The US election and Southeast Asia

There are three key risks that will impact Southeast Asian economies and markets for the rest of 2024 and into 2025.
First, there is the widening conflict in the Middle East, which may escalate geopolitical risk further and push up energy prices. The second uncertainty is whether China’s broad stimulus measures will be sufficient to boost its economy.
The third uncertainty, though, is probably the most consequential one — the United States presidential election on Nov 5.
The outcome of the election may have significant impact on the US economy and, by extension, monetary policy, interest rates and the dollar. Economies worldwide, including in Southeast Asia, will be affected.
The opinion polls suggest that Democratic candidate Kamala Harris has a slight lead in the popular vote over Republican Donald Trump. Because of the US electoral college system, however, the outcome will be determined by a handful of swing states — in which both candidates are polling very closely. As such, the election is still too close to call.
Much has been discussed about the potential inflationary bias of Trump’s desired policy mix. On the campaign trail, he has advocated for a series of escalating tariffs.
These range from a significant hike in trade tariffs against China to 60%, to a punitive 200% duty on vehicles imported from Mexico. These will add to his proposed universal tariff of 10% for all goods imported into the US.
Trump has also suggested that the tariffs can be used to pay for tax cuts. He wants companies manufacturing goods in the US to pay a lower preferred tax rate of 15%, down from 21% currently.
However, this could come at the expense of inflation, as his increased tariffs will lead to higher prices for imported goods.
Trump also wants to repatriate and deport illegal immigrants — an idea that could tighten the labour market and drive up wages, creating another source of inflationary pressure.
On the surface, his proposed policies may well prolong the current stronger-than-expected growth cycle for the US economy.
However, these policies, even if carried out just in part, may trigger renewed inflation for the US economy. The Peterson Institute of International Economics has warned that Trump’s tariff proposals could cost a typical American household more than $2,600 a year.
This higher inflation may result in a shallower rate cut trajectory from the Federal Reserve than anticipated by the market.
Currently, we expect the Federal Funds rate to fall from 5% now to 3.5% by the end of next year. But this forecast is subject to much uncertainty should Trump return to office.
In contrast, Democratic candidate Harris has so far painted her desired policies in broad strokes. In terms of trade, she is likely to continue the “small yard, high fence” approach by the Biden administration, imposing more targeted tariffs for specific industries with a less confrontational approach than that proposed by Trump.
In terms of tax policies, she has proposed a hike in income tax for top income earners, higher tax for the top capital gains bracket, and higher taxes for corporations, with tax reductions reserved for strategic sectors and clean industries.
She wants to assist smaller businesses and poorer households tackle the higher costs of living. Broadly speaking, her proposed economic policies are more targeted and less extreme than Trump’s — and likely to have less of an inflationary impact on the US economy.
Unlike Trump’s suggestions for more presidential oversight on monetary policy decisions, Harris has supported the ongoing independence of the Fed. Harris has also not suggested any measures to unilaterally devalue the US dollar, a proposal that Trump has floated on several occasions as well.
On a disappointing note, neither candidate has focused much on the further deterioration of the US fiscal outlook. The country’s outstanding public debt has jumped from under $20 trillion prior to the start of the Covid-19 pandemic in 2020, to about $30 trillion now.
The non-partisan Congressional Budget Office has projected a further jump in outstanding public debt which may cross $50 trillion, or 120% of GDP, by 2034.
This will have broad negative implications for the US economy. With higher indebtedness, growth will likely slow down as more and more revenue collected by the Treasury will be used for interest payments, rather than the longer-term structural needs of the economy.
Credit rating agencies have suggested that a downgrade of the US sovereign credit rating may be in the offing over the medium term should fiscal debt deterioration run unchecked.
Whoever wins the election, the next president will need to put in more effort to rein in the ongoing jump in US fiscal debt.
What does it mean for Southeast Asia? For regional economies, Trump’s policies may result in a renewed inflationary backdrop that may contribute to stickier interest rates and renewed strength in the US dollar.
Trump’s more confrontational foreign and trade policies towards China may also raise geopolitical risk across the region. There is the tail risk that he may weigh down the recovery of growth and trade flows for China and across Southeast Asia.
This may cause regional governments and central banks to recalibrate their respective fiscal and monetary policies in 2025.
For now, Southeast Asia’s economic growth and trade outlook remains bright as a result of a recovery in retail spending and electronics exports across the region. Most countries in the region are expected to see higher GDP growth and currency strength in 2025.
Over the longer run, supportive megatrends like the region’s young demographics, growing middle class, cross-border trade coordination and deepening integration in regional industries will all set the stage for stronger growth.
In the years ahead, we project a further 38% rise in foreign direct investment (FDI) inflows into Southeast Asia to $312 billion by 2027, and further to $373 billion by 2030.
In Thailand, the potential of the economy is already very clear. Growth is expected to continue to be driven by tourism and merchandise exports on the back of rising FDI inflows and the consolidation in fiscal spending following a relatively smooth political transition.
At its recent meeting, the Bank of Thailand surprised the market with a front-loaded rate cut of 0.25 percentage points to support growth and anchor financial stability. Going forward, we see room for another cut of 0.25 percentage points for the benchmark rate to reach 2% in the first quarter of 2025. Overall, we forecast a further rise in Thailand’s GDP growth to 2.7% for 2024 and to 2.9% in 2025, from 1.9% for 2023.
Despite the uncertain outlook from the US presidential election, Southeast Asia will remain a stable oasis of economic growth and strong trade opportunities.
Heng Koon How is head of markets strategy at UOB.