Southeast Asia has had its fair share of ups and downs over the past fifteen years. First it went through the traumatic events of the Asian financial crisis in 1997-98. No sooner had it regained some economic momentum, than the region was hit by the global financial crisis. Now, Southeast Asia faces the European crisis and its impact threatens to dwarf the previous two.
Southeast Asia can’t be blamed if it’s experiencing “adjustment fatigue.” But complacency would be unforgiveable. The region may have weathered the global financial crisis enviably well, but it may not be so lucky next time. In any event, even as Southeast Asian policymakers may hope for the best, they should be preparing for the worst.
It’s difficult to predict how the European crisis will unfold, but there are three scenarios worth exploring. The first is if Europe “muddles through” while keeping Greece within the monetary union. The second is an orderly Greek exit, or the so-called Grexit. And the third is a disorderly Greek exit with contagion spreading to Spain, Portugal and beyond.
There’s some confidence that Southeast Asian economies can weather a “muddling through” scenario in which Greece remains in the eurozone and is supported by a combination of austerity measures, structural reforms, bank bailouts and continued quantitative easing by the European Central Bank (ECB). That’s the most optimistic scenario out there, but it’s increasingly less probable.
The second scenario – an orderly Grexit – would add macroeconomic turbulence in the near term as European banks deal with the damage to their balance sheets and seek to recapitalize and deleverage. Although Greece is a relatively small economy compared to the rest of the eurozone, the macroeconomic fallout from its euro exit could still be severe. And the ECB will likely need to pump in more liquidity to counterbalance shortages.
The third and worst-case scenario is that Greece not only exits the eurozone, but also the firewalls of the European Financial Stability Facility (EFSF) and the ECB prove ineffective in containing a contagion that spreads to other economies in and out of Europe. If this happens, all bets are off.
The global economy will be in a place it has likely never been before – certainly not in the last eight decades. The crisis won’t only hit the stronger European economies hard, but will spread to the United States where the current recovery is anemic and the banks are still in the process of repairing the damage to their balance sheets caused by the Great Recession.
Southeast Asian economies are particularly vulnerable to a global slowdown given their direct and indirect trade links with Europe and the United States. Not only will direct exports to Europe take a hit, but component and commodity exports immediately headed to China will also suffer if Chinese exports to the advanced economies are affected, as they almost certainly will be. And a slowing global economy will mean lower commodity prices, leading to still lower export revenues for Southeast Asia.
Indeed, most Southeast Asian economies are already showing signs of slowing export and GDP growth in the first quarter of 2012. Export earnings aren’t increasing at the same pace and the stimulus packages introduced in 2009 and 2010 have now run their course. Thailand and the Philippines are the notable exceptions to this as Thailand is still recovering from the devastating floods of late 2011 and the Philippines continues to be buoyed by strong remittance inflows.
Greece’s exit from the eurozone won’t only lead to a further deterioration in export and GDP growth for Southeast Asia – it will also have repercussions for financial flows.