Dimming South-east Asia growth outlook adds to risks for China

[JAKARTA] China's slowing economic growth is denting demand for goods and natural resources from South-east Asia which, in turn, is hitting demand for Chinese exports in the Asean region, the biggest market for China outside the United States and Europe.

This loop effect has dimmed prospects for a second-half recovery across South-east Asia, with currencies at multi-year lows and depressed stock markets squeezing income and investment. It also complicates China's efforts to revive growth in its economy, the world's second-largest.

The region's exports have dragged as Chinese demand for Indonesian coal, Malaysian electronics and Thai auto parts has slumped, with China heading for its weakest growth since 1990.

The 10 economies in the Association of South-east Asian Nations (Asean) took nearly US$160 billion of China's exports in January-July, according to Chinese trade data - around the same as Japan, South Korea and Taiwan combined.

Sharp falls in stock markets and capital flight from South-east Asia are further battering confidence and pushing up funding costs, hobbling growth in a region where recent expansion has been fuelled by cheap debt. "Sentiment was already very fragile in South-east Asia going into the China turmoil," said Fred Neumann at HSBC bank. "Global financial volatility and higher funding costs are exerting a bigger drag on growth than many people had anticipated." The Philippines was the bright spot, with annual growth picking up to 5.6 per cent in the second quarter from 5 per cent in the first three months. But growth slowed across the region's four other main economies.

Capital Economics, a consultancy, calculated that annual growth among Southeast Asia's five main economies slowed to 4.3 per cent in the second quarter from 4.4 per cent in the first. "It's the weakest since Q3 of last year, which doesn't sound that bad, but Thailand's growth was still being dragged down by the political crisis back then," said economist Dan Martin.

As growth slows, governments are feeling the pressure.

Less than a year after taking charge of South-east Asia's largest economy, Indonesia's President Joko Widodo has reshuffled his cabinet, replacing his chief economy minister and dismissing the trade minister.

At a six-year low of 4.67 per cent in the second quarter, growth is far from a campaign pledge of 7 per cent, and the authorities are struggling to prop up the rupiah, which is down 12 per cent against the dollar this year at its lowest level since the Asian financial crisis.

Thai Prime Minister Prayuth Chan-ocha also came to power in 2014, after a coup, and promised investors stability. But with no sign of recovery he has installed a new finance minister and deputy prime minister to revive the economy.

The ringgit's 17 per cent plunge this year is compounding problems facing Malaysian Prime Minister Najib Razak, and economic issues are set to feature prominently in upcoming elections in Singapore and the Philippines.

Analysts say corporate balance sheets are, on the whole, sufficiently strong to absorb the shock. But Xavier Jean, Director of Asia-Pacific Corporate Ratings at Standard & Poor's, cautioned that weakening currencies would cause problems. "If currencies continue to depreciate, you will see some defaults," he said, singling out Indonesian firms as particularly at risk because of their greater currency mismatches and refinancing requirements.

Even if there is no spate of defaults, growth will take a hit from sliding markets. "Financial sentiment does impact real growth over time,"said HSBC's Neumann. "This recent volatility is still to be felt across South-east Asia, so we have to brace ourselves for weaker numbers."

REUTERS