Thinking of expanding your export business into Eastern territories? In this article, James Burgess of Atradius offers a useful guide to the risks and opportunities of the Asian markets.
In the last 50 years, the Southeast Asian region has seen considerable change. Supported by the Association of Southeast Asian Nations (ASEAN), established to promote regional trade, and buoyed by a growing young population, the region continues to grow year on year.
However, whilst the region’s growth continues, the potentially escalating trade war between China and the US has had some moderate impacts, albeit that strong domestic demand and counterbalancing policies that support GDP growth make a financial crisis unlikely. Nevertheless, some underlying weaknesses in the region’s economy remain, making it vulnerable to the stronger US dollar and higher interest rates.
Whilst there is evidence of rising risk aversion to emerging markets there is no significant cause for concern, and Southeast Asia continues to offer export opportunity. Keeping abreast of economic and political developments in export destinations is the foundation of any risk management strategy, so be sure to access market and sector analysis reports to keep abreast of market conditions.
Here is a snapshot of the key ASEAN markets:
- Indonesia: Export growth is slowing substantially this year. As China is Indonesia’s most important destination for good exports, China’s shift towards a more consumption-orientated economy has had a negative impact on Indonesian exports. However, exports account for just 22% of Indonesia’s GDP, enabling strong domestic demand to compensate the drag from net exports. Election-related spending will support private consumption, and business investments continue to grow strongly. Monetary policy tightening to cushion the economy from the impact of market turmoil is expected to have just a minor impact on domestic demand.
- Thailand: The economy is weathering the US-China trade war reasonably well, and while export growth will slow, no dramatic shifts are expected. Chinese import demand is cooling but strong service exports in the form of tourism mitigate the impact on export growth. Real GDP will be supported by public infrastructure investments and private consumption. Domestic weaknesses include the potential for political tension to re-emerge, which is an ongoing risk for international trade.
- Malaysia: The highly open economy is more susceptible to weaker external demand, more specifically from China, and Malaysia is one of the most vulnerable countries to the US tariffs imposed on Chinese exports. Export growth will slow after a strong performance in Q1. The domestic economy keeps GDP growth at a reasonable rate with buoyant household spending, boosted by fuel subsidies and a lower sales services tax. However, household purchasing power is set to decrease over the next year due to rising domestic borrowing rates.
- Philippines: Economic growth will slow gradually over the next two years, but this is only partially attributed to exports losing momentum. Growth in imports of goods and services will stay high, resulting in a negative contribution of net exports to GDP growth and domestic demand bolsters the GDP growth rate. Government expenditures will rise because of extensive infrastructure programmes, and private consumption remains strong as remittances still support household incomes.
- Vietnam: Amongst the five bigger Southeast Asian economies, Vietnam is forecast to maintain the highest growth rate in early 2019, contributed to by relatively strong export growth. The US-China trade skirmishes will have a negative impact on exports to China. However, Vietnam should benefit by gaining larger market shares in export markets at the expense of China, especially in the ready-made garments sector. If Chinese companies decide to move production to other countries, Vietnam is well-placed to accommodate. Domestic demand shows healthy growth because of growing tourism and strong labour market conditions.
Atradius provides trade credit insurance, surety and collections services worldwide through a strategic presence in 50 countries. Atradius has access to credit information on 200 million companies worldwide. Its credit insurance, bonding and collections products help protect companies throughout the world from payment risks associated with selling products and services on trade credit. Atradius forms part of Grupo Catalana Occidente (GCO.MC), one of the leading insurers in Spain and worldwide in credit insurance.