MANILA, Philippines — Economies in Southeast Asia are now hard-pressed to diversify their economic base as they feel the pinch of trade tensions, said the Asian Development Bank (ADB).
In an entry on the Asian Development Blog, Thiam Hee Ng, principal economist of the strategy and policy department of ADB, said most economies in the region, the Philippines included, have loosened monetary policies to provide economic stimulus amid slowing growth in the first half of the year, but noted that monetary policy “cannot do all the heavy lifting.”
“Southeast Asian economies are starting to feel the pinch of trade tensions, recession fears and other global trends,” he said.
“Southeast Asian economies, which are generally open, have started seeing the impact of this slowdown with growth coming in lower than expected in the first half of 2019. Cutting interest rates can be a useful preemptive move to provide additional stimulus to stave off further deterioration in economic activity,” he said.
The benign inflation outlook across the region, as well as the stability of oil and food prices also make central banks more aggressive about slashing interest rates.
Central banks across the region are also seeing additional room for maneuver with both the Federal Reserve and European Central Bank cutting rates.
“While the interest rate cuts should help support economic growth, they alone may not be enough to offset the impact of a slowing global economy on the region’s growth. Interest rates are already relatively low and the cost of financing may not be the main factor deterring businesses from investing,” Ng said.
He noted that uncertainties about future trade policies and more downbeat business sentiments may be more significant.
“Monetary policy alone cannot do all the heavy lifting. Fiscal policy will need to do its part as well,” Ng said.
In countries, for instance, where there are infrastructure gaps, front-loading infrastructure spending can help boost demand in the short term and result into large dividends later on.
Another promising areas for fast-tracking public spending is skills training as this can help prepare the workforce for the challenges posed by the Fourth Industrial Revolution and capacitate them for careers in new fields.
“This should be a wake-up call for countries to hasten efforts towards diversifying their economic base. As the trade conflict demonstrates, there is a risk in concentrating in a few products,” Ng said.
Economies in Southeast Asia, he said, can benefit from the relocation of some manufacturing capacity in the region as this can help countries broaden their manufacturing base and move up the value chain by undertaking higher value-added activities.
Ng noted there has been a pick-up in foreign direct investment inflows in the region in 2019 as firms relocate production in response to the higher tariffs.
“Further reforms should be undertaken so that countries can continue attracting inflows even after trade tensions ease,” he said.