ASEAN is poised to benefit from a recovery in exports and manufacturing

ASEAN’s export recovery will be supported by stronger demand from key trade partners like the United States, which is likely to pull off a soft landing this year despite elevated interest rates and inflation.

“Green shoots are sprouting in manufacturing and exports, brightening the outlook for trade-sensitive Asian economies,” wrote Maybank Investment Banking Group (IBG) economists led by Dr Chua Hak Bin.

They pointed to aggressive US fiscal spending, along with generous subsidies for semiconductors and electric vehicles, as key demand drivers for ASEAN’s exports. Other factors include a boom in Artificial Intelligence technologies which are heavily reliant on semiconductors, as well as an increase in US companies looking to replace falling inventories of technology components.

As global consumer spending on goods normalises, ASEAN economies are restructuring to meet this rising export demand. With the shifting of global supply chains, manufacturing hubs like Malaysia and Vietnam are adding capacity and attracting more foreign investments. This will in turn increase ASEAN’s leverage to a global trade recovery.

For instance, Malaysia is expected to undertake subsidy reforms and economic restructuring, following through on the New Industrial Masterplan and National Energy Transition Roadmap.

Meanwhile, Vietnam will be the first in ASEAN to introduce the global minimum tax of 15 per cent, significantly raising the tax bills for over 100 foreign companies. “The additional revenue will be used to bolster other investment incentives, ensuring Vietnam’s position as the big winner from the supply chain shifts,” says Dr Chua.

Domestic drivers will also play a role in supporting ASEAN’s GDP growth this year, as policy measures to boost the domestic economy take effect. The relaxation of visa requirements for foreign travellers, for example, could further boost the tourism sector’s post-pandemic recovery.

Uncertainties persist in a year of key transitions

A second key theme this year is rising political uncertainties brought on by the change in top leadership in several countries.

The “biggest known unknown and wildcard in 2024” will be the possibility of Republican candidate Donald Trump’s victory in the US presidential elections in November, notes Dr Chua. A Trump win could lead to sweeping policy changes, such as a withdrawal of US support for Ukraine and a reversal of Biden’s policies on renewables and electric vehicles, both of which could significantly impact global trade flows and stability.

He also raised the possibility that Mr Trump could impose a universal 10 per cent tariff rate on all imports, which may disrupt or suspend the ongoing shift in FDI and supply chains to ASEAN markets.   

Meanwhile, two ASEAN countries will undergo political transitions of their own.

Indonesia’s presidential elections in February could stretch into a run-off in June between the top two contenders. Despite this political uncertainty, Maybank IBG expects Indonesia’s GDP growth to remain resilient at 5.1 per cent in 2024.

By November, Singapore will see current Prime Minister Lee Hsien Loong hand over to his deputy Lawrence Wong ahead of the 2025 general elections. An orderly transition would support GDP growth of 2.2 per cent, up from 1.1 per cent in 2023.

China – “The Lethargic Dragon”

The third theme to watch out for is China’s slowing GDP growth, which could be a drag on its ASEAN trading partners, as well as on global growth.

Economic expansion could weaken from an estimated 5.2 per cent in 2023 to 4.4 per cent in 2024, bogged down by risks that the real estate sector crisis and high local government debt could spill over into the financial sector and broader economy.

China’s central bank is likely to continue easing policies to support efforts to restructure the economy towards new growth engines such as advanced manufacturing, although it remains to be seen if it would loosen policies to the extent of propping up domestic consumption and sentiment. In light of this, Maybank IBG’s fixed income team is mildly bullish on China bonds.

Interest rate and inflation outlook

Besides these three themes, global investors will be closely watching inflation levels this year. While headline inflation has peaked in some countries, core inflation has remained sticky. The International Monetary Fund (IMF) sees global consumer price inflation easing from 6.9 per cent in 2023 to 5.8 per cent in 2024.

In the US, inflation rates remain elevated and above the 2 per cent target level. Still, the US Fed appears to be at the end of its tightening cycle, and markets expect it to be able to guide the economy to a soft landing with a 1 per cent forecasted growth rate in 2024, following last year’s 2.2 per cent expansion.

As for ASEAN economies, there may continue to be upward pressure on rates – albeit at a more gradual pace than in 2023 – as central banks mitigate the impact of higher imported energy and food prices on local consumers.

Against this backdrop, Maybank IBG economists are more guarded on the timing and quantum of interest rate cuts in 2024, pencilling in an easing of monetary policy only from the third quarter of the year in major advanced economies and several ASEAN markets.

Cautious Optimism

While ASEAN’s growth prospects are brightening, expectations of a strong recovery will need to be tempered by geopolitical risks that could undermine recovery.

“The world may become even more fragmented, if America withdraws funding and support from Ukraine and Asia,” says Dr Chua. “Green shoots are sprouting but will be relying on good weather to bloom in 2024.”

To stay updated on the latest developments in global and Asian markets, check out Maybank IB’s research insights.