For Southeast Asia, 2003 was a roller coaster year. The early expectations of a gradual economic recovery were badly jolted when the outbreak of the Severe Acute Respiratory Syndrome (SARS) in the first quarter of the year dented several economies and saw a plummeting of confidence and growth rates. But SARS was brought under control within a few months and then petered out. Growth rates and confidence started to recover, helped also by signs of a pickup in the American economy. For the year, most regional economies expanded by an average of 4.5 per cent. Singapore's real GDP growth of 1.1 per cent was an exception and reflected the devastating impact of SARS on the most open and globalized economy in the region. By the end of the year the American economy seemed to be entering a period of cyclical recovery while Japan's economic performance also improved, generating prospects for a much better year ahead for the region. But concerns about decline in foreign direct investments, in part because of competition from China, continued to be a worrying reality for countries like Indonesia, Malaysia, the Philippines, and Singapore.

The external security environment of the region remained relatively benign, given reasonably good relations between the major powers in Asia, especially U.S.-China relations. However, the American-led war in Iraq, which broke out in March and the deterioration of the situation in that country following the initially easy American invasion and occupation, posed some troubling uncertainties for the region. Iraq was becoming a magnet for radicals and terrorists. If the situation is not stabilized it could give a boost to international terrorism. It has already resulted in an increase in anti-Americanism in Muslim countries, including in Southeast Asia where efforts to come up with a more coherent and co-ordinated response proved to be quite challenging.

Despite regional vicissitudes and sluggish economic performance in the first half of 2003, the Association of Southeast Asian Nations (ASEAN) derived some good dividends from the generally benign atmosphere among the major external powers.