Southeast Asia’s economic perils

Southeast Asia's vulnerabilities are heightened by the predominance of informal workers who comprise about 70% of the labor force. —PHOTO FROM PNA.GOV.PH

The easing of pandemic restrictions and the opening up of economies saw Southeast Asia’s growth for 2022 being calculated by the Asian Development Bank (ADB) at a higher 5.5% from an earlier estimate of 5.1% “on stronger-than-expected domestic consumption, exports and services, particularly tourism.” 

Downplaying the Philippines’ seemingly impressive 2022 growth of 7.6%, economist JC Punongbayan views it from the phenomenon of a “base effect.” This means that “coming from such a low base in 2021” makes an increase for 2022 “register as a sizable growth rate.” The “base effect” effect could very well apply to other Southeast Asian countries, which, except for Vietnam, Myanmar, and Brunei, suffered negative growth in 2020 and only grew at a mediocre level in 2021. Myanmar, however, registered a negative 18% growth for 2021.

But the ADB predicts that such growth rates cannot be sustained for 2023 “as global demand weakens” alongside high inflation due to rising global food and energy prices, rising interest rates, higher capital outflows, currency depreciation, reduced government spending, dollar appreciation, the US-China trade war, and the “collateral damage” on Southeast Asia from the Russian invasion of Ukraine. 

The Asia Society agrees with the ADB and sees 2023 as a year when Southeast Asian “governments are having to navigate a sharply deteriorating global economic outlook” marked by the cited indicators. These factors dampen economic growth in the region.

Vietnam may already be suffering the expected 2023 downturn. Asia’s fastest growing economy shocked forecasters with a 3.3% 2023 first-quarter growth, belying projections by global rating companies of from 4.5% to 6.1% for the same period. Accordingly, the Organization for Economic Cooperation and Development forecasts Southeast Asia’s economies to slow down to a 4.6% growth for 2023.

Informal workers

The region’s vulnerabilities are heightened by the predominance of informal workers who comprise about 70% of the labor force with proportions surpassing 80% in Cambodia and Myanmar. Mostly women, informal workers contribute and are crucial to national economies, but are ineligible for mandated benefits; their already bleak situation was intensified during the pandemic as many lost their means of livelihood and could not qualify for social assistance. 

Informal workers are part of a broader category—the precariat class—who are in both informal and formal work and have no security of tenure, earn low wages, lack social protection, and are in dire working conditions. In Southeast Asia, precariat work can be found in low-skilled, labor-intensive industries in agriculture, manufacturing, the service sector, and construction. 

At the other end of the labor spectrum, regular or formal work in 2023 is not free of hazards, either. The Britain-based think tank Oxford Economics forecasts that regular or formal work for all sectors in Southeast Asia would also decline as demand for it peters out due to the global trade downturns.

Being composed mainly of developing economies, Southeast Asia faces a funding gap of “almost US$500 billion in collective debt reserving payments that are due in the next four years,” according to the World Economic Forum. This is attributed to rising interest rates and a stronger US dollar. In 2022, the Philippines and Thailand registered the highest Southeast Asian increase in the ratio of government debt to gross domestic product (GDP). The debt-to-GDP ratio for Southeast Asia grew from 49% in 2019 to 63% in 2021, with Laos clocking 92.4%, Malaysia 63.4%, the Philippines 60.4%, and Thailand 59.7 percent. 

‘Debt trap’

Though not an absolute indicator, the suggested measure of debt sustainability is set at a threshold of 60% of GDP beyond which a debt crisis or a “debt trap” could arise. There are, of course, more meaningful ways of determining the magnitude of the debt burden and its sustainability with respect to loan-financed projects including social and environmental fallouts, “hidden costs,” tied aid, and sovereign guarantees.

The funding gap also infects the region’s most vulnerable business sector—the micro, small and medium enterprises (MSMEs). The sector employs almost 70% of Southeast Asia’s labor force, but 60% of the region’s MSMEs have limited or no access to capital due to “a lack of formal credit history and cumbersome requirements,” a 2021 study by the Tech for Good Institute uncovered. 

Of particular concern is China’s growing exposure in Southeast Asia’s development financing policies that see the region’s debt to the Asian powerhouse increasing. A study by Singapore’s Institute for Southeast Asian Studies (ISEAS), reports that since China’s development loans in the region are “mainly debt-financed, rather than aid-financed,” interest rates are “substantially higher … than those of benchmark institutions such as the World Bank, and therefore generate higher returns for Chinese lenders.” ISEAS concludes that China’s commercial-driven loans do not fit “Beijing’s self-image as a benevolent development partner.”

One case stands out that vividly illustrates the problems that could arise from China’s lending strategies. The massive 1,035-kilometer China-Laos railway was inaugurated on Dec. 3, 2021, and is part of China’s Belt and Road Initiative. Utilizing high-speed bullet trains, it connects Kunming in China and Laos’ capital Vientiane. 

In a Feb. 1, 2023, press release, China’s official news agency, Xinhua, praised the railway’s “role in facilitating cross-border transactions” benefiting “the people of both countries” while becoming “a popular international public [good] and a platform for international cooperation.” Xinhua’s claim, however, may be misleading because cross-border operations only started in April 2023 due to the pandemic-related restrictions of 2022. Thus, for a whole year, 80% of the railway’s traffic took place on the Chinese side of the border. 

Southeast 2
The China-Laos railway —XINHUA PHOTO

Of the total project cost of US$6 billion, China covered 70% and provided technology, equipment, and operational expertise. The remaining 30% ($1.8 billion) was charged to Laos as loans. This amount is equivalent to 10% of Laos’ GDP. Nikkei Asia notes that the benefits for Laos from the project will take 22 years to recoup in a worst-case scenario and three years as a best case. The former seems more likely, given Laos’ foreign debt of $14.5 billion at the end of 2021, which exceeded its 2022 GDP. 

On top of a weakening currency, Laos’ total debts to China already comprise 65% of its GDP. Nikkei Asia reports that the ratio is considered “the highest in the world” and “raises concerns about a ‘debt trap’ that would leave Laos saddled with loans it cannot repay.”

World’s biggest trade bloc

The Regional Comprehensive Economic Partnership Agreement (RCEP), the world’s biggest trade bloc, came into effect in January 2022 and comprises the Asean member-economies, China, Japan, South Korea, New Zealand and Australia. While hailed by advocates of neoliberalism and free trade, RCEP has dire consequences for Southeast Asia. A study by the UN Conference on Trade and Development (Unctad) points to tariff revenue losses, damaged economic and financial capacity prospects, and worsened trade balances for Asean while benefiting mainly the trade bloc’s developed country-members. 

RCEP is also seen as injurious to developing countries’ industrial development, weakening regulatory mechanisms on social protection, telecommunications and financial services, and lacking in commitments on human rights, labor protection, and environmental standards. 

In the coming post-pandemic era, Southeast Asia is projected to transit from one peril to a host of new perils that would not be easy to manage, much less overcome. This development calls into question the popularly held notion of the region’s economies being the most dynamic in the world. 

This article is excerpted and revised from the author’s introduction “Post-pandemic Southeast Asia: Systemic perils and peoples’ alternatives” to a forthcoming publication, Re-Imagining Post-Pandemic Societies: Alternative Practices Across Southeast Asia: Volume II, of the UP Center for Integrative and Development Studies, Program on Alternative Development (UP CIDS AltDev). —Ed.

Leave a Reply

Your email address will not be published.