There are three key risks that will impact Southeast Asian economies and markets for the rest of 2024 and into 2025.
First, there is the widening conflict in the Middle East, which may escalate geopolitical risk further and push up energy prices. The second uncertainty is whether China’s broad stimulus measures will be sufficient to boost its economy.
The third uncertainty, though, is probably the most consequential one – the United States Presidential election on 5 November.
The outcome of the election may have significant impact on the US economy and, by extension, the US Federal Reserve’s (Fed) monetary policy, interest rates and the US dollar. Economies worldwide, including in Southeast Asia, will be affected.
The opinion polls suggest that Democratic candidate Kamala Harris has a slight lead in popular votes against Republican candidate Donald Trump. Because of the US electoral college system, however, the outcome will be determined by swing states – in which both candidates are polling very closely.
As such, the election is still too close to call.
Trump’s desired policies mostly carry an inflationary risk
Much has been discussed about the potential inflationary bias of Trump’s desired policy mix. On the campaign trail, Trump has advocated for a series of escalating tariffs.
These range from a significant hike in trade tariffs against China to 60 per cent, to a punitive 200 per cent tariff on vehicles imported from Mexico. These will add to his proposed universal tariff of 10 per cent for all goods imported into the US.
Trump has also suggested that the trade tariffs can be used to pay for tax cuts. He wants companies manufacturing goods in the US to pay a lower preferred tax rate of 15 per cent, down from 21 per cent currently.
However, this could come at the expense of inflation, as his increased tariffs will lead to higher prices for imported goods.
Trump also wants to repatriate and deport illegal immigrants – an idea which could tighten the labour market and drive up wages, creating another source of inflationary pressure.
On the surface, his proposed policies may well prolong the current stronger-than-expected growth cycle for the US economy.
However, these policies, even if carried out just in part, may trigger renewed inflation for the US economy. The Peterson Institute of International Economics has warned that Trump’s tariff proposals could cost a typical American household more than US$2,600 a year.
This higher inflation may result in a shallower rate cut trajectory from the Fed than anticipated by the market.
Currently, we expect the Federal Funds rate to fall from 5 per cent now to 3.5 per cent by the end of next year. But this forecast is subject to much uncertainty should Trump return to office.
Harris’ proposed economic policies are more targeted and less extreme
In contrast, Democratic candidate Harris has so far painted her desired policies in broad strokes. In terms of trade policies, she is likely to continue the “small yard high fence” approach by the Biden administration, implementing more targeted tariffs for specific industries with a less confrontational approach than that proposed by Trump.
In terms of tax policies, she has proposed a hike in income tax for top income earners, higher tax for the top capital gains bracket, and higher taxes for corporations, with tax reductions reserved for strategic sectors and clean industries.
She wants to assist smaller businesses and poorer households tackle the higher costs of living. Broadly speaking, her proposed economic policies are more targeted and less extreme than Trump’s – and likely to have less of an inflationary impact on the US economy.
Unlike Trump’s suggestions for more Presidential oversight on monetary policy decisions, Harris has supported the ongoing independence of the Fed. Harris has also not suggested any measures to unilaterally devalue the US dollar, a proposal that Trump has floated on several occasions as well.
More focus needed on containing the rise in US public debt
On a disappointing note, both Presidential candidates have not focused much on the further deterioration of the US fiscal outlook. The country’s outstanding public debt has jumped from under US$20 trillion prior to the start of the COVID-19 pandemic in 2020, to the current level of about US$30 trillion.
The non-partisan Congressional Budget Office has projected a further jump in outstanding public debt which may cross US$50 trillion, or 120 per cent of the US’ gross domestic product, by 2034.
The rising debt will have broad negative implications for the US economy.
With higher indebtedness, economic growth will likely slow down as more and more revenue collected by the US Treasury will be used for interest payments, rather than the longer-term structural needs of the US economy.
Credit rating agencies have suggested that a downgrade of US sovereign credit rating may be in the offing over the medium term should the fiscal debt deterioration run unchecked.
Whoever wins the election, the next President will need to put in more effort to rein in the ongoing jump in US fiscal debt.
What does it mean for Southeast Asia?
For regional economies, Trump’s policies may result in a renewed inflationary backdrop that may contribute to stickier interest rates and renewed strength in the US dollar.
Trump’s more confrontational foreign and trade policies towards China may also raise geopolitical risk across the region. There is the tail risk that he may weigh down the recovery of growth and trade flows for China and across Southeast Asia.
This may cause regional governments and central banks to recalibrate their respective fiscal and monetary policies in 2025.
For now, Southeast Asia’s economic growth and trade outlook remain bright as a result of the current recovery in retail spending and electronics exports across the region. Most countries in the region are expected to see higher GDP growth and currency strength in 2025.
Over the longer run, supportive megatrends like the region’s young demographics, growing middle class, cross-border trade coordination and deepening integration in regional industries will all set the stage for stronger growth.
In the years ahead, we project a further 38 per cent rise in foreign direct investment (FDI) inflows into Southeast Asia to US$312 billion by 2027 and further to US$373 billion by 2030.
Amid the upcoming uncertainties surrounding global trade arising from the US presidential election, it is important to note the strong and supportive trade ties established by the Association of Southeast Asian Nations (ASEAN).
The Regional Comprehensive Economic Partnership anchors ASEAN nations in a strong trade pact with China, South Korea, Japan, Australia and New Zealand. ASEAN is also expected to refresh its longstanding free trade agreement with China.
Vietnam: Strong third quarter GDP despite Typhoon Yagi
Vietnam’s strong growth prospects are evident even today. The country’s real GDP expanded stronger than expected in the third quarter, surging 7.4 per cent – the fastest pace since the third quarter of 2022.
With a surprisingly strong third quarter performance despite the impact from Typhoon Yagi, we expect Vietnam’s full year growth to hit 6.4 per cent – up from our previous projection of 5.9 per cent.
The State Bank of Vietnam (SBV) is likely to adopt a more targeted approach to support individuals and businesses, rather than implementing a broad, nationwide tool such as interest rate cuts.
Consequently, we anticipate the SBV to maintain its refinancing rate at the current 4.5 per cent, and its focus will be to facilitate loans growth. In line with other regional currencies, the Vietnamese dong is expected to continue its steady gains in the months ahead against the US dollar.
Despite the uncertain outlook from the US Presidential election, Southeast Asia will remain a stable oasis of economic growth and strong trade opportunities.
