Stronger pathways to accessing trade finance, improved expertise in ESG practices, and ratifying free trade agreements are some of the levers Southeast Asian governments can use to further support the ongoing survival and commercial resilience of companies – particularly SMEs – who operate within the region’s supply chains. These were some of the policy recommendations that HSBC announced today ahead of the ASEAN Economic Ministers’ annual summit on the 29 August.
The recommendations come against the backdrop of supply chains continuing to shift and re-shape across Southeast Asia; COVID-19 impacting the region’s growth strategy of large-scale infrastructure development and FDI-enabled export-led manufacturing growth; and the important role that small and medium-sized companies play across Southeast Asian economies (SMEs constitute roughly 90% of all businesses and employer across the various markets1). The policy recommendations include:
Trade finance allows SMEs to mitigate the risks associated with importing or exporting goods and services, permitting trade to flow in a predictable and secure manner. Despite governments and central banks providing significant stimulus, working capital continues to be a barrier for companies especially SMEs. The global trade finance gap has ballooned to USD2-5trillion, according to the World Trade Organisation.2 This experience is shared amongst ASEAN SMEs partly because the regulatory treatment of trade transactions has become increasingly rigid and inconsistent across markets. Short-term letters of credit, in particular, have been subject to additional scrutiny during the development of Basel III rules.3 In addressing the challenges, HSBC cites opportunities to standardise trade finance regulations, policies and processes across Southeast Asian countries in order to reduce the complexity, costs and administration for smaller companies operating across borders, and to ensure that working capital becomes more accessible.
Recognising the challenge, HSBC and the Asian Development Bank recently launched a trade finance programme to help companies that are producing goods crucial to the ongoing fight against the COVID-19 pandemic.4 The programme could enable up to US$1.2 billion a year of additional trade by Asian SMEs.
Southeast Asian policymakers have been increasingly focusing on Foreign Direct Investment to drive manufacturing and export growth; however, FDI was already on the decline globally before the COVID-19 pandemic.5 For Southeast Asia to claim a greater share of the global declining FDI pie, further country reforms are needed, including programmes to transition labour to more formal and productive sectors and encourage people mobility to supplement the domestic labour.6 HSBC also encourages governments to continue to remove non-tariff barriers – such as increased automation of customs clearance – around the flow of goods and services in order to increase inbound investment.7
With the new demand for contact-free and digital services, HSBC encourages policymakers to support smaller-sized companies shift towards online channels and service-focused business models. This can be achieved by fully implementing already agreed on digital frameworks that will harmonise specific country regulations on issues such as the cross-border movement of commercial data; IP protection; and cybersecurity.8
As multinational buyers begin to invoke Environmental, Social and Governance frameworks upon their supply chain, HSBC encourages policy makers to more actively help less-resourced SMEs make the transition, lest they be excluded from business activity in future. Suggestions include establishing an ‘ASEAN SME Sustainability Hub’ focused on equipping SMEs with the knowledge, information, capability, and resources needed to respond to increasing consumer, customer and regulatory expectations. In addition, industry would welcome regional standards to define what is considered “sustainable” or “green” across different sectors.9
As protectionism and economic headwinds mount, multi-lateral trade agreements, such as the RCEP and CPTPP, could kick-start a new era of trade and investment integration and create certainty for SMEs and other trade-dependent businesses. RCEP should be concluded and ratified in 2020, with work to continue on persuading India to join as soon as possible. We would also encourage Thailand, Indonesia and the Philippines to seek in-principle inclusion into CPTPP.10
Stuart Tait, HSBC’s Asia Pacific Head of Commercial Bank, said: “Mitigating the impact of COVID-19 on supply chains – particularly for smaller sized companies – has become a first order issue for ASEAN policymakers. Given their commercial and employment importance, we have seen all Southeast Asian countries fire fiscal bazookas at this segment to support them in these turbulent times.”
“However, as fiscal measures begin to taper off and economic headwinds continue, several pincer and practical measures should be adopted to support companies particularly given how trade-dependent and internationally focused most businesses in the region are.”
HSBC has played an active role in the development of the economies of Southeast Asia for the past 150 years. HSBC’s customer base in Southeast Asia spans more than 10,000 corporate clients – including 4,500 subsidiaries of multinational corporations and more than 20,000 small and medium-sized enterprises. The region is served by roughly 15,000 staff.
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About The Hongkong and Shanghai Banking Corporation Limited
The Hongkong and Shanghai Banking Corporation Limited is the founding member of the HSBC Group. HSBC serves customers worldwide from offices in 64 countries and territories in its geographical regions: Europe, Asia, North America, Latin America, and Middle East and North Africa. With assets of US$2,923bn at 30 June 2020, HSBC is one of the world’s largest banking and financial services organisations.
5 HSBC Global Research: ASEAN Perspectives: Rethinking Growth, 30 July 2020 Pge 1
6 HSBC Global Research: ASEAN Perspectives: Rethinking Growth, 30 July 2020