Economic Outlook for Southeast Asia, China and India 2024

Developing amid Disaster Risks

Report

Economic Outlook for Southeast Asia, China and India

2 May 2024

1. Macroeconomic challenges and risks in Emerging Asia

Abstract

Emerging Asian economies – the ASEAN member countries, China and India – are showing resilience. Economic growth in the region will be driven by robust domestic and regional demand and a continued recovery of the services sectors, particularly tourism. The acceleration of the digital and green economy could benefit services sectors and exports in the region. Overall, inflation continued to moderate thanks to prudent monetary policies. Extreme weather could threaten food and energy security and other economic activities in the region, and mounting private debt could increase the risks of excessive leverage.

Introduction

Emerging Asian economies – the ten ASEAN countries, the People’s Republic of China (hereafter “China”) and India – are showing resilience. Emerging Asia has contributed strongly to global economic growth, and is expected to continue to account for more than half of total economic growth in 2024 (OECD, 2024[1]). Economic growth in the region will be driven by robust domestic and regional demand, and a continued recovery of the services sector, particularly tourism. The improvement of financial conditions is expected to continue this year. However, the region faces several challenges.

This chapter discusses the key macroeconomic challenges and risks: external headwinds; the impact of extreme weather; and elevated levels of debt, particularly mounting private debt.

Overview and main findings

The main findings of the 2024 Outlook include the following:

Overall, growth in Emerging Asian economies is showing resilience, supported by robust domestic and regional demand.
Trade in Emerging Asia shows signs of recovery. Trade in intermediate goods will strengthen.
The services sector continued to expand, becoming the largest contributor to growth. For major economies in the region, the development of high-technology-based services is becoming a driver of economic expansion.
Foreign direct investment (FDI) should pick up. The region’s attractiveness for manufacturing investments remains robust, supported by growth in greenfield project announcements.
Financial markets in the region are stable in general, though monetary authorities need to monitor the market carefully. Inflation continued to moderate in the region in 2023 thanks to prudent monetary policies. However, sticky service price inflation could increase inflation pressures and trigger financial market volatility.
Extreme weather could cause disasters that cost lives, reduce agricultural output, destabilise energy markets and increase inflationary pressures.
Some Emerging Asian countries are experiencing elevated levels of debt, particularly private debt, stemming from rising interest rates and increased costs of energy and staple foods.

Macroeconomic development in Emerging Asian countries

ASEAN-5

Indonesia

Economic growth in Indonesia is driven by domestic demand, particularly private consumption which remained steady in the second half of 2023 while public consumption fell and investment grew modestly. The economy is expected to benefit from lower inflation and increases in economic activity that took place before the February elections and that are likely to occur during religious holidays and year-end holidays. Household consumption recorded 4.5% growth in the fourth quarter of 2023 and is expected to remain strong in the near term. This is supported by steady growth in the labour market across the service and industry sectors, a recent 3.6% increase in minimum wages and government food subsidies. Investments are expected to remain robust in the near term on the back of supportive domestic and foreign investment policies, infrastructure development and downstream development of hard commodities. In particular, foreign investment inflows are expected to remain strong in 2024, owing to several major investment policies aimed at industrial expansion, notably in the processing of nickel and other minerals for electric batteries. In addition, the government is expanding its new investment list of priority sectors that are open to foreign direct investment, including high-technology services and manufacturing industries. Overall investment growth slightly moderated in the fourth quarter of 2023, posting year-on-year growth of 5.0%, from 5.8% in the previous quarter. Rapid expansion continued in services exports, which peaked at USD 9.2 billion in the third quarter of 2023. This served as a strong counterbalance to a contraction of goods exports. Growth in goods exports remains weak, at 0.4% in constant prices in the final quarter of 2023. However, the Purchasing Managers’ Index (PMI) for manufacturing shows signs of steady improvement. This should support further progress in economic activity, including higher overseas work intakes, better demand conditions and positive business sentiment. Bank Indonesia is expected to bring down key interest rates in the second half of 2024 as inflation continues to decline and the rupiah steadily appreciates.

Malaysia

The country’s economic growth is driven by the steady expansion of investments, underpinned by a resilient labour market. However, private consumption experienced a strong decline, on a quarter-on-quarter basis. Weak external demand from major trading partners impacted the country’s export industry for goods and services in 2023, with exports contracting by 7.9% in 2023, though the data for the first quarter of 2024 show robust GDP growth signalling the country may be regaining their growth momentum. On the supply side, major sectors registered an expansion in the first quarter of 2024, with construction recording the strongest growth at 9.8% from 3.5% in the last quarter of 2023, and manufacturing growth rebounding to 1.9% from -0.3% in the previous quarter. Services remain the largest contributor to economic growth, recording 4.4% expansion. Overall, growth in industrial production improved in early 2024 compared to 2023. However, manufacturing export growth in March shows a mild recovery though still weak but may signal that the worst of the slowdown seen in 2023 has passed and sets the manufacturing sector on course for gradual recovery in 2024. Headline inflation showed an uptick in February driven by non-food items such as housing, water, electricity, gas; recreation, sport, and culture; and transport.

Economic growth this year will be driven by the steady expansion of domestic demand underpinned by benign inflation and interest rates, and by the robust growth of the services sector. A potential turnaround in global trade, amid strong expectations of the United States should drive improved external demand, particularly in the electrical and electronics subsector. However, risks remain, particularly increased geopolitical tensions which could continue to disrupt supply chains and trade patterns.

Overall, headline inflation is expected to average between 2% and 3.5% in 2024. Upside risks will come from price increases on food and energy items with the extent of these risks hinging on potential second-round effects to which authorities should remain vigilant. Monetary policy will remain neutral as inflation starts to stabilise to long-term average. However, policy stance should remain vigilant to potential inflation pressures stemming from the planned withdrawal of energy subsidies and the continued depreciation of the ringgit. Malaysia’s fiscal deficit will be improved in 2024, reflecting the government’s modest pace of fiscal consolidation through a combination of spending cuts, new tax measures and reduced debt payments. Selective subsidy spending is planned, such as the continuation of electricity rebates for the poor in tandem with the phasing out of diesel subsidies. These policies, along with other fuel and food subsidy cuts, may cause some inflationary pressure. Government debt will remain elevated at 64% of GDP in 2024, up from 62% in 2023 (Ministry of Finance of Malaysia, 2023[2]). A significant drop in the value of the Malaysian ringgit in 2023 was driven by external pressure from the country’s wide interest-rate gap with the United States, Chinese economic growth and a decline in local demand for the ringgit. Expected lower interest rates in OECD economies in 2024, as well as Malaysia’s robust current account surplus, should contribute to the ringgit’s recovery. The current account will continue to be supported by the anticipated recovery of exports in the electrical and electronic sector and by commodity prices remaining elevated, driving the appreciation of the ringgit. However, the elevated commodity prices have exacerbated financial stress on poor households.

Philippines

The economy of the Philippines bounced back in the second half of 2023, recording robust real GDP growth of 5.5% in the fourth quarter of 2023. On the demand side, better economic performance than expected was driven by resilience in domestic demand, particularly private consumption, and a strong rebound of investments. Household consumption grew by 5.3% year-on-year in the fourth quarter of 2023, while investments grew by 10.2% year-on-year. Government spending dropped to -1.0% year-on-year from a high of 6.7% in the third quarter of 2023, mainly due to the fiscal consolidation programme. Economic expansion from the supply side has been driven by the services sector, which remains the largest contributor to GDP growth, continuing its strong trajectory with 7.4% growth year-on-year in the fourth quarter of 2023. Real GDP growth was expected to bottom out in 2023, largely due to weak external demand affecting exports during the first half of the year. Nonetheless, it was expected to nearly reach the low end of the government’s target of 6.0‑7.0% amid easing inflation, a tight labour market and high consumer spending, particularly during the holiday season in December. In 2024, the country will continue its rapid economic recovery, driven by a robust household consumption, a healthy rebound of government consumption and an improved global growth outlook. Other key drivers supporting economic growth momentum in the near term include sustained remittance inflows, fast-growing exports in the information technology-business process outsourcing (IT-BPO) sector and steady expansion of the tourism sector.

The share of the services sector in GDP has exceeded that of the industry sector in the Philippines since the mid-1980s, growing to 55% in 2010 and 65% in 2023. The sector’s share in total employment has also expanded steadily from 53% in 2012 to 60% in 2023. As of January 2024, the services sector employed 27.6 million people, far more than the 18 million employed in the agriculture and industry sectors combined. Export-oriented services were particularly significant, with a total services export share steadily expanding to reach 43% in the first quarter of 2024. However, services sectors generally offer lower productivity jobs, which come with low real wages for the majority of the workforce.

Thailand

Economic growth in Thailand is mainly driven by robust growth in private consumption supported by an expanding services sector, a tight labour market and improving wage growth prospects. Total investment has stagnated, with year-on-year growth estimated at 1.2% 2023, down from 2.3% in 2022. Growth in exports of goods and services also continues to slow, registering 2.1% growth in 2023, down from 6.1% in the previous year amid the global economic slowdown and structural changes. On the supply side, the industry sector, particularly the manufacturing sector, is registering lower levels of production and declining business confidence. Inflationary pressure from higher raw material costs is pushing input costs up, signalling another worrying trend for manufacturers.

Thailand’s services sector remains a bright spot in the economy, expanding by 4.3% in 2023. With manufacturing sector’s share of the Thai economy shrinking, the services sector now holds the dominant share at 65%. The services sector is driven by a rapidly expanding tourism sector, which is helping keep unemployment at its lowest level since 2019 (0.8%). Total international tourism arrivals reached 28 million in 2023, a 154% increase from 2022. A recent mutual visa waiver agreement between Thailand and China, along with visa exemptions for tourists from India and Chinese Taipei, are expected to contribute to the sector’s steady recovery in the near term. Authorities are targeting up to 35 million foreign tourists in 2024, edging closer to the pre-pandemic record of 40 million. This, along with the anticipated rebound of the goods exports and rising consumer confidence, will drive economic growth in 2024.

As of March 2024, headline inflation continued to register negative year-on-year growth for the sixth consecutive month, underpinned by government subsidies on diesel and electricity. Nevertheless, inflationary pressures will continue and likely be driven by demand pull factors as private consumption continues to grow steadily and higher oil prices persist amid growing tensions in the Middle East. The Bank of Thailand’s decision to keep the benchmark interest rate at 2.5% following eight rate hikes since August 2022 and a cumulative rate increase of 200 basis points, has resulted in relatively high real rates. However, the case for possible monetary easing should be carefully weighed against inflationary risks from expansionary fiscal policy, higher freight costs related to geopolitical tensions, and currency developments. The proposed handout scheme could stimulate the economy, while high household debt represents a downside risk to growth.

Viet Nam

The economy is showing steady signs of recovery with goods exports growing steadily in the first quarter of 2024 underpinned by robust increases in the shipment of electronics, smartphones, and garments. Growth in household consumption slowed to 3.2% in 2023 from 7.7% in 2022, while growth in investments moderated to 4.6% in 2023 from 5.6% in 2022, amid a slowdown in economic recovery and weak demand for credit. On the supply side, the services sector is the main driver of growth, at 6.1% year-on-year, supported by robust retail sales of goods and consumer services as well as transport. Tourism activities are maintaining high growth momentum, contributing to the robust growth of the services sector. Viet Nam saw a total of 4.6 million international visitor arrivals in the first quarter of 2024, an increase of 72% from the same period in the previous year. However, the industry sector faced challenges, particularly the manufacturing industry, which relies heavily on international trade for its expansion. The subsector’s growth weakened in 2023, with growth of 3.6% compared to 8.2% in 2022, contributing to the overall slowdown of the economy with its 23% share of GDP. Viet Nam’s economy is expected to recover in 2024 with the anticipated improvement of external trade coupled with a proactive monetary policy that should keep inflation within the range of 4.0-4.5%. However, a longer period of high interest rates in OECD economies could rekindle inflationary pressures. To close the gap from the fall in exports, the government has taken proactive policies such as extending a cut in the valued-added tax to boost domestic consumption, enhancing tax management on digital and e-commerce transactions, removing barriers for enterprises and expediting public investment, mostly on infrastructure. While the March 2024 PMI continued to show subdued demand, firms remain optimistic regarding 2024. For instance, data from the semiconductor industry is pointing to improvements in sales, which will benefit Viet Nam’s exporters in the tech sector. An expansionary fiscal stance and accommodative monetary stance will be maintained to boost economic growth. The government is also providing support to households and firms through tax cuts.

Viet Nam’s economy grew 5.7% in the first quarter of 2024 amid a steady expansion in exports. While marginally slower than the growth rate from the fourth quarter of 2023, which was recorded at 6.7%, the government is targeting 6.0-6.5% GDP growth for 2024.

Brunei Darussalam and Singapore

Brunei Darussalam

Growth was primarily supported by an expansion in private consumption and public investments amid declines in government spending, private investment and exports. On the production side, growth was attributed to the expansion in the non-oil and gas sector which increased by 4.5%, mainly driven by the continued expansion in air transport, finance, and the non-oil and gas manufacturing sector which covers the expansion of downstream activities, including production of petroleum and chemical products and other non-oil and gas activities. The oil and gas sector, which represents 52% of GDP, picked up in the fourth quarter of 2023, recording a growth of 11.1% year-on-year due to the increase in the activities of oil and gas mining and manufacturing of LNG. The services sector grew by 5.9% in the same period, largely supported by increases in air transport, finance, communication, and other transport services. Growth in the finance subsector corresponded with developments in banking and insurance. The economy will continue to recover in the near term, mostly driven by higher exports from the recovery of oil and gas production and the continued expansion in downstream petrochemical and fertiliser production, which will help to render the economy less reliant on oil and gas output. Construction investment spending will also drive economic growth as work continues on the redevelopment of the port at Muara and the Phase II expansion of the Pulau Muara Besar petrochemical complex. The banking sector remains healthy with declining non-performing loans, though strengthening financial surveillance and risk monitoring remains key. Recent inflation estimates show a decline of -0.52% in February 2024, reflecting a fall in clothing and footwear; housing, water, electricity; transport and communications. The government’s extensive subsidy policies and price controls will continue to tame inflation, which should help support private spending and the services sector. Risks to growth will largely come from a less favourable external environment. A weak growth momentum of major trading partners and a sharp decline in global energy prices could limit growth recovery.

Singapore

Economic activities show a faster pace of growth in the first quarter of 2024 than in the previous quarter. The services sector, which comprised the largest share of the economy at 65%, recorded continued a broad-based expansion of 3.2% primarily led by ICT, finance and insurance, and professional services and followed by wholesale and retail trade and transportation and storage sectors. However, the manufacturing sector expanded by 0.8% in the first quarter of 2024, a slowdown in growth from the previous quarter. The construction sector expanded by 4.3% underpinned by an increase in public sector construction. Core inflation remains sticky in the first three months of 2024, driven by a step-up in the GST rate, a carbon tax hike, and increases in essential services fees.

The 2024 economic outlook for Singapore is upbeat amid signs of recovery in exports and manufacturing, particularly an expected turnaround of demand for global electronics and the stabilisation of policy rates in advanced economies. Expansion in domestic demand underpinned by steady increase in investment, private consumption and government spending will also support near-term economic growth. Consumer-facing sectors such as travel and tourism, retail trade and food & beverage services will likely rebound with the expected return of tourists from China, which was Singapore’s largest pre-pandemic source of visitors, at nearly 20% of visitors in 2019. Policy rates were maintained in the first monetary policy decision of 2024 as the Monetary Authority of Singapore (MAS) continued to monitor risks to inflation and growth. The MAS estimates that headline and core inflation will average 2.5-3.5% in 2024, due in part to the one-off impact of a hike in the goods and services tax (GST) by one percentage point from January 2024 onwards. Inflationary pressures remain such as hikes in global food and energy prices and a boost in household consumption amid a strong labour market. The construction sector will remain robust, driven by public housing and infrastructure projects, while private sector construction will also expand via residential and commercial developments. Direct investment liabilities, which are closely related to inward FDI, improved in the fourth quarter of 2023, recording 10.9% growth year-on-year compared to 7.6% in the third quarter of 2023. The government is contemplating recalibrations to align with the OECD global tax framework, a move that could reshape the incentives offered to multinational enterprises operating within Singapore. Potential challenges to the growth outlook include uncertainty over the monetary policy stance. This uncertainty continues to limit businesses as it impacts borrowing costs and investment decisions. Global uncertainty could potentially disrupt raw material supplies, and this could lead to cascading effects across various industries, impacting production, pricing and supply chains.

CLM countries

Cambodia

Cambodia is on track towards gradual recovery, fuelled by a rebound in tourism, robust performance in non-garment exports and a recovery of the garments and footwear sector. The electronics industry cushioned a large decline in garment and footwear manufacturing amid weak external demand in 2023. Annual exports of electrical parts grew by 71% year-on-year, while corresponding imports registered a substantial uptick amounting to USD 1.5 billion. The surge in import demand for technology, machinery and electrical equipment demonstrates the economy’s pivotal shift towards higher production capacity. However, while total trade improved, the main export earner – the garments, footwear, and travel goods (GFT) sector – struggled in 2023 amid weak demand from US and European markets. Recent trade data in first two months of 2024, however, are showing a rebound in the garment and footwear industry while electrical parts registered a substantial decline.

Growth in the services sector is expected to increase in 2024, mainly due to tourism picking up since travel restrictions have been completely lifted and visitor arrivals from China and other Asian countries have increased, though tourist arrivals will remain below pre-pandemic levels. Cambodia will also see positive effects from its free trade agreements with neighbouring countries, as well as the Regional Comprehensive Economic Partnership (RCEP), which will promote inward investment by reducing regulatory uncertainty and harmonising standards. The industrial sector may post robust growth in 2024 thanks to strong demand for non-GFT goods as well as a recovery in certain pockets of the manufacturing sector, particularly electronics. On the demand side, drivers of growth will include continued infrastructure investment and a rebound in domestic consumption and investment, supported by strengthening tourism, transport and related retail segments. However, the continued tight monetary policy of the US Federal Reserve will constrain investments. Growth in 2024 will be hampered by external risks such as the moderate pace of economic growth in OECD economies. Cambodia also exhibits high levels of debt, and a rise in non-performing loans (NPL) poses major risks for the banking sector and the broader economy. Cambodia’s proportion of non-performing loans in the banking and micro‑finance sectors stood at 5.4% and 6.7% 2023, respectively, while private credit reached 160% of GDP as of August 2023. The latest El Niño episode will have a moderately negative effect on the agricultural sector. Household consumption will be dampened by elevated prices for energy, food, and other commodities. The country’s inflation rate is forecast to continue to moderate in 2024 if the price of oil on the international market returns to normal. Meanwhile, fiscal policy will remain focused on combatting the effects of inflation.

Lao PDR

Lao PDR’s economy remains in recovery mode, supported by improved performance in tourism, transport and logistics services, as well as foreign investment. Growth is lower than expected amid a sharp depreciation of the Lao kip, high inflation, labour shortages and unfavourable weather. The depreciation of the kip and rising food and fuel prices saw headline inflation surge to more than 40% in the early months of 2023 and it has remained high at 25% as of the first quarter of 2024. The elevated level of inflation will weigh on private consumption. Furthermore, the kip continues to depreciate against the US dollar, hitting a new low in March 2024. Rising production costs and the effects of drought on hydroelectricity generation also impacted economic activity. Exports growth contracted year-on-year in the second and third quarters of 2023 but rebounded in the fourth quarter of 2023, posting growth of 8.0%. Exports in agricultural products earned more than USD 1.4 billion, exceeding the target for the year.

Real GDP growth is expected to improve moderately in the near term, led by steady expansion of the services sector and exports. The opening of the Laos-China Railway is expected to boost trade with China, particularly agricultural, metal and mineral exports. The industry sector will also benefit from investment in the power sector through multiyear electricity contracts with Thailand and other neighbouring countries. Downside risks include elevated external debt, estimated at 68% of GDP in 2022, and a continued decline of the value of the kip, which is likely to remain under pressure amid high imports and large debt repayments coming due. Demand for Lao exports may also decline due to moderate global and regional growth. The services sector will improve amid expected increase in external demand from tourism and logistics. Public expenditure remains well below pre-pandemic levels, especially in areas such as health and education, with fiscal austerity measures being used to rein in Lao PDR’s sovereign debt stock. Changes in weather conditions, such as the those caused by the lingering effects of El Niño, may still lead to a decline in agricultural output and reduce water levels in the Mekong River while of La Niña is expected to arrive later in the year and exacerbate the risk of flooding.

Myanmar

Myanmar’s economic growth was primarily led by the agriculture, industry and services sectors. However, economic growth is expected to remain weak in the near term amid heightened conflict, which risks damaging the country’s macroeconomic fundamentals. Domestic demand is expected to deteriorate, while supply chain disruptions, labour shortages and increased logistics costs will worsen trade activity and agricultural production. The Myanmar kyat depreciated by approximately 18% against the US dollar in the third quarter of 2023 and will continue to face downward pressure amid a persistent trade deficit and a bleak foreign investment outlook. Inflation will remain high given the depreciating currency and disruptions in supply chains and farming. Power outages, which persisted throughout 2023, will worsen amid disruptions to power transmission and generation infrastructure. Outages have lasted for extended periods, particularly in industrial zones, impacting businesses and further dampening growth prospects. Spending cuts will target social services such as education and healthcare, as well as economic planning and reforms.

China and India

China

Economic activity on the demand side was largely driven by steady private consumption, though its growth was limited by low consumer confidence and the decline in asset prices. High precautionary savings after the pandemic are weighing on private consumption. Overall fixed-asset investment grew at 3% in 2023 reflecting the continuing adjustment in the real estate sector, but with infrastructure and manufacturing growing at a moderate but steady pace. Export and import growth picked up in the first quarter of 2024, both growing at about 5% following a weak 2023 amid subdued global demand. The manufacturing sector is showing signs of recovery, with PMI data of 51.1 in March 2024, signalling sustained increases in both output and new orders.

Growth momentum in China will ease somewhat this year but will likely reach close to the target of around 5%. Adjustment in the property sector will continue but pick up of infrastructure and manufacturing investment will more than make up for falling investment in real estate. Commitment to reach net zero emissions will keep investment in renewable energy infrastructure robust and so will suburban railway demand. Consumption will remain steady, but unlikely to pick up in the absence of social security reforms that would reduce precautionary savings. Exports will also pick up as global demand gradually recovers. Moreover, steady or falling prices will make Chinese products more competitive. Monetary and fiscal policy will hold up economic growth in 2024. Monetary policy will remain expansionary, with falling effective interest rates and fiscal policy will become looser. The People’s Bank of China has taken steps to support the economy while managing economic risks and deflationary pressures. In February 2024, it cut the reserve ratio requirements for banks by 50 basis points, which will provide USD 139 billion in liquidity support. The interest rate on one-year policy loans was held steady at 2.5%, which helps reducing the debt burden. On the fiscal front, additional spending of 0.8% of GDP financed by ultra-long-term government bonds will be directed to priority projects. Furthermore, special local government bonds worth 0.4% of GDP have been carried over from last year. Excessive indebtedness of some local government investment vehicles that are key deliverers of urban infrastructure remain a key risk, even though plans to resolve their debt have been adopted.

Consumer prices are expected to remain depressed, with headline inflation staying at a very low, but positive level. Adjustment in house prices is expected to continue, in particular in smaller cities where there is a greater need to work off excess capacity. In contrast, there are still restrictions on home purchases in place in big cities.

GDP grew by 5.3% year-on-year in the first quarter of 2024, following a moderate recovery earlier in 2023. Growth was led by a steady expansion of the industry sector, including high-tech industries. The country’s ongoing energy transition underpinned a surge in the production of sustainable energy products such as solar panels, electric vehicles and power generation equipment.

India

The economy is reaping the benefits of strong macroeconomic fundamentals and financial stability. Large capital outlays focused on infrastructure should boost business investments across key sectors such as manufacturing and services. Increasing investments in residential property to respond to the rapidly expanding urban population is expected to further boost private investments. Rapid growth in the digital economy will accelerate growth in e-commerce, which will support a pivotal transformation in the retail market. The manufacturing industry registered robust growth in 2023 and will remain strong amid substantial expansion in production, moderation in input prices and positive business sentiment. Meanwhile, exports show signs of recovery though still slow, growing by 4.9% year-on-year in the first quarter of 2024 following a 3.4% increase year-on-year in the fourth quarter of 2023. Engineering goods, electronics, and pharmaceutical products were among commodities recording the highest estimated monthly export earnings during the financial year in 2023.

Retail inflation in India continued to decrease in the first three months of 2024, though food price inflation remains elevated in March 2024. Monetary policy easing will start around late 2024 once the inflationary pressure eases.

The ratio of total government revenue to GDP peaked at 12.5% in 2003, ranging between 8% and 10% of GDP from 2011 to 2022. Improving domestic resource mobilisation will support the government’s aggressive measures towards infrastructure investments, particularly in transport, renewable energy and telecommunications. Fiscal consolidation and structural reforms will help improve resource allocation that will benefit several sectors, particularly agriculture.

India’s tax-to-GDP ratio, which is expected to reach a record high of 11.7% in 2024/25, is still substantially lower than the OECD average of approximately 34% (Ranjan and Ramesh, 2022[3]). Despite the marginal improvement in the tax effort from 7.6% of GDP in 2022, challenges remain. The lack of progress in revenue generation is attributable to several factors, such as the large informal economy, tax evasion, the complexity of the tax system and inefficient tax governance.

Merchandise trade in Emerging Asia shows signs of recovery

Latest merchandise trade data in the initial months of 2024 are showing signs of recovery in ASEAN, though recoveries for Indonesia, Malaysia, Philippines and Thailand are still weak. Singapore, however, registered trade growth of 4.3% in the same period, signalling a positive start to the year. Viet Nam and Cambodia show strong rebounds, each recording double-digit export growth in the first quarter of 2024. The recoveries stem from a positive outlook in external demand particularly for electronics and semiconductors, textiles, oil, and non-oil goods.

Figure 1.1. Total merchandise trade in selected Emerging Asian economies

***January 2022 to March 2024, year-on-year percentage change***

Manufacturing activity in Emerging Asia improves amid better external conditions

Figure 1.2 shows that the quarterly growth of the manufacturing industry sector value-added in Emerging Asia followed a trend similar to the monthly growth in manufacturing exports. The region, however, is beginning to show signs of a recovery from its sluggish 2023 performance. The anticipated end of monetary tightening by OECD economies in the second half of the year should help boost investments, adding fuel to a global trade rebound. Emerging Asia’s manufacturing sector showed signs of improvement in the first months of 2024. ASEAN’s manufacturing PMI recorded steady improvement in the first three months of 2024, signalling a continued recovery of the sector underpinned by better prospects in the electronics and semiconductor sector as global demand for AI microchips increases. High-technology exporters in the ASEAN will benefit from this trend though risks remain, in particular the continued high-interest-rate environments in major trade partners. India’s manufacturing sector continues to perform well, with strong customer demand and more favourable input costs boosting production. Export orders continue to expand, signalling higher intake of new business from Africa, the Middle East, Asia, Europe and the United States. As of April 2024, the GEP Global Supply Chain Volatility Index reports a continued rebound in the overall demand for raw materials, commodities and components. The index shows Asian producers are operating close to full capacity with the region’s input demand growing at the fastest pace in over two years.

Figure 1.2. Total manufacturing exports and manufacturing value-added in selected Emerging Asian economies March 2019 to December 2023 (year-on-year percentage change)

Trade in intermediate goods will strengthen as external challenges ease

Recent transformations in global logistics chains – not just for finished products, but also for intermediate goods – indicate that supply chain diversification has begun. One outcome in Emerging Asia is an increase in the flow of Chinese industrial goods to countries where production activity is being redirected, including Southeast Asia and India. This is expected to boost Emerging Asia’s critical role as an intermediate goods provider for major export markets. Asia’s role as an assembler (Factory Asia) and intermediate goods provider will remain significant, given how US and European industrial production indices are correlated with Asia’s exports while Asia’s imports are largely aligned with its own regional industrial production (ADB, 2023[4]).

The evolving trade between ASEAN and China also mirrors recent supply-chain transformations. More of China’s high-value-added intermediate products are being exported to ASEAN and India for final assembly before re-export to the US market. Meanwhile, the ASEAN countries ramped up their sourcing of intermediate goods from the European Union, with import growth in the second half of 2023 improving to 7.4%. This turn of events is largely driven by the rise of EU imports from Indonesia, Malaysia and Thailand. The increase is linked with the automotive industry in Thailand, the region’s automotive manufacturing hub, and Indonesia, which is increasingly becoming the region’s electric vehicle (EV) hub with its rich nickel reserves. Exports from the European Union to Malaysia expanded by 10% and 8.4% in January and February 2024, respectively.

There is a growing emphasis on ensuring sustainability in global value chains which should boost regional trade in environmentally sustainable goods such as electric vehicles and renewable energy products (UN.ESCAP, 2024[5]). In one recent development with potentially significant consequences, attacks on commercial vessels transiting the Red Sea have started disrupting key shipping routes. Shipping costs have risen sharply since mid-December 2023 and delivery times have lengthened, especially for trade from Asia to Europe (OECD, 2024[6]). This has disrupted production schedules in Europe, particularly for automotive manufacturing, which accounts for a significant share of trade in certain countries of Emerging Asia. Additional supply capacity this year, as reflected by stronger new orders for container ships after the pandemic, should help to meet increased shipping demand and moderate upward cost pressures. Nevertheless, OECD estimates suggest that the recent 100% increase in shipping costs could raise annual OECD import price inflation by close to 5 percentage points if it persists for about one year (OECD, 2024[6]).

Certain indicators hint at potential improvements in the near term, including the resolution of other supply chain disruptions that lingered into 2022 as well as the impacts of the Russian invasion of Ukraine and the ensuing economic sanctions stabilising. These developments have helped to ease pressures on goods prices, which will contribute to the moderation of inflation in OECD economies.

Foreign direct investment is expected to pick up

Emerging Asia’s trade links will be strengthened through a gradual increase of FDI, particularly in semiconductor and automotive manufacturing. ASEAN’s role as a manufacturing hub is expected to strengthen over the medium and long term as it continues to attract global investment despite reshoring trends elsewhere. A number of ASEAN countries are developing into critical links in the supply chain for certain products and components and are thus expected to attract a sizeable share of FDI in the near term, including Malaysia for semiconductors, Viet Nam and Cambodia for electronics, Thailand for automotive products, and Indonesia for electric vehicles. In 2022, ASEAN recorded FDI of USD 224 billion, with electric vehicles being the top haven for investors. ASEAN’s share of global FDI rose to 17.3% in 2022 from 14.4% in the previous year. Meanwhile, the trend of international companies establishing facilities in the region is expected to continue despite trade policy setbacks, such as reshoring, nearshoring and legislation such as the US Inflation Reduction Act, which provides incentives for domestic production of lithium-ion batteries and other EV components.

High-tech products, the rapid advancement of artificial intelligence (AI), and digital services will be key drivers of regional trade in the long term, while a continued upturn in semiconductor and electronics production in 2024 will help to underpin merchandise trade in the near term. The global semiconductor industry is expected to rebound, with projected annual growth of 40% in chip sales by the first half of 2025 (Tan, 2023[7]). This is largely driven by the rise in demand for AI-integrated electronics. The rapid acceleration of AI and the digital economy has increased the role of chips in a wide range of products the world depends upon. The long-term outlook for the semiconductor industry is thus strong, and most economies in Emerging Asia are set to benefit. For instance, Singapore and Malaysia, active players in the downstream semiconductor supply chain, are poised to experience rapid growth stemming from semiconductor-led exports. Demand for AI-integrated industrial electronics and 5G mobile phones is also expected to surge on the back of Industry 4.0 transformation initiatives and 5G rollouts over the next five years. In China, investment in high-tech manufacturing grew by 9.9% in 2023, beating the 6.5% increase seen in overall manufacturing, but this was still the slowest pace of high-tech manufacturing investment growth since records began in 2015.

The development of electric vehicles will deliver substantial gains to the ASEAN auto manufacturing industry. The subregion recorded USD 18.1 billion of international investment in EV-related sectors in 2022, representing a growth of 570% from just USD 2.7 billion in 2021. The investment covers the mining of critical minerals (nickel and cobalt), battery production and EV manufacturing. Further expansion is expected, with Indonesia, Singapore and Thailand actively bolstering their EV industries. Indonesia will benefit from sustained FDI for greenfield projects on nickel smelters and EV battery plants. In Thailand, the Board of Investment has introduced the EV 3.5 scheme, which aims to maintain the momentum of the country’s EV industry. Thailand recently approved investments by 16 EV battery manufacturers that collectively amount to THB 39.5 billion (Thai baht).

The growth of ASEAN exports is expected to be strengthened by the Asia-Pacific (APAC) regional trade liberalisation architecture. This includes the large Regional Comprehensive Economic Partnership (RCEP), to which all ten ASEAN nations belong, as well as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) multilateral trade agreement, which includes a number of ASEAN members. The region also benefits from the ASEAN Free Trade Area and a growing network of major free trade agreements involving APAC economies.

Services trade moderated but will remain stronger than goods export growth

Strength in services trade in Emerging Asia in 2023 somewhat offset weak performance in goods trade (Figure 1.3). In the Asia-Pacific region, growth in services trade is expected to outperform the rest of the world in 2023, with exports growing at 8.8% and imports at 9.7% compared to 7.7% and 8.2% for global commercial services exports and imports, respectively (UN.ESCAP, 2023[8]). Strength in services trade is attributed to its growing digitalisation as well as recovery in the travel and tourism sectors since the complete relaxation of border restrictions post-pandemic. Trade in services remains concentrated in a few Emerging Asian economies.

Trade in services has mainly been supported by the full recovery of the tourism sector. The strong rebound is also supported by the return of international air passenger traffic to pre-pandemic levels. The tourism industry is expected to be an important driver of growth for ASEAN exports over the medium term. International tourism flows are expected to show robust growth as per capita household incomes in large Asian consumer markets continue to increase rapidly, driving travel to ASEAN tourism destinations. This will help ASEAN economies where tourism contributes a significant share of GDP, including Thailand, Malaysia, the Philippines and Singapore.

However, barriers have gradually increased in services trade since 2014, both in Asia and worldwide. Restrictiveness is significantly higher in Asia than in the rest of the world, according to the OECD Services Trade Restrictiveness Index, with equal or higher restrictiveness across all sectors in 2022 (UN.ESCAP, 2023[9]). Restrictions on foreign entry dominate the limitations. Cross-border movements of labour are still restricted by policies including limitations on stays, nationality, residency requirements and lack of recognition of professional qualifications across borders.

Figure 1.3. Export growth in goods vs. services in selected Emerging Asian countries

***Q1 2019 to Q4 2023 (year-on-year percentage change)***

Financial markets show nascent signs of improvement though they are still constrained by tight policy rates

Inflation in Emerging Asian countries continued to moderate in 2023 thanks to prudent monetary policies across the region. As is the case globally, declines in energy and food price inflation and the gradual easing of supply-chain bottlenecks contributed to the easing. However, price inflation of services has been stickier. Persisting service price pressures could kindle inflation.

Financial market sentiments in the region fluctuated in 2023 amid uncertainty and changing views about possible rate cuts by monetary policy makers in OECD economies. While the likelihood of lower interest rates spurred rallies in equity markets, uncertainty about the timing of interest rate cuts was reflected in bidirectional movements in the US dollar that resulted in mild currency fluctuations in the region, amid volatile capital flows. Overall, currencies in Asia experienced rapid selling pressure, trading near their lowest levels between the third and fourth quarters of 2023 as Emerging Asia continued to experience the adverse impact of higher interest rates in the region and in advanced economies. In the second half of 2023, expectations that the US Federal Reserve would keep key interest rates elevated for an extended period led to a weakening of financial conditions in Emerging Asia. This drove capital outflows from emerging markets in Asia back to the stronger US dollar in 2023. A similar trend is observed until April 2024 with the strength of the US dollar resurging, fuelled by continued high interest rates, strong fundamentals sustaining GDP growth, and sticky inflation in the United States. The Indian rupee plunged to a fresh low in April since November of last year amid the strong dollar and continuous foreign fund outflows in the equity market. Similarly, the yuan is weighed down by the strong dollar and sharp depreciation in the yen and some Asian currencies. The Malaysian ringgit continued to depreciate, dragged down by reduced exports to China. Indonesia’s rupiah dropped to a four-year low against the US dollar in April and Bank Indonesia increased its policy rate by 25 basis points.

External headwinds, including inflationary pressures amid elevated food and oil prices in some Emerging Asian markets, continued to leave monetary policy makers in the region little room to loosen key interest rates in 2023. Monetary authorities such as the Bank Indonesia, the Bangko Sentral ng Pilipinas and the Bank of Thailand have resumed increasing key interest rates to keep inflation in check and safeguard financial stability. This has led to higher risk premiums and a weakening of equity markets. Nevertheless, Emerging Asian equity markets showed resilience towards the end of 2023. Furthermore, equity markets in ASEAN fared reasonably well amid the challenging financial environment, displaying improved performance in the last months of 2023.

Although inflation is broadly expected to continue easing in 2024, policy rates remain elevated to date for most countries in the region as monetary authorities continue to manage lingering inflationary pressures (Figure 1.4). Monetary policy rate paths in the region will likely diverge in the second half of the year as policy makers prioritise domestic needs such as taming inflationary pressures in some countries or supporting economic growth in others. US monetary policy will remain critical given its impact on bond yields, particularly, long-term yields and currencies in the region.

Figure 1.4. Evolution of policy rates in selected Emerging Asian economies

The impact of the US Federal Reserve’s policy rate will remain a key driver for the region’s equity markets. Expectations that the Fed will stay on track for further cuts may support stock market optimism in the region this year. However, persistently elevated inflation in the United States coupled with a possible spike in oil prices amidst increased tension in the Middle East may pose a risk in the timing of the US Federal Reserve’s rate cuts. At the same time, the European Central Bank may cut interest rates this year.

Asian stocks rose to their highest level in late March 2024, powered by technology companies, while global technology and commodity stocks led the charge in Europe amid greater confidence on lower interest rates. US stock index futures rose as chipmakers tracked sharp gains. Equity markets in ASEAN experienced a nascent rebound starting in December 2023, underpinned by an improving economic outlook for the subregion (Figure 1.5). This is expected to extend into 2024 amid a rapid shift in supply chains to ASEAN, a recovery in tourism that offers better prospects for the labour market, stronger currency relative to the US dollar and robust domestic consumption. Potential rate cuts by the US Federal Reserve in 2024 may be expected to boost the subregion’s technology and high-tech automotive sectors as well as the digital services industry, particularly for major countries such as Indonesia, Malaysia, Singapore, Thailand and the Philippines. The MSCI AC ASEAN Index, which captures large- and mid-cap representation across these five economies, increased by 0.83% in 2023 and remained stable up to March 2024, both substantial improvements from the decline of 4.09% in 2022.

Figure 1.5. Major stock market indices of selected Emerging Asian economies

***January 2023-**April*** ***2024 (3 January 2023 = 100)***

Viet Nam’s banking sector played a leading role in the recent market surge, with its net profit increasing by 22.5% in the fourth quarter of 2023 compared to the same period of 2022. The increase was driven by accelerated credit growth, strong non-interest income, industry-wide income growth and a 5% reduction in provisioning expenses. The VN-Index, however, experienced a decline in April owing to mounting uncertainties regarding the resignation of the country’s president. The National Stock Exchange of India has now become the world’s fourth-largest stock market, overtaking the Stock Exchange of Hong Kong, propelled by strong earnings and expected interest rate cuts (Joshi, 2024[10]). The Reserve Bank of India (RBI) is guarding against upside risks to inflation, particularly food and energy prices, amid the impact of the latest episode of El Niño. Another risk is the escalating tensions in the Middle East which are showing signs of impact in the stock markets, especially, with India and the Philippines experiencing a losing streak in the first weeks of April. In contrast, the prolonged slump in China’s real estate sector and exports industry has hurt the Chinese stock market, with the Shanghai Composite plummeting to a five-year low in February 2024. However, the Shanghai Shenzhen (CSI) 300 Index continued climbing back in March 2024 after plummeting in the first week of February, signalling that the stock market may be headed towards a more sustainable recovery. Hong Kong’s Hang Seng Tech Index has seen an improvement, supported by cost cutting and improvements in efficiency by tech and renewable companies.

Meanwhile, with persistent high interest rates in OECD economies and in Emerging Asia, yields for both short- and long-term bonds rose in almost all markets in the region during the second half of 2023 (Figure 1.6). As of April 2024, US 1-year and 10-year sovereign bond yields edged up on rising uncertainty regarding the timing of the US Federal Reserve’s rate cuts. Despite the fluctuation in bond yields in the United States, Emerging Asia’s bond yields remained stable in the same period. Asian local-currency bonds are expected to improve if there are rate cuts in major economies in 2024.

Figure 1.6. Bond market trends in selected Emerging Asian economies

Bond market conditions in the region improved starting in December 2023 and remain positive into the first quarter of 2024 despite the continued high interest rate in OECD economies and the recent resurgence of the US dollar. In the near term, positive indicators may help central banks consider easing monetary conditions to support economic growth and help drive better bond market conditions. In addition, banks in most major countries in the region have strong capital buffers and rising profitability, which contribute to financial stability.

Risks remain, however, including an escalation of geopolitical risks and continued tight global financial conditions. It can be noted that the Bank of Japan recently ended its longstanding policy of negative interest rates, raising its key policy rate to a range of 0% to 0.1% from -0.1%.

Ongoing property market adjustment in China could present challenges for the region

The development of property market adjustment in China could generate external headwinds for the other economies in the region. China has implemented various policy measures to cushion the adjustment in the real estate sector. Lending standards have been eased, depending on the location of the property and the type of borrower. To prop up demand, the central bank cut its benchmark interest rate twice in 2023, from 3.65% to 3.45%, and it lowered the reserve requirement ratio to support liquidity in the banking system. However, falling property prices are further deteriorating the debt repayment capacity of developers. The price of newly constructed residential properties declined year-over-year in 58 of 70 major Chinese cities, while prices of second-hand buildings had declined in all medium and large-sized cities as of January 2024.

Long-lasting adjustment of the sector is continuing, with annual property sales and real investment in real estate recording a year-over-year drop of 17.7% and 16.5%, respectively, in March 2024. The share in GDP of value added created by real estate dropped from 7% in 2019 to 6.1% in the first three quarters of 2023 (National Bureau of Statistics, n.d.[11]). Although emerging industries such as solar cell, lithium-ion battery and electric vehicle production are offsetting some of the detrimental effects, the real estate sector’s considerable influence on the overall economy is weighing on the income and wealth of households.

Real estate assets represent a substantial share of household wealth in China. Against this backdrop, downward price movements and gloomy prospects in the property market weigh on consumption through the wealth effect. Chen, Hardin and Hu (2018[12]) find that the wealth effect for housing in China, which is about ten times greater than for financial assets, is much larger than previous estimates for advanced economies. They calculate that a 1% rise in housing value translates into a 0.19% change in household consumption, and that the current cycle of dwindling housing values thus undermines household spending.

The household savings rate rose in China after the onset of the disruptions in the real estate market, reaching 33.6% in the third quarter of 2023 before easing to 31.7% at the end of the year (Figure 1.7). The soaring savings rate of urban households has been the main driver of this trend. Despite moderation in the fourth quarter of 2023, the savings rate for urban households remains above pre-pandemic levels.

Figure 1.7. Household savings rate in China

Decelerating housing prices and concerns over housing market prospects create a substantial drag on growth. Restoring consumer confidence via an orderly adjustment in the property market to curb further uncertainty will be key to addressing the challenges presented by the slowdown.

Emerging Asia must cope with extreme weather

Climate change increases average temperatures along with the intensity and frequency of the weather-related disasters globally. Emerging Asia needs to manage the economic impact of extreme weather, together with making efforts to curb greenhouse gas emissions.

Surface temperatures near the Equator exhibit a persistent upsurge (Figure 1.8) and extreme weather events such as heatwaves and heavy precipitation have been observed more frequently and with increasing intensity for decades (IPCC, 2023[13]). Climate change has direct impacts on agricultural production, energy generation and tourism receipts. ASEAN economies are among the most vulnerable against climate risks, facing a severe threat to lose a significant share of their GDP, which could reach 37.4% in the case of the most severe projected scenario of continuing global warming through 2050 (Swiss RE, 2021[14]).

The average number of reported annual occurrences of droughts and storms in the region increased from 1.9 and 25.6 respectively between 2004-13 to 2.4 and 29 respectively between 2014-23. Average annual economic damages from these disasters more than doubled between those two periods (Table 1.1).

El Niño events typically bring higher surface temperatures with more frequent extreme weather events for the Southeast Asian countries and accordingly exacerbate the ongoing negative impacts of the climate change. The latest El Niño episode is one of the imminent challenges that countries in the region need to deal with.

Disaster Type	Between 2004-13		Between 2014-23
	Average annual occurrence	Average annual damage (USD billion)	Average annual occurrence	Average annual damage (USD billion)
Drought	1.89	1.06	2.44	4.10
Flood	43.6	15.14	42	17.57
Extreme temperature	2.20	2.14	1.88	0.20
Storm	25.6	6.53	29.0	13.39

Note: Data cover all economies in the region except Brunei Darussalam.

Source: EM-DAT Database.

The latest El Niño episode adds to growth concerns

In July 2023, the World Meteorological Organization (WMO) declared that the tropical Pacific region was on the cusp of a new El Niño event after a seven-year pause. This climate phenomenon, one of the two non-neutral phases of the El Niño-Southern Oscillation (ENSO), typically generates an upsurge in air temperatures and adverse weather conditions (WMO, 2023[15]). El Niño led 2023 to become the hottest year on record, warmer by a substantial margin than the previous hottest year, 2016, when another El Niño event occurred (Abnett, 2024[16]). Average temperature anomaly in the equatorial zone in 2023 surpassed the levels of the last 50 years, including three strong El Niño episodes, while the level of deviation from average temperatures between 1951 and 1980 reached 1.05°C in 2023 (Figure 1.8).

Figure 1.8. Average land and ocean surface temperature anomalies in the equatorial region

***Deviations from 1951-1980 average***

The latest El Niño episode is expected to last around first half of 2024. The second year of the phenomenon was expected to be warmer than the first due to the time lag between the heating of the Pacific Ocean and surface temperatures, warranting continued efforts to monitor weather conditions to mitigate potential damage (Hirji, Rugard and Kahn, 2024[17]).

El Niño impacts Emerging Asian economies with diverse outcomes. A typical El Niño period leads to higher air temperatures and limited precipitation, along with more frequent extreme weather events such as droughts, floods and storms across the region. Climate change increases the likelihood of observing record-high surface air temperatures throughout El Niño episodes in Southeast Asia, especially during the month of April (Thirumalai et al., 2017[18]). Overall warming coupled with extreme weather events can alter economic activity in many ways. It can have a devastating impact on crop yields and livestock; curb water supply; reduce hydro energy generation; and lead to decreased labour productivity and a drop in tourism traffic and receipts.1

El Niño as a supply-side drag can harm growth in numerous ways

Several empirical analyses have documented that previous El Niño events adversely affected growth in some Emerging Asian countries. For instance, Cashin, Mohaddes and Raissi (2017[19]) investigate the impacts in a multi-country framework between 1979 and 2013 and found that sustained negative Southern Oscillation Index (SOI) values (SOI anomalies) hurt the real GDP growth of India and Indonesia, while the effect was opposite for Singapore due to a rise in shipping activity after the El Niño shocks. According to their analysis, GDP growth in Indonesia dropped by about 0.64% in the year following an El Niño shock. The impact was relatively high due to a slowdown in agricultural activity (coffee, cocoa and palm oil) along with adverse effects on the mining sector arising from its high dependency on hydro energy generation.

(Smith and Ubilava, 2017[20]) demonstrated that the growth impact of ENSO events is more pronounced for countries with a larger share of agricultural activity in GDP. In this regard, Myanmar, Lao PDR, Cambodia and India are more vulnerable to the adverse consequences of El Niño in the coming months due to their relatively high dependence on agricultural production and labour in farming activities (Figure 1.9). In 2022, value added in the agriculture, forestry and fishing sector is estimated to be more than a fifth of GDP in Cambodia and Myanmar, while the share of employment across these sectors in the total workforce reaches 69.6% in Lao PDR. In contrast, the importance of agricultural production in domestic output is limited in Singapore and Brunei Darussalam, a critical factor softening the El Niño slowdown effect in these countries.

Figure 1.9. Share of agriculture, forestry and fishing in value added and total employment in 2022

The importance of tourism activities to the economies of Thailand and Cambodia introduces an additional downside risk to growth in those economies during an El Niño episode. Extreme weather events such as cyclones can have significantly negative effects on tourism-related income (Hsiang, 2010[21]). Furthermore, the fact that the current episode of El Niño comes in conjunction with expectations of mild global growth and a slowdown in China adds to concerns about economic activity across the region in 2024.

El Niño can exacerbate inflationary pressures and threaten food security in the region

The adverse impact of El Niño events on agricultural and mining output as well as hydro energy generation can exacerbate inflationary pressures on food products and other primary commodities. A major upward movement in food and energy prices began before the expansion of the war in Ukraine. Although the prices of most commodities have moderated since their peak in 2022, the cost of major fertiliser raw materials (urea, diammonium phosphate and potassium chloride), as well as crude oil, rice and sugar, remain above the levels seen in early 2021, while wheat and sunflower oil prices have eased substantially below their pre-invasion heights (Figure 1.10).

Figure 1.10. Cost of selected food, energy and fertiliser commodities (2021 January = 100)

Brunner (2002[22]) noted that a 1-standard-deviation rise in El Niño Southern Oscillation generates a hike in real commodity prices of around 4% and accounts for about 20% of the fluctuations in these commodities. The study showed that agricultural commodities are particularly susceptible to the inflationary pressures of ENSO cycles, with rice and palm oil among the commodities most affected by SOI anomalies. Naylor et al. (2001[23]) found that El Niño episodes severely disrupt rice plantings and production in Indonesia and delay the harvest, and that these losses are hardly recovered after high amplitude events. Khor et al. (2021[24]) estimated the cost for the palm oil industry in Malaysia of lower rainfall and dry conditions caused by a strong El Niño event at around USD 3 billion. Cashin, Mohaddes and Raissi (2017[19]) note that El Niño events also have a detrimental impact on energy prices caused by lower generation from hydroelectric dams and an increase in energy demand for agricultural irrigation. Among their sample countries, Indonesia saw the highest estimated increase in average inflation, with a jump of 73 basis points in the year after the shock, followed by India (48 basis points) and Thailand (44 basis points). Malaysia, the Philippines and China saw adverse inflation effects on a lesser scale. The study noted the importance of the share of food products in the consumer basket as a determinant of this unfavourable impact.

Myanmar, Lao PDR and Cambodia are especially prone to the adverse price shocks generated by El Niño events due to the relatively high share of food products in their consumer baskets (Figure 1.11), with more than half of consumer spending attributed to food and non-alcoholic beverages in Myanmar and Lao PDR. Sharp rises in the cost of food staples can thus severely damage the purchasing power of households and disrupt demand for other consumer products.

Supplies of food staples are already under strain in the region. The drier weather conditions are expected to affect the rice harvest and palm oil output in Indonesia and Malaysia, and wheat yields in India (Thukral, 2023[25]). Droughts in Indonesia caused significant delays in rice planting, with the area planted between September and November 2023 dropping by more than half compared to a year earlier (Christina, 2023[26]). Moreover, with this episode’s lessening effect on monsoon rainfall, India’s annual sugar yield may fall by more than 10% in the coming months, sparking expectations that the country, the second largest global supplier of sugar over the last five years, may impose an export ban (Jadhav, 2023[27]).

Figure 1.11. Share of food and non-alcoholic beverages in consumer expenditures (2022)

The accumulated impact of warming and prolonged droughts due to climate change and the latest El Niño cycle, in tandem with elevated energy and input costs, weigh on the farmers, creating a risk of further inflationary pressures in the coming months. Declines in production volumes in conjunction with soaring prices may threaten food security in the region. Harmful interventions in the international flow of agricultural products, implemented after the sharp rise in food prices following the start of the war in Ukraine, add to these worries. India banned exports of broken rice and imposed a 20% export duty on other types of rice in August 2022. The export ban was extended in July 2023 to include non-basmati rice. Although India has since relaxed the ban, approving rice export quotas for several countries including Malaysia and Philippines, the measures are still curbing the international flow of one of the main nutrition sources in Southeast Asia.

Mitigating the impact of El Niño and safeguarding food security in the region requires a multifaceted strategy and co‑operation among the region’s economies. Closely monitoring weather developments, improving early warning systems and keeping farmers abreast of adverse weather changes in a timely manner are crucial to ensuring successful planting and harvesting seasons. Encouraging the use of drought-tolerant crop varieties and supporting the efficient use of limited water resources would be a major step towards increasing crop yields under conditions of a diminishing water supply.

The effects of El Niño are quite heterogenous. Severe weather events can disproportionately strike one subregion, while favourable weather elsewhere in the region can offset some of the output losses. Exporting and importing countries may change their usual roles under extreme weather conditions. Thus, maintaining the flow of food staples across borders and avoiding a vicious cycle of reciprocal trade interventions are vital to enhancing food security.

Southeast Asian economies implemented various policies, such as subsidies, tax cuts and price controls, to rein in the inflationary pressures on food and energy prices following the onset of the war in Ukraine. These measures explain the relatively low inflation rates in the region compared to OECD economies (OECD, 2023[28]). To soften the adverse impacts of El Niño shocks on food security, it is important to maintain fiscal measures that preserve the affordability of food staples and to use targeted programmes to help the low- and middle-income households most vulnerable to food price shocks, while keeping an eye on the sustainability of fiscal policy.

Warmer weather conditions also decrease water resources for energy generation and create higher demand for energy due to the increasing need for air-conditioning and the use by farmers of water pumps to harness ground water resources for irrigation. The destabilising impact of warmer conditions on the supply-demand balance of the energy market requires the diversification of energy sources in order to lessen dependence on water resources and avoid disruptions in power supply and spiralling energy prices. Such action throughout the period of rising temperatures caused by the climate change will also be beneficial during El Niño episodes.

Elevated levels of debt, particularly private debt could threaten the growth prospects and financial stability

Concerns on debt management is increasing. Overall, public debt-to GDP ratios have remained stable, but many economies still face public debt stocks larger in size than historical norms. More importantly, private debt (especially household debt) remains a significant risk to growth prospects in Emerging Asia.

In the aftermath of the global financial crisis, low interest rates and ample liquidity in major advanced economies led to a search for higher yields elsewhere and a rise in the capital inflows and private debt stock of emerging economies. Despite short-lived breaks in loose global financial conditions during the “taper tantrum” and the policy normalisation efforts of the US Federal Reserve, the funding cost for reserve currencies stayed close to zero for more than a decade. During this episode of accommodative monetary policy, private debt in Southeast Asian economies rose considerably.

Figure 1.12. Private debt in selected emerging market economies

Total credit to non-financial corporations as a proportion of GDP averaged 22.9% in Indonesia, 54.6% in India, 86.2% in Thailand, 88.3% in Malaysia, and 166.4% in China over the first three quarters of 2023. Household debt as a proportion of GDP averaged 16.1% in Indonesia, 37.1% in India, 62.3% in China, 67.5% in Malaysia, and 91.7% in Thailand over the same span (Figure 1.12).

The global financial landscape changed dramatically after supply-driven inflationary pressures persisted long enough to initiate a significant modification in the monetary stance of major central banks. A synchronous rise in interest rates globally and tightening domestic financial conditions in the region have increased debt payments and threaten to cause financial distress among indebted households and corporates, especially in economies with higher private debt stock.

Policy rate hikes can usher in financial stress, particularly during an episode of supply-driven inflation where external inflationary shocks have already deteriorated borrowers’ cash flows (Boissay et al., 2023[29]). Many central banks in the region raised policy rates considerably starting from mid-2022.

Elevated prices for energy and food staples since the onset of the war in Ukraine have not only impaired household purchasing power for other goods and services but have also worsened the prospects of debt repayment given increasing interest payments. The expectation of rate cuts from major central banks increased considerably beginning in mid‑2023 on the back of subsiding inflationary pressures. However, the size of monetary loosening in 2024 may be limited by resilient economic activity in some OECD economies and the risk of further supply-side shocks to goods prices from factors such as geopolitical tensions in the Middle East.

The share of income used to service the debt obligations of households and non-financial corporates, the so-called debt service ratio, is an important indicator of the debt burden of the private sector. Debt service ratios steadily increased in China and Thailand in the aftermath of the global financial crisis (Figure 1.13). In China, the share of debt payments rose sharply between March 2009 and June 2023, from 12.8% to 21.4%. According to Thailand’s Household Socio-Economic Survey, the average debt to annual income ratio per household rose from 53.7% to 62.7% between 2009 and 2021 (NSO, n.d.[30]).

Figure 1.13. Debt service ratios for private non-financial sector in selected Asian economies

Elevated debt burden puts growth at risk in countries with highly indebted private sectors

The relationship between credit and economic growth depends on the level of financial development in an economy. Financial deepening generally contributes to income at low levels of debt stock by reducing transaction costs and allocating capital efficiently across the economy. However, credit growth can hinder aggregate real growth of an economy when total private debt exceeds a certain threshold, such as annual GDP (Cecchetti and Kharroubi, 2012[31]).

In Cambodia, China, Malaysia and Thailand, where the existing level of debt is higher than annual income, elevated levels of accumulated private debt could damage economic growth. Although Singapore is an important financial centre in Asia and typically holds a large credit stock, it could be affected to a lesser extent due to the large-scale indebtedness of the private sector. Nevertheless, the impact of high debt varies among economies depending on structural factors and macroeconomic fundamentals.

Excessive debt stock and increasing debt service costs can force households to prioritise debt repayment, with fewer resources available for consumption. Likewise, financially distressed corporations can choose to deleverage and spare limited funds for investment. These responses could weaken economic growth.

Rising property prices usually occur simultaneously with rapid private credit growth, the most noticeable indicators of financial booms (Drehmann, Borio and Tsatsaronis, 2012[32]). A rise in the real cost of residential properties since 2010 in Thailand (61.2%) and Malaysia (34.6%) has accompanied rapid credit growth for households, while real appreciation of houses has been relatively subdued in Singapore (Figure 1.14). Nevertheless, the speed of increase in property prices has eased in these economies and has turned negative in China, where the long-lasting slump of the property sector continues.

Figure 1.14. Real residential property prices in selected Asian countries (2010 = 100)

Real estate constitutes an important part of collateral for private debt obligations. Policy makers should attempt to avoid a persistent decline in nominal property prices, as this can have serious economic and financial ramifications. Expectations of a further depreciation in collateral values can impel borrowers to liquidate properties, inducing an additional drop in prices. A fall in real estate prices impairs consumer spending and economic growth via the wealth effect, and also deteriorates the credit quality of the financial institutions that provided the credit in the first place. Balance sheets of property developers also deteriorate in response to declines in property and land prices, jeopardising the credit rating of leveraged companies.

Vigilant monitoring of financial institutions is key to ensuring the continuation of prudent lending practices and maintaining an adequate level of capital buffers. The capital adequacy ratios of banks in the region are generally compliant with regulatory limits, ranging from 11.8% in Viet Nam to 28% in Indonesia. Loan to deposit (LTD) ratios in Cambodia and Thailand are relatively high, standing at 119.9% and 91%, respectively (Figure 1.15). A banking sector with a higher LTD ratio relies more heavily on non-deposit funds, such as wholesale funding, which makes financial institutions more vulnerable to rapid changes in external financial conditions. The liquidity conditions of the financial sector should be scrutinised carefully, especially when cross-border banking flows, which are susceptible to sudden changes in direction, constitute the main financing source of rapid credit growth.

Figure 1.15. Capital adequacy and loan-to-deposit ratios in selected Asian countries

The deflationary environments that have developed in China and Thailand recently complicate matters concerning the elevated levels of private debt in these economies. Debt deflation, a destabilising interaction between deflating prices and high debt stock, emerges from the feedback from decelerating money supply, a slump in asset prices and damaged credit intermediation against the distressed selling of assets and debt repayment efforts in an economy (von Peter, 2005[33]). It is thus pivotal to avoid deflationary pressures in order to prevent further disruptions in the debt repayment capacity of borrowers and a slump in economic activity. Higher real interest rates stemming from depressed inflation would also dampen domestic consumption and investment.

Concerted monetary, fiscal and regulatory policies may be needed

Policy prescription against rapid credit growth depends on an economy’s financial structure and level of private debt. For low-stock, high-flow economies such as Indonesia, the Philippines and Lao PDR, where new credit creation is high, but the overall financial depth is relative shallow, the first line of defence against rapid credit growth is implementing preventive measures to limit the build-up of financial imbalances. In this regard, emerging Asian economies strengthened their macroprudential policy toolkits in the aftermath of the global financial crisis, using instruments such as countercyclical capital buffers, limits on the loan-to-value ratio, and liquidity ratio and reserve requirements (OECD, 2021[34]). In economies with growing non-bank financial activity, it is vital to monitor credit activity through non-bank financial intermediation and to implement similar prudential measures for the institutions involved in these transactions in order to prevent excessive credit generation and ensure the establishment of adequate buffers to cope with possible shocks during financial stress.

The region’s most active users of prudential measures to tackle financial stability risks are China and Singapore, which implemented 49 and 32 net tightening measures respectively between 2009 and 2021 (Figure 1.16). Despite the rapid growth in indebtedness in Cambodia and Lao PDR, the range and use of macroprudential policy measures has been relatively limited during this period. Among the more recent steps, the Reserve Bank of India recently tightened credit standards for consumer loans, increasing the risk weights for personal loans (excluding housing, education, vehicle and gold-backed loans) by 25 percentage points to curb excessive credit growth in specific components of consumer credit. Indonesia and Lao PDR have more than doubled reserve requirement ratios for local currency deposits since 2022 in order to help boost the liquidity buffers of financial institutions and moderate credit growth. Nevertheless, implementation of macroprudential policy has not been sufficient to prevent credit volume from growing in tandem with income growth in some economies in the region. Employing capital flow measures for prudential purposes during times of strong capital inflows can be effective in curbing excessive credit growth during loose global monetary conditions, such as after the global financial crisis.

Figure 1.16. Number of tightening and loosening macroprudential policy measures, 2009-21

***Selected Asian*** ***economies***

Managing a large private debt stock requires a concerted effort from monetary, fiscal and regulatory policy makers. Avoiding an abrupt decline in credit and a persistent fall of asset prices, especially property prices, is crucial to limit the probability of realising major financial risks. A balance sheet recession, where borrowers prioritise minimising their debt burden by repaying existing obligations, can generate long-lasting slow economic growth.

In a high private debt environment, an accommodative monetary policy can at best postpone the necessary adjustment, but it is insufficient to spur domestic demand as long as the excessively indebted borrowers are reluctant to expand their financial obligations (Borio, 2014[36]). Moreover, such an approach may also conflict with the price stability objective of central banks, seeing that headline and core inflation figures have yet to be completely reined in following several supply-side shocks since the onset of the pandemic. However, the inflation outlook in China and Thailand diverges from other economies in the region, and headline inflation remains in negative territory, providing some policy space to loosen monetary policy with relatively fewer trade-offs between policy goals. Nonetheless, releasing capital and liquidity buffers that accumulated during the implementation of macroprudential policy is a crucial step to help banks maintain regular financial intermediation functions while staying complaint with regulatory requirements. In China, the central bank has cut the reserve requirement ratios for both local and foreign currency deposits several times, releasing liquidity for banks. Moreover, to facilitate the flow of funds from abroad, it raised the key parameter for the upper limit of outstanding cross-border financing of enterprises and financial institutions.

To cope with the economic and financial risks of high private debt, it is important to repair the balance sheets of highly indebted households and corporations gradually, without an abrupt phase of deleveraging. In this regard, support for export and tourism driven growth can be effective towards curbing financial imbalances. Policy efforts to redirect funds to the relevant sectors can achieve such an outcome. Funding for lending programmes, which various central banks, including the Reserve Bank of India, started using after the pandemic, can be a viable option.

While fiscal policy can provide debt relief for overindebted households, fiscal space should also be accounted for to avoid exacerbating debt sustainability. Fiscal measures such as subsidies and various forms of support for households were used to cushion inflationary pressures during the pandemic. On the other hand, fiscal stimuluses can be used to encourage debt repayment rather than spending on consumption and investment and may thus serve to spur further deleveraging (Borio, 2014[36]).

In Thailand, the government has recently been working on a fiscal stimulus plan to provide about 50 million people with digital handouts of THB 10 000 (Thai baht) that can only be used for local spending within a six-month period (Wongcha-um and Ghoshal, 2023[37]). The use of these digital handouts as a substitute for regular household income should be carefully monitored to assess the possible net effect on aggregate demand for consumption and investment. In addition, the Bank of Thailand has introduced a wide range of debt assistance measures, including debt restructuring support for small and medium-sized enterprises, credit cards and personal loans. The programme also includes targeted measures for households with income lower than a threshold to convert their revolving personal loans into instalment loans with an interest rate cap.

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Note

← 1. See (Dell, Jones and Olken, 2014[38]) for an extensive review of the literature on the effects of weather on economic outcomes.

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