We continue our short conversations with some of our regular contributors about their outlook for 2022.
As vaccinations pick up, Southeast Asia could make notable progress, albeit with the uncertainty resulting from the Omicron variant. Here, we speak with Priyanka Kishore, head of India and South East Asia, Macro and Investor Services at Oxford Economics, about the outlook for Southeast Asia’s economies in 2022, and challenges facing the region.
Unravel: What is your outlook for Southeast Asian economies in the coming year?
Priyanka Kishore: After a challenging 2021, when ASEAN was hit especially hard by the Delta variant, we expect Southeast Asia’s growth to benefit from more durable reopenings as vaccination programmes reach their targeted levels by the middle of 2022.
The outlook for the first quarter has turned more cautious due to the rapidly spreading Omicron variant. Despite being less severe than its predecessors, Omicron’s high transmissibility has led to re-imposition of travel restrictions and may also lead to re-tightening of domestic restrictions in some places. A rapid rise in cases will impact sentiment and mobility negatively.
However, the economic damage is likely to be far lesser compared to the previous waves as the region has made notable progress on ‘living with COVID’. We also expect activity to rebound quickly as the cases start to fall, as has been the case with the previous COVID waves.
Unravel: What are some key challenges that economies in Southeast Asia will have to grapple with in the new year?
Ms Kishore: While consumers and businesses are progressively adjusting to functioning with COVID-related disruptions, growth is still far below potential for the region. This is especially true for the more tourism dependent economies such as Thailand and Indonesia. But even in Singapore, which has benefitted from strong global trade and a massive fiscal support, we expect the output gap to close only in 2023.
In such a scenario, inflationary pressures due to rising input prices could pose a major policy challenge, especially given the limited scope for fiscal support to offset monetary tightening in most ASEAN economies. So far, inflationary concerns have been absent outside of Singapore, which tightened monetary policy in October 2021 – six months ahead of our and consensus expectations. But upside risks to consumer inflation persist.
A hawkish Fed complicates the situation further. Of all the central banks in Southeast Asia, we find the strongest link between Indonesia’s monetary policy and the Fed. Not surprising, given Bank Indonesia’s forex mandate. However, with markets now pricing the first Fed hike in March 2022, weaker currencies may push other Southeast Asian banks to act faster too. This is not our base case but an important risk that needs to be monitored.
Unravel: Do you expect to see trade in the region reach pre-pandemic levels, or will supply chain disruptions continue to be witnessed?
Ms Kishore: So far Asia has been less impacted by logistic and shipping issues than the West. Its problems have been more homegrown with lockdowns to contain Delta’s surge negatively impacting production, especially in Southeast Asia. Vietnam being a case in point. However, not all Southeast Asian countries have had a bad run in 2021. Indonesia’s exports have substantially outperformed rest of the region, boosted by rising commodities demand and prices. Malaysia has also benefitted from the global commodity price surge but to a lesser degree.
This is not to say that the region is immune to supply side issues. We expect exports of goods that are more exposed to global supply chains, such as electronics, machinery and transport equipment to remain weak until disruptions begin to wane, most likely in the second half of the year.
An additional source of concern is slowing Chinese demand. As per our estimates, China’s import demand has been coming off since Q2 2021 and we expect this trend to spillover into 2022 amid a property downturn and the zero-COVID approach.
Hence, export growth is likely to slow through the first half of 2022. But we are more optimistic about the second half and forecast a pick-up in export momentum, supported by our view of normalising supply chains and faster global economic recovery.
Unravel: Are you optimistic about the region’s economic growth prospects in the long run? What key factors will determine growth?
Ms Kishore: ASEAN’s post pandemic recovery path is quite diverse. Singapore’s GDP is expected to converge back to its pre-COVID baseline by 2025, but the Philippines will still have deep economic scars. We also forecast sizeable permanent output loss for the other major ASEAN economies – Indonesia, Malaysia and Thailand. The different outcomes reflect the countries’ COVID containment strategies, extent of macro policy support and economic structures, such as reliance on exports.
However, we do see scope for ASEAN’s economy to heal faster – through greater emphasis on regional integration. The Regional Comprehensive Economic Partnership (RCEP) Agreement, which came into force on 1 January 2022, could be a key force in this regard. The attractive rules of origin under RCEP increase ASEAN’s attractiveness as a supply chain destination, as businesses actively consider a ‘China+1’ strategy. But, as is the case with the ASEAN Economic Community (AEC), success hinges on the political will to prioritise economic interest over populist decisions.
Priyanka Kishore has more than a decade’s experience in macroeconomic research and forecasting across emerging markets, with a special focus on India and ASEAN. She currently leads Oxford Economics’ Singapore Global Macro Services team and is responsible for overseeing the firm’s South and South East Asia research.