Asian economies are showing resilience, but doing business is becoming more complex
Emerging Asia remains a key driver of global economic growth
How resilient are the emerging economies in Asia now that energy prices are rising and trade barriers are increasing? What factors determine the extent to which economies can absorb external shocks? And what does it mean for Dutch companies that Asian trade flows are increasingly driven by geopolitical developments?
Emerging Asia remains one of the key growth drivers of the global economy. The region is therefore in a stronger position than it was during previous global shocks. Many countries have larger foreign exchange reserves, deeper domestic markets and more credible economic policies. However, there are differences between countries, relating to their energy situation, the strength of their domestic economies, the quality of their institutions and their position within changing international supply chains.
Higher energy prices affect countries differently
Rising energy prices are driving up production, transport and logistics costs across the region. Energy-importing economies such as India, Thailand, the Philippines and Vietnam are particularly vulnerable. In these countries, higher fuel prices are fuelling inflation, which is eroding consumer purchasing power and putting pressure on companies’ profit margins. China and Malaysia are better placed to absorb the energy shock. China can draw on strategic reserves and alternative energy suppliers. Malaysia benefits from its position as an exporter of LNG, although energy-intensive sectors there remain vulnerable to higher costs. Indonesia occupies a middle ground. The country has a substantial commodity base, but is partly dependent on imports for oil. Higher oil prices and a weaker rupiah could therefore push up inflation and drive up the cost of fuel subsidies, with consequences for purchasing power and public finances. For Dutch exporters, rising energy prices in their export markets could mean that demand for their products declines and the financial position of local customers deteriorates. A high level of energy dependence amongst customers and suppliers, or limited scope to pass on rising costs, may lead to an increased payment risk.
Domestic buffers make all the difference
The extent to which countries can absorb external shocks is primarily determined by their domestic buffers. A large consumer market, manageable inflation, sufficient fiscal space and a stable currency make it easier to weather headwinds. The quality of a country’s institutions is also important. Predictable regulation, independent policy-making bodies and a transparent investment climate underpin business confidence. Generally speaking, Asian countries have made significant progress in this regard over the past few decades, but they also have vulnerabilities to a greater or lesser extent. Thanks to a large domestic market, investment in infrastructure and digitalisation, India has a powerful internal engine for growth. At the same time, licensing, customs procedures and product certification remain complex. Vietnam is benefiting greatly from foreign investment and the relocation of production from China. However, rapid credit growth is putting pressure on the liquidity and financial buffers of smaller banks in particular, making it more difficult for local businesses to secure financing.
Malaysia offers opportunities in semiconductors, data centres and electrical equipment, but this also makes it more dependent on the global technology cycle. Indonesia, too, benefits from a large domestic market. As a result, economic growth remains stable, but its ability to absorb external shocks is under pressure due to doubts about economic policy. Since President Subianto took office in 2024, concerns about fiscal discipline, policy predictability and the independence of the central bank have increased. Thailand and the Philippines are the most vulnerable to external shocks amongst the region’s larger emerging economies. In Thailand, high household debt and weak consumption are holding back domestic demand. The Philippine economy is suffering from high inflation and political uncertainty. China remains indispensable in global supply chains, but weak consumption and problems in the property sector are making growth uneven.
Trade flows are shifting
Geopolitical tensions, such as the ongoing rivalry between China and the US and the war in the Middle East, are not leading to a decline in international trade, but are altering the routes along which goods and investments flow. To minimise risks, many companies are therefore diversifying their supply chains and markets. This is particularly relevant in the case of China, which is affected by US trade tariffs and is also implementing measures of its own that pose challenges for foreign companies. In order to reduce their dependence on China, companies are spreading their production in line with the so-called ‘China-plus-one’ strategy. Under this strategy, they retain production capacity in China whilst expanding their capacity elsewhere. South-East Asia, in particular, is thus developing into a connecting link between Chinese imports, regional assembly and the final markets.
More complex business operations in an attractive region
The problem now is that, with this diversification strategy, China is only partially being removed from the supply chain. Chinese machinery, components and semi-finished products are increasingly being processed in other Asian manufacturing centres, after which the finished products are shipped to Europe or the US. The US is keeping an ever-closer eye on transhipment, origin and the use of Chinese components, raising the threat of additional tariffs or other measures. At the same time, Europe is imposing stricter requirements on sustainability, working conditions, product standards and rules of origin. As a result, Dutch companies are increasingly required to demonstrate where key components originate from, which processing steps take place in each country, and why the finished product is deemed to have a particular origin under the applicable rules. A product assembled in Vietnam or Malaysia does not automatically take on the origin of that country if it consists largely of Chinese components and has undergone only limited local processing. Insufficient evidence can lead to the loss of tariff preferences, additional trade levies, inspections and delays at customs. Companies would be well advised to request clear supplier declarations, production records and documents of origin, and to specify in contracts who is responsible for incorrect information or unexpected import duties.
For Dutch companies, there are ample opportunities to diversify their suppliers and markets, but this can make supply chains less transparent. Without proper screening, this can therefore entail customs and compliance risks.
Despite rising energy prices and increased trade barriers, the emerging economies in Asia remain an attractive market for Dutch companies. Doing business in the region is, however, becoming more complex, as companies must take into account the energy sensitivity of their customers and changing trade rules.
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Bert Burger- Deputy Head Economic Research Department