beyondbrics

As the economic outlook in the US and Europe deteriorates by the day, investors are asking which countries in southeast Asia would be hardest hit by the knock-on effects of a double-dip recession.

Leif Eskesen, a regional economist at HSBC in Singapore, reckons that Vietnam, which is going through an extended financial crisis of its own, is the most exposed to a downturn by some way because of its reliance on foreign trade and investment, weak corporate balance sheets, troubled banking sector and poor fiscal position.

Indonesia, which has a powerful domestic market and strong corporate balance sheets, will fare the best of the major southeast Asian economies.

To assess the relative vulnerabilities of Indonesia, Malaysia, the Philippines, Thailand and Vietnam to a global downturn, HSBC looked at three factors:

The spill-over risks in terms of trade, finance and investor confidence; the strength of corporate and bank balance sheets; and the fiscal/policy room that governments have to respond.

Eskesen gave the five countries a relative vulnerability score of one to five on each factor and the conclusions will make particularly unpleasant reading for Vietnamese officials and investors.

Indonesia led the pack with an average score of 2 and Malaysia (2.3), Thailand (2.7) and the Philippines (3) were not too far behind. But Vietnam came in bottom of the class by some measure, with Eskesen giving the country a 5 for each factor.

Why did Vietnam fare so badly? Eskesen wrote:

In Vietnam, the spill-over risk is aggravated by external (wide current account deficit and low reserve coverage) and domestic imbalances (high inflation, a wide fiscal deficit and balance sheet vulnerabilities). Vietnam also has very limited policy room.

Given the sensitivity of officials in one-party, Communist-ruled Vietnam to bad press,  it is unlikely that Vietnamese newspapers will be rushing to publish HSBC’s findings.  Senior cadres have already instructed local journalists to refrain from reporting that the country suffers from Asia’s highest inflation rate (even though, at 19.8 percent year-on-year, it does).

But while, to borrow Warren Buffett’s aphorism, Vietnam is most exposed if the tide goes out, it will not be the only one in a dangerous state of undress.

The whole region is likely to suffer, Eskesen wrote, if the world faces another global financial crisis, which could be just as bad as 2008-09, “if not worse, considering that the advanced economies have fewer policy options this time around.”

He concluded:

While emerging market countries, including the ASEAN-5, have some capacity to implement counter-cyclical policies, they also have less room to move in than three years ago.

Related reading:
Vietnam: a question of balance, FT
Vietnam embarks on banking reform, beyondbrics
Vietnam: grappling with change, beyondbrics