The sun is setting on Southeast Asia’s economy. A perfect storm of financial problems has hit the region: a drop in global prices for natural resources, central banks that have struggled to fight inflation pressures, and a weakening Chinese yuan that has prompted capital outflows from the region. Stronger economies such as Singapore and Australia have weathered the storm, but it’s only a matter before neighbouring markets start to feel the effects. Unless they take action to shore up their economies sooner rather than later, the outlook looks bleak for these nations, and investors must be prepared.
What’s Causing This Financial Crisis?
The Southeast Asian financial crisis of 1997 has often been cited as an exemplary example of what can happen when an economy becomes over-reliant on one sector or commodity and is hit by a sudden drop in demand. The Thai government’s decision to allow the Thai baht to float freely following a decline in the country’s commodities triggered the crisis.
The currency subsequently fell by as much as 30% against the U.S. dollar, which led investors to pull their money out of the country. That capital outflow and the government’s mishandling of the situation sent Thailand’s economy into a downward spiral from which it never fully recovered. Southeast Asia’s heavy dependence on exports to the U.S., particularly of oil and other natural resources, was at the root of that crisis.
How Did Southeast Asia End Up Here?
This time around, the triggers for financial problems are different. The drop in commodities has worsened, but it wasn’t the initial cause of the crisis. The immediate causes include the U.S. Federal Reserve’s decision to raise interest rates, leading investors to seek higher returns in emerging markets in search of higher returns. The Chinese yuan has been falling in value, prompting capital outflows from other Asian countries, and a slowdown in global growth has also hit the region’s export-dependent economies.
Indonesia: The Canary in the Coal Mine
Indonesia is the canary in the coal mine for the current Southeast Asian financial crisis. It was one of the first countries to feel the full force of the natural resource price decline. Commodity prices fell around 50% between mid-2014 and 2016, with iron ore and coal leading the decline. The drop in the price of commodities led to lower profits and decreased tax revenues in the country. To make up for the loss, the government cut spending, which led to a decline in domestic demand. Indonesia’s currency, the rupiah, has also been hit hard by the decline in commodity prices. The money fell by 50% between mid-2014 and mid-2016, which made exports less competitive.
Philippines: A Steady Collapse
The Philippines has seen a steady decline in growth for some time, which has developed into a full-blown financial crisis. The country has been heavily reliant on remittances from overseas workers, which have slowed as the global economy has slowed. The Philippines’ growth was 5% in 2016 but fell to 3.7% in 2017. A government forecast for 2018 puts it at 3%. The country’s dollar-pegged currency has weakened against the U.S. dollar, and exports have declined. There’s been a decline in tourist arrivals and a drop in foreign investment. And now, the Philippines’ credit rating has been downgraded.
Malaysia: Inching Towards Crisis
Malaysia is edging ever closer to a full-blown financial crisis. The country’s finances are in poor shape, with government debt at 57%. There’s also been a decline in foreign direct investment, with the country losing its place as Southeast Asia’s most attractive place to invest. Malaysia’s currency, the ringgit, has fallen by 15% against the U.S. dollar since the start of the year. That prompted the central bank to intervene to prop up the currency, but to little avail.
Singapore: Too Big to Fail?
Singapore may be the Southeast Asian country best to weather the current financial storm. The country’s economy is expected to slow down in the coming years, but it will likely be able to weather the storm due to its strong fundamentals. The economy is diversified and wealthy, with a strong currency and high savings rate.
Malaysia’s Shaky Banking System
Malaysia’s banking system is one of the leading causes of concern in the country. There’s been a marked decline in profitability among banks caused by weak loans and a decline in non-performing loans. There’s also been a decline in customers’ deposit balances. The Malaysian central bank has been propping up the banks through cheap funds, with net funds injected into the system rising by 92 billion Malaysian ringgit ($23 billion) in the first quarter of 2018.
Singapore’s Stagnant Economy
Singapore’s growth has been slowing for many years, and the economy is expected to keep slowing down shortly. The dual headwinds of a decline in global growth and a decrease in growth in Asia have hit the country. The Singapore dollar has fallen by 7% against the U.S. dollar since the start of the year, making Singapore’s exports less competitive.
Indonesia’s Currency Collapse
Indonesia’s rupiah is the weakest Asian currency, trading at about 15,000 rupiahs to one U.S. dollar. The fall in commodity prices has hit Indonesia hard, as the country has been one of the primary beneficiaries of the commodities boom in recent years. The currency has been in free fall since the start of the year, losing 20% of its value. The fall in the rupiah has prompted the central bank to raise interest rates to attract investment and shore up the currency’s value. But it’s been unsuccessful so far: the rupiah has fallen against the U.S. dollar despite the higher interest rates.