How do ASEAN economies cope with external shocks?

Emerging markets tend to be more vulnerable to external shocks or disruptive negative events. This is particularly true for countries with large external financing needs, both to finance current account deficits and to finance the amortization of external debt.

In difficult times, when global economic or financial conditions are difficult, capital flows may shrink or reverse, making it more difficult to finance external needs without using foreign exchange assets. It is therefore important to monitor and analyze different measures of external vulnerability in emerging countries. In this article, we focus on the large economies of Southeast Asia (ASEAN), namely Indonesia, Thailand, Malaysia, and the Philippines.

Foreign exchange reserves and external financing needs in 2024
(Billion USD) Source: Haver, IIF, QNB analysis

We assess external vulnerabilities from two dimensions: external financing needs and the overall level of official foreign exchange reserves. Countries with large external financing needs must finance them by seeking additional foreign capital or using their own foreign exchange reserves.

Official foreign exchange reserves can provide important support for absorbing external shocks. However, the level of foreign exchange reserves must be considered in context, taking into account not only short-term external financing needs but also other key macroeconomic parameters. Traditionally, a country’s foreign exchange reserves are considered adequate when they can meet more than three months of imports and are sufficient to cover 20% of the total amount of domestic currency held by the public or at least one full year of external debt. The International Monetary Fund (IMF) has created a useful composite indicator for these measures, called the IMF Reserve Adequacy Indicator. Countries are considered to have adequate foreign exchange reserves when they are able to meet the IMF standard threshold of 100-150%.

Measuring the adequacy of current accounts and reserves
(Estimates and forecasts to 2024) Source: Haver, IMF, QNB analysis

Our analysis looks at the current account positions and foreign exchange reserves of the ASEAN countries we analyse and draws conclusions on their resilience to possible global or regional shocks.

Although Thailand is highly exposed to the global economic cycle (manufacturing exports and tourism), it is still well able to cope with sudden changes in capital flows. Although international tourism is still far below pre-pandemic levels, the situation remains stable. China continues to maintain a large current account surplus, and its official foreign exchange reserves have accumulated to US$221 billion, easily meeting the IMF’s reserve adequacy standard of 209%.

Malaysia, a major producer of manufactured goods and raw materials, is another resilient ASEAN economy. Like Thailand, the country has also been running a current account surplus for many years. As a net exporter of oil and commodities, Malaysia has benefited from generally strong commodity markets in recent years, leading to a wider current account surplus. Malaysia’s reserve adequacy criteria are much stricter than Thailand’s, with the Malaysian central bank holding nearly half of Thailand’s $113 billion in foreign reserves. However, Malaysia remains within the safe zone of the IMF’s reserve adequacy criteria, with a coverage ratio of 115%.

The Philippines is a net external borrower, meaning it runs a current account deficit. Currently, the large trade deficit is only partially offset by large remittances from the overseas Filipino worker community, and the country’s current account deficit is expected to reach about 2% of GDP. Although the deficit is partly due to a much-needed investment surge, the deterioration in external conditions has been severe so far. However, the monetary authorities control ample foreign exchange reserves. Official reserves of $103 billion meet 196% of the International Monetary Fund’s reserve adequacy standard.

Indonesia, historically the largest ASEAN country most vulnerable to potential external shocks, has returned to a current account deficit. This comes after the country briefly benefited from a raw materials boom that boosted its external revenues due to high coal, gas and palm oil prices. In fact, the country is now expected to run a current account deficit of around 1% of GDP this year. This deficit is expected to persist for longer as the implementation of a number of important investment projects will require more imports. Indonesia’s official foreign exchange reserves are $136 billion, equivalent to 112% of the International Monetary Fund’s reserve adequacy standard.

In summary, ASEAN’s major economies are relatively resilient to sudden changes in risk sentiment and capital flows. This resilience is a major source of support amid heightened uncertainty related to global monetary conditions and regional exchange rate fluctuations.