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Southeast Asia: Economic Recovery and Path Choices

  A series of important regional and international conferences – the ASEAN Summit and East Asia Cooperation Leaders’ Meetings, the Group of Twenty (G20) Leaders’ Meeting and the Asia-Pacific Economic Cooperation (APEC) Leaders’ Informal Meeting were held intensively in Southeast Asian countries, and Southeast Asia was in focus for a while caught the eyes of the whole world. In addition, with Timor-Leste’s accession, all 11 Southeast Asian countries have become ASEAN countries.
  The brilliance of Southeast Asia is not only in the diplomatic and political fields. Its economic recovery under the background of the new crown epidemic superimposed geopolitical crisis and global recession is also remarkable. Although the internal and external situation is still grim, and the road to recovery is still bumpy and tortuous, there are diverse options for its roads, models, and breakthroughs, which provide many favorable conditions for its continued recovery and development.

  With the popularization of vaccines and the loosening of epidemic prevention measures, most economies in Southeast Asia have shown strong recovery momentum. According to the forecast of the Asian Development Bank, the overall gross domestic product (GDP) growth rate of Southeast Asian countries will be about 5.2% in 2022. Southeast Asia is the most dynamic and diverse region in the world economy, and ASEAN is expected to become the fourth largest economy in the world by 2030. With the prominent status of the value chain in Southeast Asia, its internal value-added share continued to rise, and the center of gravity of the global value chain began to shift to Southeast Asia.
  But Southeast Asian economies are characterized by openness and fragility. Since the outbreak of the new crown epidemic, the world economy has gone through a cycle from recession to recovery, and then to a second recession. In order to reverse the hyperinflation that has not been seen in 40 years, major central banks in western countries, such as the Federal Reserve, have launched aggressive interest rate hikes, which may slow down the global economic growth and spread the recession to more developed and emerging economies. Southeast Asian countries have encountered imported inflation crisis and recession in the process of recovery. They are faced with the task of maintaining a balance between ensuring people’s livelihood and maintaining recovery. Therefore, it is urgent to open up a third way.
Facing complex internal and external situations

  The situation facing the Southeast Asian economy includes the following aspects.
  First, the COVID-19 pandemic has had a wide-ranging and deep impact on the economy, adding to the additional and abnormal disturbances to the economy caused by the ultra-loose fiscal and monetary policies of the United States and Europe. In terms of the real economy, countries inside and outside the region have strictly restricted the flow of people and goods, and some countries have continued to this day, resulting in supply chain disruption and demand setbacks. In terms of the virtual economy, the rapid spread of the epidemic has increased investment uncertainty, and the financial and capital markets in Southeast Asia have undergone major shocks. In response to major systemic risks, the United States and Europe launched unprecedented fiscal and monetary stimulus policies in early 2020, which played an important role in supporting enterprises, stabilizing employment, and boosting consumption. Flooding and economic overheating. The recovery of supply in Southeast Asia cannot keep up with the pace of external demand, and the input of global inflationary pressure has instead dragged down the actual demand in the region and caused additional abnormal disturbances to the Southeast Asian economy.
  Second, the escalation of the Ukrainian crisis led to a sharp rise in energy and food prices, and further promoted the restructuring and rebalancing of the world economic landscape, especially the industrial division of labor. The escalation of the crisis in Ukraine has not only triggered a humanitarian crisis, but also hit Russia’s wheat, oil and gas and fertilizer exports, as well as Ukraine’s wheat production. The sanctions imposed by the United States and Europe on Russia have further disrupted the global industrial and supply chains. The current accounts of Southeast Asian oil importing countries have been most affected, and countries in the region are generally facing food security issues. In addition, the development of the world economy is highly related to the geopolitical situation. The escalation of the Ukraine crisis has promoted the formation of a new pattern of confrontation between the East and the West, triggering the restructuring and rebalancing of the world economy, especially the energy supply and demand structure. The rising influence of national security and value factors has made Southeast Asia’s integration and promotion of globalization face higher friction costs.
  The third is that the US and European Central Banks have introduced unprecedented tightening policies, which may trigger a regional or even global recession. Inflation levels in the US and Europe have continued to rise this year, hitting a high in nearly 40 years. In March, the Federal Reserve launched an emergency rate hike cycle, and has raised interest rates by 300 basis points so far, the largest intensive rate hike since 1981. The European Central Bank also changed its position of not raising interest rates within the year, and the interest rate of the European deposit facility was positive for the first time in 10 years. The central banks of the US and Europe are willing to take the risk of recession in order to curb inflation, and the increase in borrowing costs has restrained investment and consumer spending. The world economy is slowing down synchronously, and the prospect of recovery is worrying. The International Monetary Fund (IMF) has lowered its world growth forecast three times this year, predicting that the loss of global output between now and 2026 could be as high as $4 trillion, the size of the entire German economy. The Southeast Asian economy is facing the double impact of capital outflow and sluggish external demand. The wealth of the region has been harvested by the US dollar again, and the recovery process has continued to be delayed.
Difficulty maintaining recovery balance

  Since entering 2022, Southeast Asia has fallen into a severe inflation crisis, and people have to tighten their belts in daily spending. Singapore’s inflation rate in September remained at 7.5%, the highest since June 2008, with food, housing, transportation, and entertainment costs leading the way. Inflation in Laos soared to 34 percent in September, the highest level this century, with food, medicine and fuel prices under pressure. The direct cause of this round of inflation is that the epidemic continues to disrupt the global supply chain, and the escalation of the Ukraine crisis exacerbated the rise in food and energy prices; the fundamental reason is that since the outbreak of the epidemic, the United States has relied on the US dollar’s ​​status as an international reserve currency to export inflation and bubble pressure, followed by a sharp increase in interest rates , causing capital outflow and currency depreciation in Southeast Asian countries, and rising prices of imported goods, triggering secondary imported inflation.
  The repeated deterioration of inflation has led to a sharp increase in household debt pressure in Southeast Asia, consumers have significantly reduced non-essential spending, and corporate profits have come under enormous pressure. Regional inflation superimposes external interest rate hikes, and the pressure to tighten monetary policy continues to increase. Countries are forced to find a difficult balance between avoiding inflation affecting social stability and maintaining economic recovery. On September 22, the State Bank of Vietnam unexpectedly announced a sharp increase in refinancing and deposit rates by 100 basis points. Vietnam has been easing monetary policy for the past decade to provide ample fuel for its growth, and has at one point tried to hold off on the Federal Reserve’s current rate hike. But with the dong falling to its lowest level since 1993, Vietnam’s central bank had to step in to prop up the exchange rate to curb inflation. At present, most countries in Southeast Asia have entered the channel of raising interest rates. In addition to reversing the momentum of inflation, raising interest rates will also help reduce the misallocation of resources and economic distortions, and consolidate the foundation of long-term growth, given that the previous continuous loose policy may lead to capital flow to inefficient sectors and enterprises.
  However, amid the unfavorable situation of stagnant external demand growth and rising recession risks, raising interest rates may further weaken domestic demand for goods and services, shaking Southeast Asia’s fragile recovery foundation. While Southeast Asia’s relatively good recovery has been encouraging, demand for commodities and manufactured exports has shown signs of weakening. Especially since entering the third quarter, the decline of European and American manufacturing industries has accelerated, and the risk of recession may be transmitted to Southeast Asia through the value chain. Whether the Southeast Asian economy can continue to recover steadily depends on the spillover effects of the Fed’s interest rate hikes, geopolitical conflicts, and the impact of the epidemic. However, judging from the current situation, it is difficult for these factors to be significantly improved in the short term. In addition, the central banks of many countries are acting independently and collectively raising interest rates too aggressively. The probability of the world economy remaining low and fluctuating is relatively high. The economic recovery of Southeast Asia – the price balance has begun to tilt to the right, and it is becoming more and more difficult to anchor the goal of sustainable recovery, and there is an urgent need to find a third way.

Scenery along the Chao Phraya River in Bangkok, Thailand. On November 18, 2022, the 29th Informal Leaders’ Meeting of the Asia-Pacific Economic Cooperation (APEC) opened in Bangkok.
A collaborative and empowered recovery model can be adopted

  Historical experience shows that cooperation is the basic principle for human beings to deal with major crises, and the international community is built on this principle. At present, to prevent risks such as world economic recession, high inflation, and financial market turmoil, countries need to strengthen cooperation. The Asian financial crisis in 1997 made Southeast Asian countries realize the importance of strengthening regional cooperation, which gave birth to ASEAN-China-Japan-Korea (10+3) cooperation, and enhanced regional risk management and crisis response capabilities through strengthening economic, trade, financial and other dialogues to help Southeast Asia has relatively successfully avoided the external shock of the 2008 global financial crisis.

  The author believes that in order to overcome the difficult balance between maintaining recovery and ensuring people’s livelihood at this stage, Southeast Asia can adopt a recovery model of cooperation and empowerment, and comprehensively enhance regional economic resilience by promoting regional integration, including economic transformation and risk resistance capabilities of various countries. Among them, strengthening cooperation with China is crucial. With the improvement of China’s value chain status, Southeast Asia has begun to assume some of the functions of the “world factory”. At the same time, it is more dependent on China in terms of industrial division of labor and export value addition, and promotes the formation of an expanded version of the “world factory” based on China. Southeast Asia has taken advantage of the trend to deepen cooperation with China, which can not only stabilize prices and promote growth in the short term, but also enhance the resilience and security of the region’s internal market in the long run. This is the third path for the Southeast Asian economy to embark on a stable and predictable recovery.
  The first is to deepen openness and cooperation and serve as the driving force for each other’s development. This includes: activating the superimposed effect of the effective implementation of the Regional Comprehensive Economic Partnership Agreement (RCEP) and the launch of the China-ASEAN Free Trade Area 3.0 version, and launching the RCEP upgrade process at an appropriate time; making good use of the China-ASEAN Expo and the China-ASEAN Business and Investment Summit To expand high-quality cooperation in emerging fields such as the digital economy, green economy, and blue economy, as a key area to further enhance the China-ASEAN Free Trade Agreement; to give full play to the potential of the New International Land-Sea Corridor and drive it through multimodal transport channels The integrated development of cross-border industrial and supply chains will enhance the resilience of regional supply chains.
  The second is to strengthen macro policy coordination and control policy spillover effects. Including strengthening the transparent sharing of policy information, coordinating the goals, strength, and rhythm of fiscal and monetary policies, strengthening the coordination of financial supervision, and jointly maintaining the stability of regional financial markets and industrial and supply chains; expanding the institutional functions of the 10+3 Macroeconomic Research Office (AMRO) Consolidate international consensus to promote regional economic and financial governance; cooperate with Asian Development Bank, Asian Infrastructure Investment Bank and other institutions to prevent systemic risks.
  The third is to promote balanced and inclusive development and fully stimulate growth potential. The first is to speed up the negotiation of the China-ASEAN International Development Cooperation Agreement, pay attention to the urgent needs of Southeast Asian countries, and promote practical cooperation in key areas such as poverty reduction, food security, and industrialization. The second is to vigorously develop the China-ASEAN development knowledge network, carry out joint research, exchange discussions and capacity building on major development issues of mutual concern, and fully explore development theories and practices suitable for their respective national conditions.

In July 2022, in Kuala Lumpur, Malaysia, the world’s second tallest building “Merdeka 118” with 118 floors and a height of 678.9 meters is under construction.

  General Secretary Xi Jinping emphasized that in the turbulent waves of the global crisis, countries are not riding on more than 190 small boats, but on a big ship with a shared destiny. Small boats cannot withstand the wind and waves, but giant ships can withstand the stormy sea. Only by helping each other in the same boat can China and Southeast Asia overcome the stormy waves and sail towards a bright future.

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