The Future Forecast: Asia in 2023
January 11, 2023
At the end of each year, as the winter holidays begin to unfold with the promise of family and good cheer, we ask our experts across Asia to reveal what the New Year has in store. And every year, they tell us the same thing: it’s hard to predict the future in the world’s most rapidly changing region.
The last three years certainly helped make that point, as unexpected events on the world stage made our best attempts at futurism seem futile—from Covid-19 in 2020, to dramatic changes in Myanmar and Afghanistan in 2021, to the war in Ukraine, which abruptly shuffled the economic deck for countries throughout Asia in 2022.
But here’s one thing we do know: our “Predictions” edition is consistently a reader favorite. And if anyone has their finger on the future, it’s our astute development experts with their ears to the ground. So here is a selection of 17 predictions for the year ahead in Asia. Enjoy!
Asia’s Economic Prospects in 2023: Blue Skies with a Chance of Clouds
The Asia-Pacific region is emerging from the effects of the pandemic, which shook the foundations of economic growth. Small businesses in the services and small-scale manufacturing sectors, which form the largest part of the economy across the region, were particularly hard hit. Their post-pandemic recovery has been hampered, and their vulnerabilities amplified, by global supply-chain disruptions, the continued absence of tourists from mainland China, rising fuel and commodity prices, and accelerating climate impacts. The roughly 70 percent of Asia’s workforce employed in these sectors and in the informal and gig economy are still at grave economic risk.
Three important drivers of recovery and growth in Asia and the Pacific will be investments in resilient and adaptive human resources, innovations to help economies transition to clean energy, and inclusive access to the digital economy. But despite the strong economic headwinds from the war in Europe, and with the pandemic’s late surge in China still to be reckoned with, Asia is growing faster than any other region in the world and will continue to see steady economic growth and recovery in 2023.
In South Asia, economic activity is already reaching pre-pandemic levels, with India leading the pack and Bangladesh revving its manufacturing engine, but Sri Lanka and Pakistan are still struggling with macroeconomic instability. Workers and businesses across Southeast Asia are back at work and more digitally connected than before the pandemic. Tourism is back and will continue to support recovery when tourists from mainland China make their expected return later in the year. Northeast Asia will struggle with the continued contraction of the Chinese economy and the lingering effects of border closures and interrupted trade. The forecast for the Pacific looks sunny, as tourism rebounds in Fiji.
Overall, we will see bluer skies over Asia with an increasing emphasis on regional trade, continued expansion of digital innovation in all segments of the economy, and redoubled efforts to explore green technologies in response to rising fuel prices. But the unpredictable effects of global conflict and climate change will continue to cast occasional dark shadows on Asia’s economies in 2023.
Afghanistan: Continuing Hardship
In the 16 months since Afghanistan came under Taliban control, possibly the only positive development in the country has been a relative improvement in the security situation. As most of the violence reported before August 2021 was attributable to the Taliban insurgency, it is unsurprising that Afghanistan is now safer after the departure of foreign forces. Unfortunately, on all other fronts the hardships that Afghans must endure have continued to grow, with rapidly rising poverty and unemployment, a collapsing economy, and desperately inadequate public services. Yet, faced with these unprecedented challenges, the main highlights of the Taliban’s rule in 2022 have been draconian restrictions on women’s right to work, to go to school, or to participate in activities outside the home, even visits to public parks with their families.
Despite several calls from the international community for the formation of an inclusive and consensus-based government with a mandate to clarify Afghanistan’s future political system and priorities, the Taliban’s policies have remained unchanged. These policies don’t just undermine the cohesion of Afghanistan’s highly diverse society; they risk the total collapse of state institutions, which are currently being run by poorly educated Taliban staff and leadership. As a result of these unilateral policies, Afghanistan’s current regime remains unrecognized by the international community. The Taliban’s insistence on maintaining their highly authoritarian and restrictive model of governance could push this overwhelmingly aid-dependent country into a humanitarian catastrophe and a possible return to civil unrest.
As a country sharing borders with six countries between Central Asia, Iran, China, and Pakistan, Afghanistan’s stability remains crucial for regional security and trade. Several clashes were reported between the Taliban and the security forces of Pakistan and Iran in 2022, and these could escalate in 2023 in the absence of a coherent regional approach to engagement with the Taliban. To prevent Afghanistan’s collapse into renewed international conflict, its neighbors must find a way to engage with the Taliban more assertively, based on a regional consensus rather than ad hoc, country-by-country engagements. Finally, the international community and the Afghan diaspora must continue to demand equal access to education and employment for women and men and engage with the leaders of the Taliban to explore ways to ease restrictions on millions of women and girls currently deprived of the most basic and fundamental rights.
Bangladesh: Resiliency, Sustainability, and Elections
Elections will be the buzzword this year, as Bangladesh’s next general election is just around the corner in the first week of January 2024. This makes 2023 a critical year, with possibly profound consequences for the Bangladeshi people’s economic well-being and democratic institutions. Against the backdrop of the war in Ukraine and Covid-19, 2023 will test the resiliency and sustainability of the Bangladesh economy. Bangladesh’s foreign policy motto, “friendship towards all, malice towards none,” will also be challenged, as the country is becoming increasingly geopolitically interesting to global and regional powers. Finally, continuing to defend itself against human rights accusations is expected to be a recurrent theme of 2023 in Bangladesh.
Cambodia: Tourism, Exports, and a Knowledge-Based Economy
In November, Cambodia marked the end of its year as the chair of ASEAN, hosting the annual summit and bringing together ASEAN heads of state, dialogue partners, and significant world leaders, including the U.S. president. In 2023, the Royal Government of Cambodia will place a strong emphasis on rebuilding the post-pandemic economy and expanding economic opportunities for Cambodian citizens. Efforts are already underway to reignite international tourism and exploit export market opportunities, the latter taking full advantage of free trade agreements such as those with South Korea, China, and the Regional Comprehensive Economic Partnership, which all came into effect in the past year.
There will also be a redoubling of effort to capitalize on recent gains in digital technology and to build on the encouraging results of the recent college entrance examinations. More than 70 percent of students taking the test passed this year’s examination, qualifying them to go on to college. This is an extremely positive development in Cambodia’s ongoing campaign to create a knowledge-based economy.
The question for 2023 is whether the legitimacy that the government seeks in the wake of its successful ASEAN summit will nudge Cambodia forward on important reforms and greater responsiveness to the needs of its citizens. The potential exists for government, civil society, and the private sector to cultivate a culture of dialogue, consultation, and mutual respect that will allow them to cooperate more effectively to find concrete solutions to everyday problems.
Indonesia: Post-Pandemic Domestic Challenges and a Growing International Role
Indonesia enters 2023 with cautious optimism after President Joko Widodo, popularly known as Jokowi, lifted pandemic restrictions as 2022 drew to a close. Indeed, a survey reveals that 65 percent of Indonesians feel confident that the country will soon recover. Indonesia’s central bank projects national economic growth between 4.5 and 5.3 percent in the coming year, supported by private consumption, investment, and positive export performance. One key target of recovery is micro, small, and medium enterprises, the backbone of Indonesia’s economy. Indonesia’s MSMEs have shown resilience in multiple economic crises over the past two decades, but the Covid-19 pandemic hit them hard. The government’s strategy for MSMEs calls for them to become greener, more inclusive, and more digitally savvy.
On the legal reform front, after decades of deliberation, Indonesia finally passed a new Criminal Code in November 2022, replacing the old law inherited from Dutch colonial rule. The law contains some provisions that are already provoking vigorous discussion among the public and civil society. But the new Criminal Code is not set to take effect until 2025, leaving a three-year window for judicial review of any challenges and for the government to make its case.
It is politics, however, that will dominate the public consciousness in 2023. Elections are coming in 2024, and this year will be a busy one for politicians. The parties must register their chosen presidential and legislative candidates by November. With negotiations and coalition-building dominating the political agenda, the Jokowi government may become a lame-duck sooner than expected, even though his term continues until October 2024. Indonesia will also be preoccupied with Jakarta’s appointment of caretakers in place of elected leaders in over 270 provincial, district, and city governments. Indonesia’s grand design is to hold all these elections simultaneously in November 2024, and the caretakers will fill the gap until election day. But they will also play a significant role in administering those elections in their areas, and their performance will inevitably draw close public scrutiny. This political year also means that there will be no new policies that might reduce electoral support, and populist issues may once again come to the fore, but 2023 will also present opportunities for civil society to make its voice heard.
On the international stage, Indonesia assumes the ASEAN chair in 2023, where it will have to grapple with an array of difficult challenges, but the success of Indonesia’s G20 presidency in 2022 has injected the country with a new sense of confidence. One critical issue will be the situation in Myanmar. Domestically, a handful of NGOs want to see Indonesia push the Myanmar military to abide by ASEAN’s Five-Point Consensus for resolving the current crisis and returning Myanmar to democracy. As chair, Indonesia is taking as its theme “ASEAN Matters: The Epicentrum of Growth.” It is clear that Indonesia wants ASEAN to also focus on post-pandemic economic recovery.
Korea: a “Global Pivotal State”
In March 2022, Yoon Suk-yeol of the People Power Party (PPP) won Korea’s presidential election. But since his inauguration in May, he has had a bumpy road managing state affairs and fulfilling his campaign pledges, due to low public support and an uncooperative National Assembly that is still dominated by the opposition Party of Korea (DPK). The DPK’s single-party majority means it can pass legislation without PPP support, and indeed it has already passed a few bills with no PPP members even present. President Yoon’s five-year term will continue to be an uphill battle, at least until the 2024 general elections, when a change in the parliamentary balance is possible.
North Korea will continue to be a threat to the Korean peninsula in 2023. North Korea fired 38 ballistic missiles in 2022, the most of any year to date. Despite that, President Yoon has proposed his “Audacious Initiative” for North Korean denuclearization. The Initiative offers significant, staged improvements to North Korea’s economy and the livelihood of its people if the North halts its nuclear development and shifts to a substantive process for denuclearization. The response from North Korea, however, has been cynical, and it welcomed the New Year with missile launches, saying that South Korea has become an “undoubted enemy.”
In international relations, Yoon’s new government envisions Korea as a “global pivotal state.” Although Korea is now one of the world’s top 10 economies, and Korean popular culture has taken the world by storm, Korea has not been an active player on the international stage. The Yoon administration will seek to expand Korea’s foreign engagement, including various forms of regional cooperation. The government released its own Indo-Pacific strategy a few days before the new year. The strategy paper is regarded by many as reasserting Seoul’s alignment with Washington in the Indo-Pacific, where the U.S.-China rivalry has intensified. The year 2023 marks the seventh decade of the U.S.-Korea alliance. While the two countries celebrate their seventieth anniversary, Korea will continue to feel pressure in its relationship with China, especially on economic and trade issues.
Laos: Curveballs, Tourists, and High-Speed Trains
Armed with a new high-speed train to carry people and goods throughout the country, Laos is looking to move on from the pandemic. Watch for a boom in construction and traffic as the once laid-back capital of Vientiane becomes a hub for what many travel magazines are calling the best place to visit in 2023.
If 2023 is anything like the past few years, however, we can expect Laos to throw any number of curveballs as it digs its way out of the economic effects of the pandemic. In fact, the surprises started early with the appointment of a new prime minister at the end of 2022. With schools operating in person and the tourism sector open for business, we can anticipate an increase in visitors, especially if China loosens its travel restrictions. This expected wave strain a struggling service sector that lost much of its human capital as workers sought security in farming during the pandemic or pursued higher wages as foreign workers.
But the new influx from abroad will help to boost the country’s low foreign currency reserves, which have hampered the economy and led to high inflation (over 38 percent year on year) and a persistently weak national currency, the kip, that has made everyday households struggle to keep up. All efforts will go towards righting the economic ship as debt-to-GDP ratios top 100 percent for the first time. Expect increased attention to tourism, agricultural exports, high-priority infrastructure upgrades, and new investments in energy for export as a cash-hungry economy tries to fight the last of the Covid headwinds.
Malaysia: Cautious Optimism and a New Government
Malaysia heads into 2023 with a shiny new government: elections on November 19 produced a “unity” government led by Prime Minister Anwar Ibrahim’s Pakatan Harapan (Alliance of Hope) coalition. It is a government of compromise, however, crafted at the king’s insistence after a hung parliament, with PH joining hands with its main rival, the conservative Barisan Nasional (National Front) coalition, despite the devastating defeat of BN’s lead party, UMNO, in the election. The Malaysian Islamic Party, PAS, although holding the most seats in parliament, now sits in the opposition.
The instability that has characterized Malaysian politics is likely to continue into 2023, though there is a sense of hope that Anwar Ibrahim, the fifth PM in as many years, after 20 years of seeking this position, will bring some new energy and reformist direction to the country. His stature in the international community also leads to optimism that Malaysia can return to its earlier regional and global prominence.
One of the most urgent priorities for the new government is addressing the spiraling cost of living that threatens many Malaysians. The economic situation is complex: beneath seemingly positive macroeconomic indicators lie unsustainable subsidies and growing debt that must be confronted. Medium-term priorities must include reinforcing the social safety net and introducing reforms to prepare Malaysia’s economy for the future, including strengthening the highly skilled workforce and shifting exports towards high-value-added products and away from raw materials. The social cleavages of race and religion that have long characterized Malaysian society are deeper than ever, as reflected in the election results, but at the same time, a solid majority of Malaysians voted against corruption and for an inclusive Malaysia. As we head into 2023, one month into a new government, many Malaysians are cautiously optimistic about the future.
Mongolia: a Hopeful Outlook for the Economy and Quality of Life
Mongolia’s economy is highly dependent on China, and border disruptions caused by Beijing’s zero-Covid policy hurt Mongolia in 2022. Looking ahead to 2023, the reopening of China is likely to provide opportunities for growth and improved economic performance. This growth could be bolstered by commodity prices if they stay high into 2023, which seems likely, boosting Mongolia’s income from mining. Growth is sorely needed to rebuild an economy that saw two decades of poverty reduction significantly undermined by the pandemic.
This hopeful economic outlook is counterbalanced to some extent by persistent macroeconomic challenges and the political conflict emerging from a fresh corruption scandal. On the macroeconomic front, Mongolia owes significant payments on its external debt in 2023, at a time when its foreign currency reserves are low. Successful navigation of debt repayment and management of the reserves on hand will be crucial for economic stability. Efforts to bring inflation under control, which was a major pain point for Mongolians in 2022, will also be critical to ensuring that recovery comes with improvements to quality of life.
Last year ended with a series of public protests stemming from revelations of the possible theft of coal revenues by executives at the largest state-owned coal mine, a scandal that may implicate a number of high-level politicians. This scandal has sparked protests and public frustration, but it has also ignited political disputes that could destabilize the current government. If this “coal-theft” scandal results in a genuine effort to address Mongolia’s persistent governance challenges, including tackling corruption and reforming state-owned enterprises, 2023 will be a year of opportunity for Mongolia’s development. If the main result of this scandal is political in-fighting and government instability, however, the opportunities presented by the new year will likely be squandered.
Nepal: Reimagining Its Role in a Region Known for Geopolitics
Nepal’s voters went to the polls in 2022 to choose their second five-year government under the 2015 constitution, and 2023 could prove to be the most stable year of the next five-year term. Last year’s electoral results, particularly at the federal and provincial level, have reconfigured the power relations among the parties. The presence in the parliament of newly emerged and reestablished parties means that the old guard can no longer ignore them and the demands for reform they represent. How the parties work to safeguard their win-win power sharing, like the formation of the current seven-party coalition government, will shape Nepal’s stability in 2023.
Nepal’s evolving federalism will continue to frame the political debate about democracy and public service delivery, and negotiations will all but mandate a more constructive, public dialogue on federalism itself. This will begin within and around the seven-party coalition government, but it must eventually expand to include the real experiences of these systems by the public at large. However premature it may appear to outsiders, substantive public discussion can help defuse the inevitable frustrations of a still-young system and provide a counterweight to the views of the Kathmandu elite about federalism’s successes and failures over the past few years.
A growing number of Nepalis are questioning the country’s direction, and newly elected governments at all levels will be facing a tall order to deliver on demands for employment and service delivery. Hope is not baseless for Nepal’s economy, with growth projected at 5.1 percent and foreign remittances expected to remain steady. But these factors alone will not meet public needs, as projected inflation will continue to stunt the public’s purchasing power. Limited access to nonstate resources for community-driven development will serve as a motivation for questioning political institutions.
This overall situation raises questions about the country’s efforts to safeguard its fragile economy and pull together comprehensive infrastructure and development plans across local, provincial, and national jurisdictions that remain poorly defined within broader constitutional mandates. It’s hard to imagine that the year ahead will be one of bold advances in the country’s top priorities. But it is reasonable to anticipate that bilateral and multilateral partners will continue to play a major role in Nepal’s development, providing options for the country to continue to reimagine its role in a region that is often entangled in geopolitical debate. The onus is on Nepal to make thoughtful, clear decisions to support, rather than antagonize, its global partners.
Pacific Islands: Youth, Growth, and Migration
The climate crisis, resource management, and the long-term effects of Covid-19 will dominate the 2023 agenda for the Pacific Islands. Growth is expected to be around 4.8 percent across the region due to an uptick in resource extraction and tourism, the two main sources of revenue for most Pacific Island countries, but growing public debt will continue to be a major concern. Governments will need to grapple with the continuing cost of social protection programs put in place over the past few years.
Expect to see more migration, and emigration, of skilled workers. While foreign remittances will be welcome, they may not offset the effects of brain drain or the labor gap in the countries most affected. Migrants fleeing poverty or climate effects will continue to be vulnerable to exploitation. Should a global recession occur in 2023, it will disproportionately affect groups already at risk of poverty, gender-based violence, and human trafficking. On the other hand, the region’s large youth populations and increasing digital connectedness present obvious opportunities that must be part of any strategy for economic prosperity and climate resilience.
In 2022, electoral systems were tested. The Marape government was returned in Papua New Guinea, while there were changes of government in Nauru, Vanuatu, and Fiji. After 16 years of FijiFirst leadership in Fiji, all eyes are on the new government, a coalition of three parties with a slim parliamentary majority. National elections in the Solomon Islands, now scheduled for 2024, will be closely scrutinized as geopolitical and security issues play out at the provincial, national, and regional levels. On a positive note, in countries where the traditional media have faced the threat of government censorship, there is growing online debate about citizen journalism and the public interest.
Overall, the three big challenges for the Pacific Island region align with larger, global trends: maintaining public trust in leaders and institutions as they confront growing public debt; building resilience and broadening revenue streams to mitigate the lingering effects of the pandemic, the global disruption of supply chains, and the climate crisis; and creating a robust framework for safe and legal migration by people seeking better livelihoods or escaping the effects of climate change.
Pakistan: Rebounding from a Heat Wave, Flooding, and Food Insecurity
In 2022, grave challenges on multiple fronts severely tested Pakistan’s resilience. From June to October, following a severe heat wave, unusually heavy monsoons and melting glaciers caused unprecedented, devastating floods that directly affected some 33 million people. Floodwaters have yet to recede in some areas. Eight million Pakistanis remain homeless, and the flooding destroyed crops and disrupted the planting season, threatening to roughly double the numbers of the food-insecure to 14.7 million. Compounding this surge of food insecurity were significant economic stresses, including high inflation, the devaluation of the Pakistani rupee against major currencies, rising fuel prices, and dwindling foreign currency reserves. Last year was also a year of political upheaval, with the ouster of the government of former prime minister Imran Khan sparking dramatic protests against the new government of Shehbaz Sharif, fueling further polarization of the electorate.
In 2023, it is crucial that Pakistan rebound from these travails. The nation must address its economic situation with sound, forward-looking policies and real commitments, even as it responds to the desperate humanitarian situation caused by the floods. In the political domain, we should watch closely for new policy directions from the Sharif government in its second year, and the greater stability that changes might provide. These efforts must not squelch the thriving spirit of innovation that has taken root in Pakistan’s cities, where tech-driven startups are creating exciting opportunities for the people and the economy in the years ahead.
The Philippines: a Reset and a Recovery
The coming year will be one of recovery and reset for the Philippines.
The recovery is necessary after two years of significant Covid-19 restrictions that affected all facets of life. The Philippine economy was battered, and the Marcos administration has inherited raging inflation, rising poverty, high government debt, a depreciating currency, continuing corruption, and declining foreign investment. Other long-term challenges persist. Education is in crisis after two years with no in-person schooling on top of historical underperformance. Healthcare is weak and under-resourced. Security remains a concern against both the Communist insurgency and other nonstate groups in Mindanao, and recovering a focus on rule of law and the protection of human rights will be a critical building block.
The reset is with respect to international relations, particularly reinvigorating the Philippine-U.S. relationship and resetting Philippine relations with a range of multilateral and regional institutions. Early steps by the Marcos government in this direction have already won positive recognition from the international community.
The administration of President Ferdinand “Bongbong” Marcos began with a huge electoral margin, and he and his allies face very limited opposition. Keeping the focus on improving the lives of all Filipinos and not on political intramurals may be another challenge. In 2023 there is a tremendous opportunity to align executive and legislative agendas to address some of the country’s fundamental challenges.
Sri Lanka: Citizens Call for a Progressive Vision of an Uncertain Future
Sri Lanka heads into 2023 with its economy in shambles. After defaulting on its debt repayments for the first time in its history last April, the country has been experiencing its worst economic crisis since independence. Soaring inflation, a weakened currency, and depleted foreign exchange reserves have now left the country struggling to pay for essential imports such as food, fuel, and medicine.
The dire situation sparked a revolutionary protest movement last summer, the Aragalaya (or People’s Protest), which unified citizens both island-wide and overseas in their dissent against the government and the Rajapaksa regime. More protests are likely in 2023, as well as pressure to hold early elections, as President Ranil Wickremesinghe, who assumed the presidency in July 2022, has failed to confront the public discontent that forced the resignation of his predecessor, Gotabaya Rajapaksa.
The country has already seen the exodus of over 300,000 young professionals in search of greener pastures, with more expected to emigrate this year in the face of the soaring cost of living and uncertainty about the country’s future. There has also been an increase in crime amidst the ongoing crisis, as hapless citizens have resorted to theft, prostitution, and drug-trafficking to deal with growing hardships. Despite a sharp rate hike in August, the country is still experiencing scheduled power cuts for two hours a day, and interruptions as long as 10 hours per day are predicted this year if the government cannot pay for sufficient coal. The new government’s budget for 2023 focuses on boosting revenue, implementing tax reforms, and fiscal consolidation to secure an IMF bailout package to help put the country back on track, but Sri Lanka’s debt restructuring is deeply entangled with its major bilateral creditors, including China and India.
The revitalization of Sri Lanka’s democracy amidst its complex, post-authoritarian politics will be a fundamental project for 2023. The country needs a comprehensive package of political reform, including a new constitution that eliminates the executive presidency and reestablishes the institutions and practices of representative democracy with strong checks and balances. It is not clear that the current members of parliament or the fractured political parties that have been jockeying for power are in fact up to this task, but for the first time in its history, Sri Lanka’s citizenry has awoken and will, one hopes, not step back from its progressive vision for the future. Thus, 2023 will be a pivotal year for Sri Lanka—possibly violent and chaotic—as competing forces of change work themselves out. The hope for Sri Lanka’s future lies with the aspirations and determination of its citizens, who must remain steadfast in their demand for change.
Thailand: Elections, Partnerships, and Economic Recovery
Thailand is poised for a potential milestone year in 2023. The big story will be the national election, likely to be held in May, and the chances of a change in government are high. Based on recent polling, Prime Minister Prayut Chan-ocha is in a precarious position going into election season. The ruling PPRP party is highly fragmented and seems destined for a poor showing. The opposition Pheu Thai party seems the most likely front-runner, but it is far from certain that they will win an outright majority. The 250-member unelected Senate will vote for the next prime minister, along with the 500-member lower house. Unlike the 2019 election, when all but one senator voted for Prime Minister Prayut, support could be split among several candidates for the top job. The election campaign is likely to be intense but stable, and the election itself should be orderly and well managed, but anxiety will be running high in the election’s aftermath. If the prime minister finds a way to stay in power, we should expect renewed street protests and political polarization.
In foreign policy, Thailand has just completed a successful year as the chair of APEC. Mainland Southeast Asia is becoming increasingly important in geopolitical terms, and external powers such as the United States, China, Japan, and Australia are increasing their attention to the region. Thailand’s role as the anchor economy in the Mekong subregion, and its central geographic position, makes it an essential partner for major external powers. As China emerges from its Covid-19 isolation, and particularly if the Thai election leads to a change of government, expect even greater competition for Thailand among the major powers.
On the economic side, the picture is relatively bright. Thailand has fully emerged from the pandemic, and the tourism sector is booming again. Remarkably, the Thai economy has already returned to pre-pandemic levels, although inflation, energy prices, and a possible global recession make the prospects for growth in 2023 uncertain.
Timor-Leste: Aiming for ASEAN Ascension and Economic Diversification
In 2022, Timor-Leste made significant strides towards greater regional integration. The country eased travel restrictions, reopening to international travel for the first time in two years. In November, the Association of Southeast Asian Nations (ASEAN) agreed to grant Timor-Leste full observer status and establish a roadmap for full membership in 2023, a goal the country has pursued for more than a decade. Preparing for full ascension into ASEAN will be a key focus of attention for Timor-Leste in 2023.
Timor-Leste will also continue to battle the lingering economic effects of the Covid-19 pandemic and the disruptions from the Russia-Ukraine war, which created high rates of inflation, ongoing supply chain disruptions, and, in turn, greater economic uncertainty for Timorese in 2022. Given the functional depletion of the Bayu Udan oil and gas field, which has been the primary source of the country’s income, the danger of falling off a “fiscal cliff,” as well as the need for economic diversification, will come into sharper focus in 2023.
The 2022 presidential election was transparent, and its results were respected across the country. The same outcome is hoped for in parliamentary elections coming in the first half of 2023. The inauguration and initial actions of the ninth Constitutional Government will reveal how Timor-Leste will take advantage of key opportunities and address pressing challenges over the next half decade.
Vietnam: a New Reality, Pragmatism, and a Push for Carbon Neutrality
We live in a time when unpredictable events can cascade into global crises. This makes predicting the future risky. Vietnam is not immune to these uncertainties. At a recent economic summit organized by the Communist Party’s Central Economic Commission, the discussion revolved around the “new reality”—issues like monetary tightening; rising interest rates and the revaluation of investments; supply chains, re-shoring, and near-shoring; and, of course, the potential for a global recession. These macroeconomic uncertainties were couched in terms of the rising cost of climate change and shockwaves from the war in Ukraine. There was a litany of concerns, but there were no clear pathways forward. We enter 2023, therefore, with questions rather than predictions.
Since September, more than 1,200 companies in Vietnam—mostly foreign businesses in the garment, footwear, and furniture sectors—have been forced to lay off staff or cut working hours. More than 450,000 workers have had their hours cut, and 40,000 have been laid off. Yet, growth and foreign investment in Vietnam are forecast to remain strong, as global corporations continue to diversify production out of China. The value of Vietnam’s exports is now equal to its total GDP. That is a significant level of export dependence. Will a global recession disrupt Vietnam’s export industries and stall its strategy for a high-skilled, high-tech economy? There is much at stake.
Vietnamese are increasingly aware that climate policies elsewhere can affect them domestically. Consider the EU’s Carbon Border Adjustment Mechanism, which would tax the carbon content of roughly $1 billion in current EU imports from Vietnam. At the COP 26 summit in 2021, Prime Minister Pham Van Chinh pledged to make the country carbon neutral by 2050. His pledge has now been integrated into all related ministerial plans. The power sector, however, has been a laggard. On December 14, 2022, an International Partners Group, comprising the United States, Japan, and major European economies, established a $15.5 billion Just Energy Transition Partnership to fund development of Vietnam’s substantial renewable energy potential. But Vietnam’s power grid is inadequate, and the regulations, standards, and financial mechanisms needed to translate this funding into viable projects are limited. Given the three- to five-year timeline for implementation, will Vietnam be able to create the enabling environment to meet its demand for new power sources?
The diplomatic repercussions of the war in Ukraine have been largely underestimated. In truth, Vietnamese sympathies are torn between Russia and Ukraine, where many have long personal relationships. Some see the United States as the culprit in this war. As the war drags on, will the status quo hold, or will opinion turn to one side or another, and thus lead to a recalibration of external relations?
Vietnamese diplomats have consistently sought to ring-fence the conflict in the South China Sea from its relationships with China, the United States, and Russia, the last its primary arms supplier. Does the recent signing of an exclusive economic zone boundary agreement with Indonesia, 12 years in the making, signal a bilateral process to resolve the ASEAN side of this conflict, or is it an isolated incident of diplomacy? The significance cannot be overstated, as a series of bilateral agreements on EEZ boundaries would unite the littoral states in ASEAN and shift the focus to China’s claims to international waters.
Despite these concerns and many others, Vietnam can approach 2023 with optimism. Inflation is low, GDP growth is relatively high, infrastructure continues to be built, and the transition to a higher technology, lower carbon economy is underway. While the past few years have been difficult, Vietnam has managed to find its way through. We predict pragmatism will prevail, and with it, continued success.
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