All Southeast Asian economies saw their fiscal positions worsen after massive government spending related to Covid-19. (Photo: Linhao Zhang / Unsplash)

Southeast Asian Economies: Out of the Storm, Clouds on the Horizon


The Southeast Asian economy is looking up, after absorbing the blow of several downside risks in 2022. Continued growth in 2023 will depend on China’s recovery, the management of the fallout from the U.S.-China trade war and the war in Ukraine.

After taking a battering in 2020, the Southeast Asian economy appears to be finding its feet. In its latest forecastthe International Monetary Fund (IMF) expects Southeast Asia to be the world’s fastest growing region, with the five largest economies expanding at 4.3 per cent in 2023 and 4.7 per cent in 2024. The Asian Development Bank (ADB) is more optimistic. It places regional growth in 2023 at 4.7 per cent (Table 1). 

The pertinent question here is whether there are risks that could derail the regional recovery. In 2022, the Southeast Asian economy gained momentum as growth reached 5.5 per cent. The growth came despite several external risks: the escalation in the trade and technology war between the United States and China; the Russian invasion of Ukraine and the resultant geopolitical risks and spike in agricultural and energy prices, and monetary tightening. At the height of the pandemic in 2020, Southeast Asia’s economy had contracted by 3.2 per cent. In 2021, the region returned to growth of 3.3 per cent as lockdowns eased. 

The Profound Influence of China

The prospects for Southeast Asia’s recovery hinge crucially on what happens in China, as well as the global economy. China has experienced a massive decline in growth since the pandemic began and prolonged lockdowns due to its zero-Covid policy. After several downgrades, the IMF has recently revised upwards its projection for China’s growth to 5.2 per cent in 2023 and 4.5 per cent in 2024. China’s decision to finally reopen underlies this upgrade, although there are still a number of domestic uncertainties in the banking and property sectors that could impinge upon growth, including the possibility of a severe Covid-related health outcome. 

The calls for reshoring, friend-shoring, and nearshoring of supply chains, which is in one of the four pillars of the US-led Indo-Pacific Economic Framework for Prosperity (IPEF), is not just about limiting capital outflows, but reversing them. This is basically protectionism in new clothing.

Another key factor is how the U.S.-China trade war evolves. The trade war is escalating and now includes bans on technologies and controls on exports of advanced semiconductor chips to China by U.S. companies, for instance. The switch from tariffs to non-tariff barriers is concerning as the latter are opaque, and their impacts can be profound. The escalation could have a major impact on Southeast Asia since their regional supply chains remain China-centered. The conflict has already resulted in some labour-intensive industries and activities relocating from China to Vietnam, Thailand and Malaysia. Capital-intensive components of the key supply chain industries — electronics, electrical and other machinery, and automotive parts — have not been much affected as yet. That is not to say they will not be affected should the conflict continue to escalate.

Table 1

Sources: ADB (2022a); ADB (2022b); IMF (2023); World Bank (2023).
Notes: (a) Southeast Asia includes Timor Leste for ADB, while the IMF definition (ASEAN-5) includes Indonesia, Malaysia, Philippines, Thailand and Vietnam.
(b) ADB forecasts for Brunei, Cambodia, Lao PDR and Myanmar are from the September 2022 ADO Update (ADB 2022a), while the rest are from the December 2022 ADO Supplement (ADB 2022b).

The Fallout from the Russia/Ukraine War and Fed Tightening

Compounding matters, there is a kinetic war following the Russian invasion of Ukraine in February 2022. This has driven up energy costs and caused a spike in geopolitical risk and major agricultural and other commodity prices. The war increased the urgency for ASEAN countries to transition their energy policies while managing other risks and keeping an eye on inflation.

The U.S. Federal Reserve responded to inflationary concerns with aggressive monetary tightening following years of loosening in the form of quantitative easing. The aggressive response affected global interest rates and could induce a recession in the U.S. and Europe. But there are signs that the tightening may end soon. Reflecting this, the IMF’s assessment in January 2023 is less pessimistic about a global recession, with global growth revised upwards to 2.9 per cent from 2.7 per cent in October 2022. This is also due to adverse risks moderating with a stronger boost emerging from pent-up demand and a faster fall in inflation expected. Nevertheless, the balance of risks remains tilted to the downside, so a global recession cannot be ruled out entirely.

Global Gloom and Domestic Concerns 

The major concern for Southeast Asian countries from a possible recession in the West is the impact on exports and growth, and indirectly on debt levels, which are projected to rise. All Southeast Asian economies saw their fiscal positions worsen after massive government spending related to Covid-19. A rise in service costs of external debt through rising interest rates, as well as the valuation effects of a stronger U.S. dollar, will increase the debt burden and could induce debt distress in some countries, such as Laos.

Although prospects for the region will be heavily influenced by global developments, given its heavy reliance on international trade and investment, domestic factors should not be discounted. On the political front, Malaysia and the Philippines have newly elected administrations that are still finding their feet. Thailand and Cambodia will hold elections in May and July, respectively. Although Indonesia will only go to the polls in February 2024, the fate of the US$34 billion project involving the relocation of the capital could be affected. Until the new President is elected, some policy paralysis can be expected. The political and economic turmoil in Myanmar is a grave concern for its citizens and also ASEAN.

Protectionism in New Garb

These uncertainties and the pandemic have contributed to an increase in anti-globalisation sentiment that could further threaten the recovery. For instance, there is increasing discussion of the need to improve the resilience of supply chains, emanating from the U.S. but spreading quickly to other countries. The calls for reshoring, friend-shoring, and nearshoring of supply chains, which is in one of the four pillars of the US-led Indo-Pacific Economic Framework for Prosperity (IPEF), is not just about limiting capital outflows, but reversing them. This is basically protectionism in new clothing. The shift toward so-called self-reliance comes at a time when the need for liberalisation is increasing but the appetite for it is waning. The disparity between need and appetite further weakens the ability to address the impacts of digital disruption, divergent demographic trends and the rise in all forms of inequality. Unless these protectionist tendencies are curbed, Southeast Asia’s recovery as well as its long-term growth and prosperity will be at risk.


Jayant Menon is a Senior Fellow at ISEAS – Yusof Ishak Institute. He was formerly Lead Economist in the Office of the Chief Economist at the ADB.