So this is the world the region faces. Given that, how well will its economies withstand the shocks from the global environment? What factors will shape their performance?
First and foremost, it will be a strong political direction of the economy that will matter. This is the key to maintaining confidence and ensuring discipline in monetary and fiscal policies while also providing the basis for sound long-term economic initiatives. Second, economies will need to be agile enough in their trade diplomacy to find ways around rising protectionism and still reap the synergies from trade and foreign investment. Finally, the capacity to promote sources of growth to offset protectionist headwinds will also help — this will depend on maintaining domestic demand and plugging into the future industries that are emerging.
Considering these factors, we find three likely outperformers in Asean — Vietnam, Malaysia and Singapore. This may appear counterintuitive since these highly open economies are greatly exposed to the damage from trade wars and inward policies that many countries are pursuing. These are certainly vulnerabilities, but these countries possess other strengths that are likely to help them weather the rough times ahead.
Supportive politics are essential
See also: Politics drive investment divide in southeast Asia’s top markets
The question about politics is not so much the frequent changes of government or the number of street protests. The critical factor is whether the political system supports sound policies:
At one level, this means credible monetary and fiscal policies that maintain economic stability. At a time of growing financial vulnerabilities, the ability to withstand potential financial market ructions will be more valuable. The disjoint between ebullient stock markets and more cautious bond markets cannot last long: we believe that some form of correction with all its dislocations is likely at some point in time. When that happens, it will be emerging economies whose credible central banks and finance ministries inspire confidence in global investors that will better absorb the shocks.
At another level, it also means that the system allows initiatives and reforms that promote long-term development — even if some of these measures might be painful in the short term. Does the political system facilitate a government that does the right things for long-term economic transformation? Can it make well-laid plans and demonstrate a strong administrative capacity to implement those plans? Has the system taken care to develop the skills and ecosystems needed?
Agility in trade diplomacy
See also: Indonesian yield curve steepest since 2023 on fiscal fears
The international trade order is in disarray, and a new order is emerging. Trump’s trade wars have undermined the set of rules, norms and practices that protected small trading nations — these nations can no longer depend on institutions such as the World Trade Organization to provide much protection.
Two factors are important in determining how countries might better handle this challenge. One is how agile a country’s trade diplomacy is, whether it can find ways to negotiate with the US and other large trading partners so as to minimise tariffs and other forms of protectionism.
Another factor is the country’s ability and willingness to enter new trading arrangements that bypass American protectionism. After all, America’s imports account for roughly 13% of global imports — there is still the remaining 87% of the world market to serve. Aggressively negotiating multilateral and bilateral economic partnership agreements will serve a country well, but not all countries will be able to pull this off.
New growth opportunities
Despite the wars and trade conflicts that we read in the headlines, there remain opportunities for economic development that the region can exploit if countries possess good fundamentals. We present here a few examples of the positive engines of growth:
We all know about the AI boom, which has triggered an explosion of capital spending that has broken all records. There are technological breakthroughs in other areas as well, such as in the biomedical field as well as in renewable energy. The resulting capital spending has raised demand for components manufactured in emerging economies, including in Southeast Asia. The huge investments in data centres in Malaysia and elsewhere in the region are a testament to the positive spillovers that our region is enjoying as a result.
Supply chains will continue to be reconfigured: The reasons for production to shift out of China remain in place. First, China’s rapid technological progress allows it to move up the value chain. In doing so, it is vacating lower-value niches that can be shifted out of China to other developing economies in a way that is good for China (releasing scarce labour and other resources that can be deployed to more profitable ventures) as well as other emerging economies. Many Chinese companies are moving production abroad, not only because of the trade wars and geopolitical tensions, but also because they are globalising and they find it beneficial to invest in regions such as Southeast Asia.
Sink your teeth into in-depth insights from our contributors, and dive into financial and economic trends
Second, even if the US strikes a trade deal with China, the two powers will remain engaged in a major and long-lasting contest for global power. That means that US tariffs on Chinese goods will still be punishingly high compared to those that our region suffers. Moreover, many global firms will seek to produce outside China to avoid potential geopolitical pitfalls. Third, several emerging economies have improved their fundamentals in the past decade and can now offer global manufacturers a return on investment that is close to that of China.
Trade in services continues to grow. The past few years have seen a surge in exportable services out of countries such as India and the Philippines. Many of the world’s largest professional services companies have established “global capability centres” in these countries, hiring skilled accountants, analysts and even researchers at a fraction of the cost in developed economies. Yes, there are some potential risks posed by AI to these global capability centres, but the available research shows that the effects need not be fatal so long as countries adapt to new technologies.
How do regional economies compare?
The most recent data on global flows of foreign direct investment show that Asean has maintained a higher share of greenfield investments (i.e., investment in new factories) compared to China and India. But there is also evidence of a two-tier Asean emerging, where a few countries are performing well while others are lagging. If we compare countries according to the factors we identified as critical, the reason for this two-tier Asean becomes clearer.
First, in terms of political factors, some countries are clearly doing better than others. Singapore and Vietnam’s dominant-party system provides the stability that encourages long-term planning. But Malaysia’s more competitive setup also does well because of its competent economic policy institutions. The key is whether the important institutions, such as the judiciary, police, military and other stakeholders, exert stabilising or destabilising effects on broader politics. In this context, it would appear that Thailand and Indonesia are currently suffering some degree of destabilising impact as various players jostle for power.
Vietnam, Singapore and Malaysia stand out in the second factor of agility in trade diplomacy. These countries are part of a select club that holds membership in both the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP). Membership of RCEP gives them tariff-free access to a broad range of Asian markets. At the same time, the CPTPP signals their commitment to high standards in market openness and regulatory standards, which in turn allows expanded trade into higher-income markets, including Japan, the UK and Canada. This dual participation enhances their attractiveness to multinational firms looking to diversify supply chains away from China and to secure regulatory predictability.
Note how Vietnam was quick off the mark in engaging the Trump administration at various levels, demonstrating a strong grasp of how the US government operated and what its priorities were. The Vietnamese showed skill in offering concessions, including reportedly fast-tracking a Trump golf resort, and were among the first to secure a tariff deal that helped ease prolonged uncertainty. Malaysia displayed similar agility, with its trade minister and officials making multiple trips to Washington. The country also used its diplomatic skills in brokering the Thailand-Cambodia ceasefire to gain favour with the White House. Singapore quietly pursued intense trade diplomacy at multiple levels with the US administration, securing one of the best trade deals among US partners. In all cases, the ability to respond swiftly to emerging challenges and achieve positive outcomes helped these countries manage the fallout from global turbulence.
The third important determinant of relative performance is the capacity to develop new engines of growth. Vietnam, Singapore and Malaysia have shown an ability to adapt to global technological change. Vietnam has successfully positioned itself as a hub for labour-intensive electronics exports, underpinned by sustained investments from major multinationals. Malaysia’s pre-existing advantage in the assembly, testing and packaging segment of the semiconductor supply chain is a strong base for the economy to expand into other segments involving higher degrees of value-added. Singapore, while already a high-income economy, reinforces the region’s technological core through its position as a hub for logistics, finance and digital services, supported by predictable regulatory institutions.
The coming years are likely to present immense challenges for Southeast Asia. Unexpected and often difficult shocks will affect geopolitics, financial markets and the global economy. There will also be new opportunities in technology, supply chain reconfiguration and services. However, seizing these opportunities will not be straightforward as they require greater support from efficient states than previous economic transformations, investment in skills, infrastructure and the foresight to develop complex ecosystems that sustain new technologies.
This is where a supportive political system, trade openness, an appetite for reform and participation in global value chains will matter. It is these factors that will allow countries to capture opportunities from the ongoing waves of supply chain realignments and technological shifts. Sound institutional frameworks, while differing in form from country to country, will help provide sufficient stability to manage internal pressures and external shocks. Countries would do well to see how Vietnam, Malaysia and Singapore created these strengths in their own different ways.
Manu Bhaskaran is CEO of Centennial Asia Advisors
