2019 expected to be "challenging year" for Asean: Bank of America Merrill Lynch report

The outlook for next year is expected to be a challenging one for Asean on several fronts, with key risks on the horizon including the US-China trade conflict, rate hikes, and weakening sentiment towards emerging markets, according to economist Mohamed Faiz Nagutha from the Bank of America Merrill Lynch (BOAML).

In a BOAML report, Asean economic growth is projected to moderate to 4.8 per cent in 2019, after two consecutive years of around-5 per cent growth.

On that note, Mr Nagutha said that growth concerns are likely to dominate in 2019, with inflation taking a backseat.

Domestic demand is expected to moderate as a result of the normalising investment cycle and weaker government consumption, while private consumption remains stable. Meanwhile, weaker external demand and trade-risks should result in slower real export growth, but not to the point of collapse at this stage, he wrote in a report.

Meanwhile, inflation is projected to rise marginally but is unlikely to be a "major policy concern", he added.

Further monetary policy tightening is expected in the year ahead, especially in Indonesia and the Philippines due to continued anxiety over foreign exchange and capital outflows, while Thailand and Singapore seem keen to normalise policy, said the report.

In the case of slower than expected growth, Mr Nagutha said that fiscal policy may need to play a bigger role in support domestic demand.

"Benign budget deficits give policymakers in Singapore, Indonesia and Thailand considerable policy room, but Malaysia and the Philippines could struggle to increase policy stimulus," he wrote.

In the coming year, key risks to watch out for include the evolution of the US-China trade conflict and a sharp slowdown in China.

In the case of further escalation in trade tensions or a faster slowdown in China, Asean growth is likely to ease further and could hold back monetary policy tightening.

However, a faster de-escalation could help cushion the slowdown but is "unlikely to reinvigorate the economic cycle which has matured", said Mr Nagutha.

Fed rate hikes could also weigh on Asean's growth, with Indonesia being the most sensitive to any change in the Fed's policy stance, he noted.

"In our view, the other Asean central banks will only reverse course in the event that Fed rate hikes stop abruptly," he wrote.