Key Takeaways
- Emerging markets in Southeast Asia will enter 2024 at an inflection point. Weaker trade and fading reopening momentum have staunched growth in 2023. Five key themes will determine the growth landscape.
- First, external demand is set to recover but slower global growth will dampen the upturn. Second, capital outflow pressures have risen amid tighter global monetary conditions. Third, central banks may ease policy next year. Fourth, fiscal policy is gradually consolidating. Fifth, domestic demand is resilient.
- On balance, we expect growth to be stronger in 2024. Risks to the outlook include a sharp slowdown in global growth, slower growth in domestic services, and adverse capital flows.
Emerging markets in Southeast Asia are set to enter 2024 at an inflection point. In 2023, fading momentum from post-pandemic re-opening and weak global trade caused growth to stagnate. Central banks maintained tight monetary policy to contain inflation. The question is: will muted growth in the region's economy and tight global monetary conditions dominate in 2024, or will there be a transition to a new economic landscape?
Five key forces will shape the outlook, in our view. First, slower global growth will dampen the recovery in export demand among emerging markets of Southeast Asia. Second, global risk sentiment, high energy prices, high interest rates in the U.S. will continue to squeeze capital flows. Third, we anticipate rate cuts in the U.S. later in the year will prompt central banks in the emerging markets of Southeast Asia to follow suit. Fourth, fiscal policy will continue to gradually consolidate, albeit at different speeds across the region. Finally, we expect domestic demand to remain resilient.
Weak Global Growth Suggests Subdued Outlook For External Demand
Two opposing forces will influence external demand for the region in 2024. Slower global demand in 2024 is likely to extend a weakness in demand for the region's exports. On the other hand, following several quarters of weak trade activity, the trade cycle appears to be bottoming out, and demand for some goods looks to be improving.
We forecast global growth to slow in 2024 because of below-trend growth in the U.S., Europe, and China. In the U.S., we expect pent-up demand and excess saving effects to fade; at the same time, monetary conditions have tightened, leading to a period of slower growth.
In Europe, tighter monetary policy amid generally weaker demand is likely to lead to below-trend economic expansion. Weaker momentum in China with restrained policy stimulus suggests to us slower growth in 2024. Overall, this means that we expect global economic growth to slow from 3.1% in 2023 to 2.8% in 2024, with weak growth in late 2023 and early 2024, followed by mild improvement. This lower global growth momentum in early 2024 will curb external demand in the emerging markets of Southeast Asia.
On the other hand, trade activity in the region looks to be stabilizing following several quarters of downturn. Looking at seasonally adjusted trade volumed for emerging Asia ex China (see chart 1), the goods trade cycle peaked for the region in August 2022. There followed a period of weak external demand, which has curbed growth in the emerging markets of Southeast Asia in 2023. There are signs this cycle is bottoming out. Goods export and import volumes rose since June. Trade values show a similar trend.
Chart 1
Another positive signal comes from the electronics sector, which is highly influential for emerging market economies in Southeast Asia. Electronics exports numbers have improved in recent months, with technology firms in East Asia reporting better outlooks.
Chart 2
Capital Flow And Exchange Market Strains Emerging
Capital outflow pressures have increased in the emerging markets of Southeast Asia in recent months. Global risk sentiment, high energy prices, and high U.S. interest rates are straining capital flow conditions and will influence capital flow risks in 2024.
Global risk sentiment has retreated and the broad Dollar Index advanced nearly 3% over September before pulling back by 1 percentage point in October. The U.S. Federal Reserve signaled higher-for-longer interest rates at its September monetary policy meeting. In early October 10-year U.S. treasury bond yields rose to 4.8%, a level last seen in late 2007. The elevated U.S. interest rates are leading to lower interest rate differentials with the emerging market economies of Southeast Asia, which attract capital outflows from local currencies into U.S. dollars. If U.S. interest rates remain high, capital outflow pressures will persist.
Energy prices advanced steadily since July, when Saudi Arabia cut oil production by 1 million barrels a day. Benchmark crude prices rose in September to US$92 a barrel before falling sharply in the first week of October. Volatile energy prices put pressure on current accounts, especially for the net energy importer economies of Thailand, Philippines, and Vietnam. Malaysia and Indonesia are modest net energy exporters.
Looking at local currency exchange rates versus the U.S. dollar during the year, there has been a general weakening trend over the year, and currencies have weakened further during September (see chart 3). The Malaysian ringgit and Thai baht have weakened most in 2023. The Thai baht and Indonesian rupiah underperformed in September 2023. Various factors are squeezing the Thai baht, including the high oil prices, weaker external demand, and low domestic interest rates.
Chart 3
Monetary Policy Easing On The Cards
Central banks look to be at the end of their interest rate hiking cycles for now. The path of monetary policy in 2024 depends, however, on developments on domestic inflation as well as on foreign exchange market conditions.
Rising energy prices caused inflation to accelerate in July and August. In addition, meteorologists expect El Niño conditions in Southeast Asia to continue into 2024 following lower-than-normal rainfall in 2023, which will hamper agricultural activity and raise food inflation. Core inflation, however, is moderate and near trend rates. Seasonally adjusted annualized inflation and core inflation data shows the moderating trend in core prices running up against a sharp uptick in headline inflation (see chart 4).
Chart 4
If U.S. interest rates remain higher for longer, then low interest rate differentials with emerging markets of Southeast Asia will mean further exchange market strain. Central banks will maintain tight monetary settings to prevent sharp capital outflows and volatility in exchange rates.
In our baseline, we expect headline inflationary pressures to be moderate, and we do not anticipate a widening of inflation pressures across the consumer basket. El Niño conditions will drive food inflation higher, but this is likely to dissipate as weather conditions improve. We expect the Fed to cut interest rates particularly during the second half of 2024 as inflation moderates. We project central banks will follow suit and ease monetary policy in emerging Southeast Asia over 2024 as U.S. monetary conditions ease and domestic inflation stabilizes.
Fiscal Policy Consolidating Gradually
Fiscal policy is proceeding on a path of gradual consolidation in emerging markets of Southeast Asia. During the pandemic governments acted to support economies, and fiscal deficits increased by about 3.9% of GDP on average between 2019 and 2021. As a result, fiscal debt burdens increased in the region, but the level of fiscal debt to GDP is still modest.
Chart 5
The magnitude of fiscal consolidation varies across the region. Indonesia has consolidated its fiscal position quicker relative to the rest of the region (see chart 6). Malaysia and the Philippines have been consolidating more gradually. Vietnam's general government balance has not consolidated because weaker economic conditions have prompted fiscal action.
There are fiscal policy efforts in the pipeline. In Thailand, authorities have signaled a direct stimulus to households worth about 3% of GDP in 2024. This would improve growth but delay the fiscal consolidation approach.
Chart 6
Domestic Demand Will Drive Growth
Domestic demand will be a key driver of growth in the region in 2024, supported by resilient private consumer activity, expansion in the services sector, and favorable labor markets.
Private consumption is supporting the overall economy with growth rates at or above the overall GDP growth rate (see chart 7), and we expect the trend to continue over 2024 in our baseline. GDP expenditure breakdown at a quarterly frequency is unavailable for Vietnam.
Chart 7
A second factor supporting strong domestic demand has been the strength of services activity in the wake of the post-pandemic reopening. Some of the growth momentum has eased during 2023, and a key swing factor for the 2024 outlook is whether services growth will remain resilient or continue to moderate (see chart 8).
Chart 8
Services are particularly influential in Thailand and the Philippines, whereas they have less influence in Indonesia and Vietnam (see chart 9).
Chart 9
The labor market is supporting domestic demand. It has been steadily improving following the pandemic-driven downturn. The employment-to-working age population ratio suggests a broad trend of recovering conditions following a sharp employment dip during the pandemic (see chart 10). The current employment dynamics are favorable for domestic demand in 2024.
Chart 10
Baseline Expectations, Challenges, And Risks
In our baseline, we expect emerging markets of Southeast Asia to remain among the fastest growing in 2024. We anticipate services growth will stabilize given the sector's strong track record of consistent growth pre-pandemic. Gradually improving labor markets will also support domestic demand.
We project monetary policy to ease over 2024 as core inflation remains contained and as global monetary conditions loosen. We expect external demand to present fewer obstacles as the global trade cycle reaches a turning point.
Chart 11
There are significant risks to the outlook. The top risk is a sharper-than-expected slowdown in global growth. Slowing activity along with a deterioration in labor markets could cause knock-on effects for emerging markets in Southeast Asia in the form of weaker external demand.
A second risk is that the slowdown in momentum in domestic services activity extends into 2024. Fiscal policy would still be consolidating, and central banks will find it harder to ease policy to prevent capital outflows. This would result in a domestically driven slowdown in economic activity for the region.
On the policy front, a resurgence in inflation spreading from commodity prices and El Nino effects could derail the disinflation outlook. A related risk is higher-for-longer global interest rates--if global monetary conditions are tight, there will be capital flow volatility.
In addition, central banks would keep monetary policy restrictive to prevent exchange rate pressure. This slower monetary policy easing path and tighter financing conditions would dampen economic activity. Under this scenario, there will be fiscal slippage as governments lean on fiscal spending to support growth and as tighter financing conditions push government interest burdens higher.
An inflection point looms for emerging markets in Southeast Asia with several factors finely balanced. Risk factors could dampen aspects of the recovery such as external demand, services activity, or fiscal slippage, but on balance our baseline outlook is for an improvement in growth following a slowdown 2023.
Editor: Lex Hall
Related Research
- Economic Outlook U.S. Q4 2023: Slowdown Delayed, Not Averted, Sept. 26, 2023
- Economic Outlook Emerging Markets Q4 2023: The Lagged Effects Of Monetary Policy Will Test Resilience, Sept. 26, 2023
- Economic Outlook Eurozone Q4 2023: Slower Growth, Faster Tightening, Sept. 25, 2023
- Economic Outlook Asia-Pacific Q4 2023: Resilient Growth Amid China Slowdown, Sept. 25, 2023
This report does not constitute a rating action.
| Asia-Pacific Economist: | Vishrut Rana, Singapore + 65 6216 1008; vishrut.rana@spglobal.com |
| Asia-Pacific Chief Economist: | Louis Kuijs, Asia-Pacific Chief Economist, Hong Kong +852 9319 7500; louis.kuijs@spglobal.com |
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