Southeast Asia in 2023: Economic Resurgence with Climate Change Uncertainty

As the world emerges from more than two years of a COVID-19-induced hiatus, global economies remain cautious in light of looming recession, supply-chain disruptions and widespread inflation. However, although the International Monetary Fund (IMF) has forecast a global average growth of 2.7% for 2023, the Asian Development Bank (ADB) forecasts a 4.7% growth for Southeast Asia.

Thanks to the Regional Comprehensive Economic Partnership (RCEP) free trade agreement, Southeast Asia will be the world’s largest single market by 2030. It already produces 8% of global exports and receives 10% of global inbound foreign direct investment (FDI), almost on par with mainland China. The incremental removal of tariffs will further boost local economies. Its large population and workforce, as well as its cost effectiveness, can return the region to better than pre-pandemic levels.

The rivalry between the United States and China has unexpected benefits for Southeast Asia as both sides deepen relationships and strengthen their presence in the region. Companies wary of rising costs, pandemic-induced lockdowns and other surprises in China have relocated manufacturing operations to Southeast Asia, primarily Vietnam and Thailand. New economic and free-trade zones, tax incentives and improved infrastructure, as well as strategies such as ‘China Plus One’ have encouraged more FDI into the region.

A study by HSBC, published in The Edge Markets, showed that Thailand, Singapore, Indonesia, Philippines, Malaysia and Vietnam are set to grow by between 3.2–7.6% in 2023. They also found that 90% of companies in China, France, Germany, India, the US and the UK intend to expand their presence in the region over the next 2 years.

The COVID-years sped up Southeast Asia’s digitalization efforts; internet use and tech start-ups grew by 85% more than in Europe over the same period, 65% more than in the US. There were 40 million new online users in 2020/2021, and e-commerce saw a huge 21% growth (worth USD 90 billion, the fastest in the world). This will probably continue in 2023 as personal finances improve and consumers get used to shopping online.

Myriad digital transformation initiatives have been implemented, including digital financial services. There is room for Southeast Asian economies to grow as large informal worker populations move to banking services, especially online banking. Microfinancing for Southeast Asian small and medium-sized enterprises (SMEs) would also boost local economies and business prospects.

Tourism is a key sector for many Southeast Asian countries, as a global pent-up desire to travel – and especially demand from Chinese tourists – will see this sector rise again.  Chinese tourists made up 22% of pre-pandemic visitors to the region. With relaxed vaccination-related arrival requirements, travel services being reinstated, and traveller incentives such as digital nomad and second home visas launched, tourism incomes and employment will increase in 2023.

Political Stability is a Question

Even as the region’s economic outlook seems more positive, the region’s political stability is in question. Malaysia and the Philippines held elections in 2022, but uncertainty still remains given Malaysia’s recent history of sudden regime change. Its new unity government under Anwar Ibrahim remains a fragile entity. In the Philippines, while Ferdinand Marcos Jr’s government is relatively stable, activists and opposition voices are known to be quickly oppressed and arrested.

In May 2023, Thailand is set to go to the polls, while Indonesia builds up to its elections in 2024. While these may have little direct effect on tourism, travel or visitor safety, political uncertainty never bodes well for financial investments. The region is known for its quick clampdowns on skirmishes and public protests, as well as issues with human rights and democracy. Myanmar’s military coup limits any possibility of foreign investment or tourism, but the junta has begun talks with armed ethnic groups on planned elections later this year. 

Climate Change is the Biggest Threat

Beyond economic prospects and political uncertainty, the biggest threat to Southeast Asia is climate change. The region is one of the most at-risk areas due to global warming, sea level rise and extreme weather events. The impacts of Super Typhoon Odette in the Philippines and Cyclone Seroja in Indonesia in 2022 are just two examples of the extent of the devastation that can occur. The ADB has reported that the overall GDP for Southeast Asia could fall by 11% by the end of the century as a result of climate change impacts.

More than 77% of Southeast Asia’s population lives by the coast, making them most susceptible to sea level rise, including major cities such as Bangkok and Jakarta. Riverine communities suffer from prolonged droughts which lead to dried up rivers, exacerbated by the building of dams upstream or salt water intrusion which damages crops at the estuaries. These situations affect rural communities that depend on inland fisheries such as in the Mekong and Tonle Sap, as well as farmers in areas like the Mekong Delta region.

Extreme weather also affects Southeast Asia’s fisherfolks, who contribute about 21% of the world’s marine fisheries production. Small-scale fisherfolks are the cornerstone of Southeast Asian coastal communities. With a predicted overall fall in fisheries output in Southeast Asia by 30% by 2050, these fishermen will suffer the most, especially in the face of extreme weather events which will prevent them from heading out to sea, directly affecting their ability to earn a living.

At the level of governance, there are commitments to combatting climate change. All ASEAN countries are signatories of the Paris Agreement, and have declared their NCD (nationally determined contribution) targets. The region has also committed to reaching a 23% renewable energy target. Sustainable financing is lauded across the region, and carbon markets, trading and offsets are promoted for corporate entities, or are required by law or regulation.

Electric vehicles (EV) are seen as the way forward as 92% of transport-related emissions come from road transport. A number of Southeast Asian countries have provided various incentives to promote their use, from lowered EV taxes in Thailand from 8% to 2%; in Singapore decreased road taxes of up to 34%; and in Malaysia a total exemption of road tax. Indonesia has set a 2025 target of 25% of all cars on its roads to be EVs. Corporate entities are also on board. Grab ride-hailing services has 8500 EVs in its Southeast Asian fleet, the largest in the world. Singapore Grab offers carbon offset payments upon booking that are used for reforestation and conservation projects.

The ADB estimates that for every USD 1 million of government expense on renewable energy, 5 times as many jobs are created (versus fossil fuels), which could also be an opportunity for just transitions for the region’s growing workforce. Solar farms are expanding across Southeast Asia, with Vietnam leading the way. Indonesia and the Philippines are the world’s second and third largest producers of geothermal gas respectively. There is also huge potential in the region for wave and wind power.

The ADB has noted that the region stands to benefit from low carbon development, especially as growing affluence and education can result in increased consumption, yet at the same time has the potential to evolve into a demand for more sustainable options. Singapore’s recent USD 133 million Enterprise Sustainability Program strongly encourages businesses to develop sustainable solutions. There is potential for further growth in sustainable debt and private equity markets as they are but a fraction of conventional markets. The UN Global Compact will help to drive more private capital towards sustainability initiatives in 2023.

Obstacles to Overcome

While the noises from the top seem positive, more needs to be done in terms of actual implementation in 2023. Political stability and will determine whether regional governments can truly mitigate the effects of climate change. Countries such as Myanmar and Timor Leste will be preoccupied with other priorities to focus on environmental matters. Many countries have environmental laws and climate change frameworks, but do not have the know-how or institutional structures to move into implementation. Countries like Brunei, struggling to strengthen and diversify its economy, may find it difficult to meet sustainability demands.

Malaysia and Singapore will inevitably prioritize sustainability initiatives that can drive economic growth, while more decentralized nations like Indonesia may struggle to push through laws and policies through regional authorities. Malaysia faces a similar dilemma in which environmental laws are hosted under the federal constitution but natural resource, land and forest use rights lies at the state level. With insufficient sustainability financing, most Southeast Asian countries struggle to finance environmentally-friendly initiatives or climate change initiatives. Indonesia and Thailand have demanded international financial support and access to new technologies in return for higher NCD targets.

More authoritarian states might be able to enforce and streamline climate action, but there is little room for debate or true multi-stakeholder partnership in policy formulation. Other countries such as Indonesia and Malaysia, where there is a growing climate justice movement, may have room for open discussion, protests and informal networks for environmental action, but this can also paralyze broad nation-wide implementation. The state still needs to drive climate action to ensure that laws and policies support grassroots initiatives.

Even positive moves such as Tesla’s purchase of EV battery materials from Indonesia should be more critically contemplated. Malaysia is now also a potential manufacturing centre for EV batteries given the discovery of the necessary minerals in the country. The mining of these resources will have devastating long-term impacts on both the environment and indigenous communities; vast deforestation will inevitably occur. EV batteries in these countries still rely on fossil fuels to be charged, which then defeats its entire purpose. Waste disposal from these industries (and of expired solar panels) are still severely damaging, especially when there is weak health and safety enforcement. The advent of EVs catching fire and exploding in floods is a real threat in a region where flooding is a regular occurrence.

As the region moves to renewable energy (RE), questions arise for example, on Indonesia’s higher biodiesel mandate, intending to reach a 35% biofuel blend in 2023, with a view to eventually achieving completely fossil fuel-free biodiesel. The complete reliance on palm oil as feedstock can lead to more deforestation. The oil palm development moratorium of 2018 to prevent haze was paused in 2021. Exports of Indonesian palm oil are weak given high domestic demand and stagnant yields. Indonesia needs to incorporate the use of waste fat and used cooking oil as an alternative or supplementary feedstock to prevent a return to oil palm expansion.

Solar farms can also lead to deforestation and land grabbing in return for the space needed for sufficient and consistent electricity generation. In truth, most existing RE policies do not effectively lead to energy transition but simply place climate-friendly components into fossil fuel dominated systems. This is because of a legacy of energy oligopolies, generations of fossil fuel dependency and myriad vested interests in the existing energy industry and market structure.

Aspirations for a more inclusive future

Rising inequalities and growing populations of disadvantaged groups, usually on the frontlines of climate change impacts, are the ones who suffer the most. 2023 needs to be the year where local knowledge is tapped for more inclusive and effective nature-based solutions. Farmers in Cambodia deal with climate change daily, but much of the country’s climate adaptation efforts are severely disconnected from these communities.

This is a common situation across Southeast Asia as international funders and their market-driven mechanisms exclude poor and rural communities. Carbon trading and offset efforts do not reduce the production and consumption that adds to global warming, and rarely, if ever, result in any benefits to those hurt the most by climate change. Southeast Asia needs to take real action in 2023, and quell the desire to revive the economy through potentially-damaging mass tourism or unsustainable manufacturing and development. Climate governance will otherwise be reduced to mere green-washing and empty talk, without effective solutions for the socio-political impacts of top-down or elite (and often urbanite) decision-making.
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Dr. Serina Rahman is conservation scientist, environmental anthropologist, and lecturer at the Department of Southeast Asian Studies, National University of Singapore.

The views expressed in this article are not necessarily those of Heinrich Böll Stiftung.