What is in store for emerging Asian economies in 2023?

Many economies in the region could be in for a bumpy ride next year, but some may also be set to benefit as companies diversify investments from the Chinese market.

South and Southeast Asian economies have had a challenging 2022, a year when the global economy was supposed to have recovered from the ill effects of the COVID-19 pandemic.

Instead, the Russian invasion of Ukraine, coupled with continued supply chain snags, recurring COVID lockdowns in China and soaring inflation, among other problems, have dampened growth prospects and caused economic pain to businesses and households.

The aggressive hiking of interest rates by the US Federal Reserve to control surging inflation has also led to a depreciation of a number of Asian currencies vis-a-vis the US dollar.

This has worsened some nations' debt troubles, eroded their purchasing power and prompted their central banks to raise rates accordingly to prop up their currencies.

Trade-oriented ASEAN economies face headwinds

The rising costs for imports of food and fuel, among other goods, have depleted the foreign exchange reserves of some countries and triggered economic crises.

In South Asia, Sri Lanka and Pakistan have already received assistance from the International Monetary Fund after falling into debt distress and facing balance-of-payments difficulties.

Experts predict a challenging economic environment in 2023 amid weakening growth prospects all round for the US, eurozone and China, and tightening financial conditions.

The World Bank, IMF and the Asian Development Bank have all downgraded growth forecasts for developing Asia. 
Trade-oriented economies like Singapore, Thailand, Vietnam and Malaysia are set to be especially affected by the slower global expansion, according to predictions.

Alicia Garcia-Herrero, chief economist for the Asia Pacific region at the investment bank Natixis, said growth in the region will be dragged down by weaker external demand and tighter monetary conditions.

"As external demand softens, exports are starting to sag, and we expect further weakness in the coming year," she noted, pointing out that trade-driven economies such as Malaysia and Vietnam have already contracted in November.
Rajiv Biswas, Asia Pacific Chief Economist at S&P Global Market Intelligence, shares a similar view. He said manufacturing exports from the Association of Southeast Asian Nations are facing increasing headwinds in 2023 amid recessionary conditions in the US and EU and weak domestic demand in China.

"ASEAN economies such as Malaysia, Singapore and Thailand are expected to show moderate economic growth in 2023, helped by continued expansion in domestic demand, albeit moderating," he said.
Will lifting COVID restrictions boost China?

China, the largest economy in the region, is also expected to record slow growth in 2023, with the ADB recently cutting its projection for the country to 4.3% from 4.5%.

The Asian giant's economy has been hit hard by stringent coronavirus restrictions as well as a crisis in its massive property sector, with developers defaulting on loans and struggling to raise cash after Beijing imposed widespread lending curbs in 2020.

Beijing has attempted to boost growth by slashing key interest rates and pumping cash into the banking system.
Additionally, China this month abruptly abandoned its zero-COVID policy, after years of on and off lockdowns, mass testing, long quarantines and restrictions on people's movement.

While some restrictions remain in place, there is some hope that as China lifts the strict containment measures, domestic demand will revive in the world's second-largest economy.

This should also help some tourism-reliant Southeast Asian countries, like Thailand.

"ASEAN tourist arrivals are still shy of pre-COVID due to the lack of Chinese tourists," Garcia-Herrero said. "While we do not expect Chinese tourists to return to ASEAN as much as pre-COVID, one would expect that there will be a lift should China open up."

Biswas pointed out that the reopening of international borders in many Asia-Pacific countries during 2022 has already allowed a gradual restart of international tourism. "But momentum is expected to build significantly during 2023 in economies with large international tourism sectors, such as Thailand, Malaysia, Singapore and the Philippines," he predicted.

Will India's economy buck the trend?

India, the region's second-largest economy, is also facing difficulties amid rising interest rates and a global trade slowdown. Meanwhile, elevated crude oil and gas prices have contributed to a deteriorating trade balance.

Consumer inflation, meanwhile, has consistently overshot the central bank's 2-6% target range, forcing the Reserve Bank of India to hike interest rates multiple times this year, pushing borrowing costs up to pre-pandemic levels.

"Continued economic expansion at a pace of 5.3% year-on-year is forecast for the 2023-24 financial year, with tighter monetary policy settings and weaker external demand acting as drags on economic growth," said Biswas.

Garcia-Herrero said India faces a few challenges in the coming year, pointing to tighter liquidity conditions, weakening exports and decelerating growth momentum.

"We expect India's GDP growth to slow to 6.3% year-on-year in 2023 from 6.9% in 2022," she said.

Companies diversify from China

Experts have said companies will continue to diversify their investments away from China in 2023 to avoid the supply chain disruptions witnessed this year and amid growing geopolitical tensions between Beijing and the West. Some ASEAN nations are likely to benefit from this trend.

"Total FDI inflows data, which includes not just cross-border M&A flow but also greenfield investment, shows a surge of foreign direct investment into India, Singapore, Malaysia, Indonesia and Vietnam in 2022," said Garcia-Herrero.

"We expect this trend to continue even as China gradually lifts zero-COVID restrictions, providing a boost of not just capital inflow but also headcount demand to the ASEAN and India region."