KUALA LUMPUR/JAKARTA: From a potential tariff war, economic slowdown to political turmoil affecting key trading partners, 2025 is set to be a challenging year for Southeast Asian countries looking to boost their economic growth.
“The challenges will be hard,” Piter Abdullah, executive director of Jakarta-based think-tank Segara Institute, told CNA.
“Externally, Southeast Asian countries will have to navigate high global uncertainty while grappling with domestic challenges which are equally heavy.”
In Indonesia – which is the region’s biggest economy – these internal hurdles come in the forms of sluggish household consumption due to the shrinking of its middle-class population and a series of ambitious programmes introduced by a newly formed government which might upset the country’s fiscal stability.
Meanwhile, Thailand is looking to revive its tourism and service industry-driven economy which had been battered by the COVID-19 pandemic. However, low domestic consumption, high household debt and political instability might hinder this aspiration.
In Malaysia and Vietnam, both of which saw stellar economic performances in 2024, the main challenge would be to maintain momentum and continue to pull in foreign direct investment (FDI) amid a host of global challenges.
The biggest challenge would come from United States president-elect Donald Trump, who has vowed to impose a series of measures to protect American-made products.
During his first term in office, Trump imposed heavy tariffs on Chinese goods, prompting a so-called tariff war. China is a key trading partner for many Southeast Asian nations.
The policy continued under the Joe Biden administration which expanded it to include products made by Chinese-owned companies operating in other countries like Vietnam, Thailand and Malaysia.
Trump, who has promised to double down on his tariff policies, will be inaugurated on Jan 20.
“Even before he is sworn in, Trump has aired ‘threats’ to parties which he considers unfriendly to the US, including to members of BRICS,” Piter said, referring to the intergovernmental organisation comprising nine countries: Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates.
Indonesia, Thailand, Vietnam and Malaysia have stated their intentions of joining the organisation and BRICS has named them “partner countries”.
As the threat of a renewed tariff war looms, analysts say Southeast Asian countries need to diversify their markets.
But with several of Europe’s biggest economies facing political turmoil and economic decline and with East Asian giants China and Japan still grappling with deflation, finding new trading partners will not be easy.
Southeast Asia’s growth projected to hold steady in 2025
Southeast Asia’s growth for 2024 has been revised up to 4.7 per cent from 4.5 per cent, driven by stronger manufacturing exports and public capital spending in larger economies, the Asian Development Bank (ADB) said in its December 2024 economic forecasts.
Growth picked up in Malaysia, Thailand, Singapore and Vietnam, supported by domestic demand, lower inflation and sustained public investment, ADB said.
“While Vietnam sees rising foreign investment, other Southeast Asian economies like Indonesia and the Philippines are on track to meet previous growth forecasts,” the bank said.
“However, geopolitical tensions, trade fragmentation, and severe weather events – such as Typhoon Yagi and Tropical Storm Trami – pose risks to growth, particularly in agriculture and infrastructure.”
ADB expects Southeast Asia’s growth to hold steady at 4.7 per cent in 2025, although it warned that policies under the incoming Trump administration in the US may impact the region.
“Changes to US trade, fiscal and immigration policies could dent growth and boost inflation in developing Asia,” it said, noting that significant policy changes are expected to take time and be rolled out gradually, with the impact mostly felt beyond the 2024-2025 forecast horizon.
ADB revised Thailand’s gross domestic product (GDP) growth for 2024 up to 2.6 per cent from 2.3 per cent, reflecting stronger-than-expected public spending and export recovery, and maintained it at 2.7 per cent for 2025.
“The economy grew faster in the first nine months of 2024, driven by higher public spending, strong tourism, expanded manufacturing and rising gold exports,” it said.
Vietnam’s growth forecast for 2024 is also revised upward to 6.4 per cent from 6.0 per cent, and for 2025 to 6.6 per cent from 6.2 per cent.
“Strong trade performance, a resurgence in export-led manufacturing, and ongoing fiscal stimulus measures drove Vietnam’s economic growth to 6.8 per cent for the first three quarters of 2024,” the bank added.
“The robust rebound in export-led manufacturing and trade, bolstered by the resilient US economy, is expected to continue supporting GDP growth.”
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GROWTH TARGETS
Malaysia looks set to cap a strong economic performance in 2024 by surpassing initial targets and registering between 4.8 per cent and 5.3 per cent growth. The government, meanwhile, is aiming for a 4.5 per cent to 5.5 per cent growth in 2025.
To achieve this, analysts told CNA the country must continue to pull in FDI and implement structural reforms to raise incomes, reduce subsidies and broaden the revenue base.
Trump’s threat of higher tariffs in his second term might prove to be a stumbling block, but one that Malaysia can overcome by diversifying its trading partners and having clearer policies with top trade partner China, the analysts said.
Key to these steps is maintaining domestic political stability, they added, noting that Prime Minister Anwar Ibrahim has managed to keep his unity government intact and must now move to implement such long-term policies.
Sunway University economics professor Yeah Kim Leng told CNA that Malaysia’s performance last year was propelled by trade recovery, a doubling in investment pace and sustained consumption.
“Maintaining consumer and investor confidence and fanning both domestic and external sources of growth will be key to achieving 5 per cent or higher growth in 2025,” he said.
“Keeping fiscal prudence while mobilising sufficient revenue, raising spending efficiency and encouraging higher productivity in all sectors of the economy are expected to sustain the growth momentum through 2025.”
Economist Geoffrey Williams said the target of 4.5 per cent to 5.5 per cent growth is “normal” and should be achieved with stable interest rates and without any policy intervention, which could otherwise risk raising inflation.
“The economy is mostly back to normal with strong growth, low inflation, stable interest rates and low unemployment,” the founder of Malaysia-based Williams Business Consultancy told CNA.
“So, the government can focus on structural reforms to raise incomes and investment as well as subsidy rationalisation to help fiscal policy and debt and deficit management.”
Anwar said on Dec 10 that the country had recorded total approved investments of RM254.7 billion (US$56.6 billion) from various economic sectors for the first nine months of 2024.
This is an increase of 10.7 per cent from the RM230.2 billion for the same period in 2023, he wrote in a post on X.
Anwar said the total investment amount for the first nine months of 2024 involves 4,753 projects that are expected to generate 159,347 new job opportunities.
Meanwhile, Indonesia is projecting a 5.2 per cent growth this year, up just 0.1 percentage point from 2024’s recorded growth.
The new target is far from Indonesia’s new president Prabowo Subianto’s vision of achieving 8 per cent growth before the end of his first term in 2029.
“Prabowo is being realistic because he is new to the job while his government is still in a transitional period,” said Piter of Segara Institute.
Despite the modest target, the Prabowo government needs to address a number of issues if it wants to achieve the desired economic growth.
For Indonesia, 2024 was marked with back-to-back deflation of 0.08 to 0.18 per cent which occurred between May and September as well as a slowing down of domestic consumption. Household consumption in Indonesia contributes at least 50 per cent of the country’s GDP every year.
“With so much global uncertainty which might hurt our exports, the one thing that keeps Indonesia’s economy afloat is domestic consumption,” Bhima Yudhistira, executive director of Jakarta-based think-tank Centre for Economic and Law Studies (CELIOS), told CNA.
Indonesia’s domestic consumption grew by 4.91 per cent in the third quarter of 2024, which is slower than the 5.05 per cent for the same period in 2023 and the 5.40 per cent in the third quarter of 2022.
The slowing growth came amid a sharp decline in Indonesia’s middle-class population, one of the many effects of the COVID-19 pandemic, which left many businesses and factories shuttered.
To combat this, Prabowo has promised to create 19 million jobs over the next five years by reviving its languishing manufacturing sector.
To achieve this, Prabowo aims to gradually stop exporting raw minerals in favour of trading finished goods, continuing a policy – better known as downstreaming – of his predecessor Joko Widodo.
But Indonesia’s downstreaming vision would require a lot of cooperation and investments from other countries.
“However, Indonesia is not attractive enough in the eyes of many investors compared to its neighbours like Malaysia, Thailand or Vietnam,” Bhima said.
To make Indonesia more attractive, Prabowo needs to streamline bureaucracy, provide tax incentives and improve the quality of its workforce.
“Furthermore, some companies are starting to demand that their energy needs come from renewable sources. Prabowo needs to address these issues quickly or else these companies will take their money elsewhere,” he said.
To stimulate investment, Indonesia needs to put some of its own money to make necessary improvements, Bhima added.
“However (in 2025), Indonesia will kick-start some of Prabowo’s programmes like the free meal initiative and affordable housing for the poor. This leaves little fiscal room for the government to stimulate economic growth.”
In 2025, Indonesia is earmarking 71 trillion rupiah (US$4.4 billion) and 24.9 trillion rupiah for the free meal initiative and subsidised housing respectively, out of a budget of 3,613 trillion rupiah.
WAGE HIKES IN MALAYSIA THREATEN SMALL BUSINESSES
To finance these programmes as well as a burgeoning government expenditure spurred from Prabowo’s decision to add more ministries to his Cabinet, Indonesia had planned to increase its value-added tax (VAT) rate from the previous 11 per cent to 12 per cent from Jan 1.
Amid widespread criticisms, the government said in December it would provide exemptions on some goods and services.
VAT for cheap cooking oil provided by the government and sugar for industry would have remained at 11 per cent while non-premium education and healthcare services will be exempted from VAT duties entirely.
But in a turn of events – and just a day before the start of the new policy – Prabowo announced on Dec 31 that the one percentage point increase to the VAT will apply only to luxury goods and services.
“The government has decided that the increase of VAT rate from 11 per cent to 12 per cent will apply only to luxury goods and services that are the subject of luxury sales tax and are consumed by those with higher income, such as private jets, yachts and luxury homes,” he said.
Prabowo added, however, that his administration will continue with the planned support measures that had been previously announced to soften the blow from the planned VAT increase.
Yusuf Rendy Manilet, a researcher at Jakarta-based think-tank Center of Reform on Economics, had previously told CNA that the planned VAT increment would have affected the country’s middle-class population.
“This policy will add a blow to the middle-class who already have to deal with stagnant wages and a multitude of government levies and mandatory social security premiums which eat away their take home pay,” he said, adding that this segment of the population has been the driving force behind the country’s domestic consumption.
A reduction in their purchasing ability could result in slow demand for domestic goods and in turn cause the manufacturing and agriculture sectors to suffer, said Yusuf.
Meanwhile, in Malaysia, Anwar has introduced a higher minimum wage and bumped salaries for the civil service – moves that are expected to increase private consumption and drive economic growth, said Malaysia-based economist Shankaran Nambiar.
Despite that, Nambiar pointed out that the higher minimum wage, alongside another policy to mandate retirement scheme contributions for foreign workers, are moves that will hit small- and medium-sized enterprises (SMEs) and potentially soften the economy.
Consistently described as the backbone of Malaysia’s economy, SMEs account for 48 per cent of employment and contribute 38 per cent of the country’s GDP, according to an October 2023 report by professional services firm EY.
Malaysia’s MSME sector grew 5 per cent and contributed RM613.1 billion to GDP in 2023, but remains highly vulnerable to external factors like policy decisions, technological advancements and geopolitical events.
After Anwar’s Budget 2025 speech, SMEs had warned that the higher minimum wage and mandatory Employee Provident Fund (EPF) contributions for foreign workers would further hit their bottom line at a time when their margins were already squeezed.
“The private sector, particularly the SME sector, may not be fond of a mandatory contribution to EPF for foreign workers. The higher costs might affect some of the less vibrant and smaller companies,” Nambiar said.
“With global growth marking a slightly lower level in 2025 … and China not being able to post the kind of exuberant figures they traditionally have, Malaysia is likely to fall closer to the lower end of the 4.5 per cent (in GDP growth).”
Malaysia’s finance ministry said in its macroeconomic outlook for 2025 that the global economy is projected to grow by 3.3 per cent next year, while China is forecasted to register 4.5 per cent growth mainly due to “sluggish productivity”.
TRUMP’S THREATS
China’s fragile economy is bracing for more US trade tariffs under a second Trump administration, which has threatened tariffs in excess of 60 per cent on imports of Chinese goods.
The US has also begun imposing tariffs on solar imports from Vietnam, Thailand, Cambodia and Malaysia, aimed at curbing Chinese companies that try to diversify their supply chains to avoid harsher tariffs.
Nambiar said the use of tariffs as a foreign policy measure could act as a dampener on Malaysia’s economy.
“The old story of expecting Chinese companies to move to Malaysia to avoid tariffs will not work, unless there’s going to be significant local content,” he said.
“Malaysia will have to be clearer with regard to its policies, particularly in relation to China. The Trump administration may not tolerate ambiguity too well.”
Asrul Hadi Abdullah Sani, a partner at strategic advisory firm ADA Southeast Asia, said the region’s trade surplus with the US could also make Malaysia’s exports, especially semiconductor industries, vulnerable to tariff risks.
“Therefore, it is key for Malaysia to continue to diversify its trade partnerships,” he said.
Asrul Hadi said Malaysia’s government should continue to streamline its agencies and departments, ease regulatory processes and improve transparency in decision-making.
“This approach will make Malaysia more attractive to foreign investments, particularly as the federal government aims to strengthen the country’s position in the global semiconductor supply chain,” he added.
Sunway University’s Yeah, however, highlighted that Trump’s pivot to tariffs and other trade weapons to protect US industries will have mixed effects on Malaysia, given the openness of the country’s economy and good relations with both America and China.
“The trade and investment diversion during Trump’s first term and (current President Joe) Biden administration’s trade disputes with China has benefited Malaysia as evidenced by the rise in FDI and trade volume,” he said.
“It will need to navigate the adverse trade impact and supply chain disruptions should the tariff hikes materialise. This will involve compliance with demand conditions, seeking alternative markets and providing assistance to affected firms to minimise enduring damage to the Malaysian economy.”
Malaysia’s finance ministry said in its macroeconomic outlook that while its trade volume with China is significantly higher than the US, trade with Washington is “crucial” for strategic economic sectors such as technology and healthcare.
“Any policy shift towards protectionism, such as higher tariffs and new non-tariff measures in these countries, could bring repercussions to Malaysia’s external sector,” it said.
Given Trump’s tariff escalation and the ongoing wars in the Middle East and between Russia and Ukraine, Yeah surmised that external conditions are expected to be volatile and unpredictable next year.
“To maintain growth, the government will need to be nimble and pragmatic in responding to potential large destabilising changes in the international trade and investment environment,” he said.
Meanwhile, the planned tariffs by Trump could spell bad news for Indonesia, which relies on trade with both China and the US.
China is the top export destination for Indonesia’s goods totalling US$67 billion in 2022, while the US is the country’s second biggest export destination with exports worth US$31 billion in the same year.
“If the US imposes a high tariff on Chinese products then production will slow down and thus there will be less demand in China for minerals and agricultural products coming in from Indonesia. And this was exactly what happened during Trump’s first term in office,” Piter of Segara Institute said.
Attempts to sell Indonesia’s goods elsewhere will not be easy, the analyst added.
Indonesia’s third biggest trading partner, Japan, is still facing a contraction to its economy which stems from a long-lasting deflation which began in the 1990s.
Meanwhile, the European Union, Indonesia’s fifth largest partner, is seeing weak economic data and stagnant growth amid political instabilities in Germany and France and the ongoing war in Ukraine.
Despite this, Indonesia’s trade ministry is confident that the country’s exports will grow by 7.1 per cent in 2025, thanks in part to steady demand from Indonesia’s fourth largest trading partner India.
Amid so much global uncertainty, experts are sceptical that the target will be feasible.
“To safeguard the economy from all these global challenges, Indonesia must boost domestic demand to keep businesses afloat and the economy growing,” Bhima of CELIOS said.
“Which is why, Indonesia needs to rethink about the tax hike and other policies which hinders people’s purchasing power.”
POLITICAL STABILITY
Closer to home, Yeah noted that political stability in tandem with favourable policies and efforts to promote investment under the Anwar administration is a “major factor” behind the surge in FDI from US, China and other countries, particularly Singapore and those in Europe.
“While successive administrations have consistently maintained investor friendly policies, the differentiating factor this time would be the current administration’s greater focus on good governance and fiscal discipline,” he said.
Asrul Hadi predicted that Anwar’s government will remain stable despite continued calls by coalition partner the United Malays National Organisation (UMNO) for the release of former premier Najib Razak, who is currently in jail for corruption.
Najib, a former UMNO president, is currently pursuing a legal case to be released on home detention after claiming that the then-king had issued a royal addendum granting the move.
Deputy Prime Minister Ahmad Zahid Hamidi appears to have consolidated his position as UMNO president with “no clear apparent threat”, Asrul Hadi said, noting that Ahmad Zahid is also looking to welcome exiled party leaders back into the fold.
Ahmad Zahid recently said UMNO was open to welcoming back sacked or suspended members like ex-ministers Khairy Jamaluddin and Hishammuddin Hussein if they prove their commitment to the party.
Despite that, the analyst Asrul Hadi said the Sabah state election – due to be held by December 2025 – could prove to be a “headache” for Anwar.
While UMNO is a unity government partner together with Sabah’s ruling coalition Gabungan Rakyat Sabah (GRS), some of UMNO’s assemblymen are part of the opposition in the Sabah state government.
After details of a mining scandal levelled corruption allegations at several GRS leaders, UMNO’s Sabah branch called for GRS chairman and Sabah chief minister Hajiji Noor to resign and the state assembly to be dissolved immediately.
“Still, the result (of the Sabah state election) will have no bearing on the federal level and the power dynamics between (Anwar’s) government and the federal opposition,” Asrul Hadi said.
Some political cracks, however, have recently started to appear in both government and opposition camps.
Government minister Tengku Zafrul Abdul Aziz is mulling defection from UMNO to another within the ruling coalition, sparking anger from his own party, while key opposition figure Ahmad Samsuri Mokhtar has resigned from his treasurer-general post in the opposition Perikatan Nasional coalition, in a perceived protest at how his party has been seemingly sidelined.
Analysts previously told CNA that while the developments could cause “chaos” in both coalitions, they expect the political status quo to remain in both camps for now.
Nambiar called political stability a “key foundational stone” for economic growth.
“Anwar has established a firm position for himself and as long as the coalition is solidly behind him – as it seems to be the case now – the pre-condition of political stability will be satisfied,” the economist added.
Meanwhile, things are looking pretty stable in Indonesian politics with nearly all parties both inside or out of Prabowo’s 11-party coalition vowing their support towards the president’s policies and programmes.
But questions remain on how effective Prabowo’s “chunky” Cabinet will be and can they work together, particularly as its 116 members all come from different backgrounds and represent different political interests.
Comprising 48 ministers, 56 vice-ministers, five agency chiefs and seven special envoys, Prabowo’s Red and White Cabinet is the largest Indonesia has seen in six decades.
It is also nearly double the size of his predecessor, Joko Widodo’s, which had a total of 60 members in his Cabinet.
Experts are worried that a Cabinet so large and diverse will be prone to internal rifts, reducing the government’s effectiveness in doing its job.
“As a consequence of adding new Cabinet positions, the (Indonesian) government first needs to build new offices, recruit staffers and so on,” Piter of Segara Institute said.
“(These ministers) cannot move quickly. Meanwhile, these tough challenges are upon us and need to be addressed fast.”