The 90-day pause in the trade war agreed between U.S. President Donald Trump and his Chinese counterpart, Xi Jinping, was greeted with relief around the world, but the dispute remains among the biggest risks to Southeast Asia’s economy next year, according to forecasts from banks in Asia, the U.S. and Europe.
Gross domestic product grew more slowly in most regional economies during the July to September quarter as the trade war began taking a toll on exports; Combined GDP growth for the five large Southeast Asian economies fell to 4.5% from 5.5% in the previous quarter.
Bank of America Merrill Lynch has forecast the slowdown will continue for the five countries — Indonesia, Malaysia, the Philippines, Singapore and Thailand — with growth falling to 4.8% in 2019, down from 5.0% in 2018 and 5.1% in 2017.
“The list of risk factors is just too long to mention,” Mohamed Faiz Nagutha, the bank’s Southeast Asia economist, told reporters Thursday. Among the obstacles he cited, U.S.-China trade tensions, China’s economic slowdown and the possibility of more interest rate increases by the U.S. Federal Reserve than the market anticipates.
The U.S. bank still believes Washington and Beijing will resolve their differences. But the fourth quarter of this year and the first quarter of 2019 could be the “softest patch” in the world’s second-largest economy, before China begins to recover in the second half of next year, Nagutha said. That could hamper growth in Southeast Asia.
Selena Ling, head of treasury research and strategy at Singapore’s Oversea-Chinese Banking Corp., said earlier this week that the biggest risk for Southeast Asia continues to be trade protectionism.
Despite the cooling of U.S.-China tensions, medium-term structural issues such as Beijing’s “Made in China 2025” high-tech manufacturing initiative and the growing competition between the two countries in high-tech industries are “not going to go away anytime soon,” Ling said.
She also stressed that this year’s communique from the G-20 summit in Buenos Aires was the first not to adopt a unified stance against protectionism, due to U.S. opposition.
The Singaporean bank estimates growth rates in Malaysia, Singapore, Thailand and Vietnam will slow down in 2019.
Suresh Tantia, a vice president at Credit Suisse specializing in the Asia-Pacific equity market, has a similar view. The 90-day truce is “a relief” to the market, Tantia said, adding, “Definitely you should see repressing of the risk premium.” Investors’ concern, however, will linger well into first half of next year, he said, because the cease-fire is temporary.
Still, equity markets in emerging Asia are expected to perform better next year, after the battering they took in 2018, the Swiss bank said. “The emerging market is looking pretty cheap,” said Credit Suisse’s Asia-Pacific chief investment officer, John Woods.
As the earnings outlook for U.S. companies darkens and the dollar weakens, investors will look elsewhere for opportunities, Woods said. The bank said stock markets in China, Singapore and Indonesia all have high upside potential.
Political risk, meanwhile, remains a major threat in some countries, such as Thailand, due to uncertainty over upcoming elections, Credit Suisse said. Southeast Asia’s third-largest economy is expected to return to civilian rule early next year, but such details as the party composition of a future government are unknown.
Indonesia will hold a presidential election in April. Both Credit Suisse and Bank of America Merrill Lynch believe incumbent President Joko Widodo will remain in office. But OCBC’s Ling pointed out that the campaign has just started, and cautions that there may be market or business uncertainty as the vote draws near.