Over the next three years, the IMF is projecting a brighter outlook for Southeast Asia, particularly Vietnam, Indonesia, and, to some extent the Philippines, than for emerging markets in other regions.

These countries are well placed to begin the process of recovery, along with the Chinese mainland, whose resilient economy has acted as an economic anchor in Asia. Since the second quarter of 2009, there have been early signs of stabilisation in Asia's financial markets and the broader economy, with moderating export declines.

In hindsight, the Asian financial crisis in 1997/1998 was partly due to weak financial and banking systems. Since then, most Asian economies have been improving their foreign exchange reserves and reducing external debt.

The ASEAN 5 (consisting of Vietnam, the Philippines, Indonesia, Malaysia and Thailand) has at least tripled international reserves, while the group's debt servicing ability has also greatly improved.

Growing regional trade links

Many developing economies around the world have relied on export-led growth. In Southeast Asia, the flourishing trades in parts, components and intermediate goods have tightened regional trading links.

According to IMF estimates, intra-regional trade in Asia grew nine percentage points to 52% between 1990 and 2006. Intra-regional trade within emerging Asia gained 10 percentage points to 41% over the same period.

Within the ASEAN 5, Malaysia has the highest export-to-GDP ratio (95%), followed by Thailand and Vietnam, where exports represent more than half of GDP.

Indonesia and the Philippines, the two most populated countries in ASEAN, have larger domestic markets, with exports representing 28% and 29% respectively of GDP. For Vietnam, the third-largest population centre in ASEAN, exports account for 57% of GDP.

While external demand is a pivotal factor for export-dependent economies in developing Asia, reliance on G3 demand is not as large as for many emerging economies outside the region.

Among the ASEAN 5, Vietnam sends 56% of exports to the G3 (seen as the EU, plus the US and Japan), while the other four ASEAN countries export between 35% and 49% to the G3. Singapore, which has the highest export-dependency ratio in ASEAN, sells less than 25% to the G3.

In comparison, ASEAN exports to China are significantly higher than those from emerging economies such as Central and Eastern Europe. About 10% of ASEAN 5 exports go to China, with the Philippines exporting the most.

China's domestic demand partially offsets external falls

As one of the major exporters in developing Asia, China has also suffered from the collapse in global demand, with sharp year-on-year declines in exports reported in each of the three preceding quarters.

But to counteract that, China has been swift to introduce fiscal and monetary policies to stimulate domestic demand in a bid to offset falling external demand. Although GDP growth dropped to a seven-year low of 9% in 2008, followed by slower growth of 6.1% in the first quarter of 2009, the Chinese economy expanded 7.9% in the second quarter of 2009.

Coupled with data pointing to stronger domestic demand, this scenario indicates that the stimulus measures have started to take effect, raising confidence that the official growth target of 8% or more for 2009 will be achieved.

A stronger Chinese economy helps the rest of developing Asia by increasing the likelihood of increasing exports to China, thereby increasing intra-Asia trade. Chinese imports from each of the ASEAN 5 have either moderated the decline or rebounded since January 2009.

ASEAN also benefits from China's adoption of a sound economic policy and maintenance of a stable Chinese currency.

With this economic anchor, ASEAN may go through the current global financial crisis without suffering from the economic troubles experienced during the Asian financial crisis.

China's trade role in the ascendancy

China's capacity to absorb ASEAN exports should not be overstated. Exports from Malaysia, Thailand, Indonesia, the Philippines and Singapore to China are about the same as their exports to the US, with the exception of Vietnam.

Moreover, the ASEAN 5 and Singapore are experiencing dropping demand from markets in the G3. Even for Singapore, which exports less to the G3 than the ASEAN 5, China only accounts for around one-tenth of Singapore's exports, which is less than half of what it sells to the G3.

An integrated global supply chain means that a large share of developing Asia's exports to China may actually be driven by demand from developed economies, chiefly the G3.

China acts like a hub for the processing trade: it imports raw materials, parts and components, and intermediate goods from developing Asian economies and then exports final consumption goods to developed markets. In this regard, the true impact of shifting external demand on ASEAN exports would presumably be higher than export data suggests.

Although a robust Chinese economy is good news, China alone cannot replace the current dwindling export demand from developed countries.

Yet, with G3 economies likely to show clearer signs of stabilisation next year, the green shoots of recovery seen in Vietnam, Indonesia and the Philippines are expected to grow further in 2010 through 2011.