues to grapple with escalating protests.
Thailand: Thailand's transition out of its five-year period of junta rule in March has left it with a military-dominated, but still fragile, government. In 2018, Thailand’s GDP grew at 4.13 percent — its highest in six years. But in April, Thailand’s finance ministry cut GDP growth projections for 2019 to 3 percent, down from a forecast of 3.8 percent at the start of the year. GDP growth in the second quarter of 2019 slowed to hit 2.3 percent growth year-on-year, the lowest quarterly rate in nearly five years. Tourism, which comprises over a fifth of the country's GDP, has also slumped. Tourist arrival growth slowed from 7.5 percent in 2018 to under 2 percent in the first half of 2019 because of China's economic slowdown, Thai election uncertainty and Vietnam's growing appeal as a tourism destination.
Some Southeast Asian countries have benefited more than others from the U.S.-China trade war, but all are at risk of taking an economic hit.
Thailand's strengthening currency has also posed a challenge for Thai exporters, with the baht appreciating 5.5 percent against the U.S. dollar in the first eight months of 2019. But in addressing this issue, Thai monetary authorities (like those in Vietnam) will be cautious, given that intervention in foreign exchange markets could come under the scrutiny of the United States' broader push against alleged currency manipulators. To spur growth, the Thai government is planning stimulus measures totaling over $10 billion, in addition to a package of sweeteners aimed at drawing in companies in China seeking refuge from the trade war.
While much is unclear in the broader U.S.-China trade war, Southeast Asia’s economies are already feeling the pinch in terms of more troubled growth prospects and economic woes. Much will depend on whether Washington and Beijing can reach some accord on their disputes. Until then, those caught in the middle will likely have to continue enduring the headwinds.