What began as credit turmoil in the United States has intensified into a global financial crisis, leading to protracted slowdown and severe financial deleveraging in many countries. Like other regions in the world, ASEAN is not immune from this downturn. Since the crisis further deepened in September 2008, the region has been confronted with many challenges arising from slowing growth, tighter external financing conditions, volatile capital flows, and increased vulnerabilities. In response to the deepening crisis, many countries in the region have put in place various policy measures to recapitalize and inject liquidity into financial institutions, in addition to huge stimulus packages being implemented in some economies to firm up domestic demand.

ASEAN Has Not Decoupled from the Global Downturn …

Faced by increasingly difficult external conditions, the economies of ASEAN have slowed in 2008 (see Figure 1). Preliminary figures for the first three quarters of 2008 suggest that the region grew by 5.5 per cent, down from 6.2 per cent registered in 2007. Two factors account for this downward shift in regional growth. First is the deeper-than-expected financial crisis and second is the severe recession in advanced economies. Together, these headwinds moderated growth in global economy last year (estimated at 3.4 per cent by the IMF versus 5.2 per cent in 2007), and exerted significant spill over to the region, in terms of sharp decline in export growth and tighter financial conditions.

Although the impact of the crisis on the real economy of ASEAN was not so severe, available growth indicators point to deceleration in economic activity particularly in the Philippines and Singapore where growth rates fell markedly from a year ago. After growing by an average of 8.5 per cent in the first three quarters of 2007, Singapore managed to grow by 3.1 per cent during the same period in 2008. In the third quarter alone, output did not grow at all, as output of manufacturing, construction and services sectors plunged. In the Philippines, growth also slowed significantly to 4.7 per cent for the first nine months, from 7.5 per cent during the same period in 2007, on weak consumption and exports.