South-east Asia’s fortunes have risen tremendously since the dark days of the Asian Financial Crisis – you only have to look at the gleaming malls and airports that have sprouted in Hanoi, Jakarta and Manila, or the increasingly modern manufacturing sites of Kuala Lumpur, to get a sense of the economic buzz that permeates the region.
But now is not the time to rest easy. On the contrary, policy makers across the region should step up reform efforts designed to boost ASEAN’s openness and integration. This is crucial both to shield its economies and businesses from the challenging and tough global backdrop, and to allow them to capture opportunities going forward.
As ASEAN’s Chair in 2019, Thailand - under the theme of Advancing Sustainable Partnerships - has set a positive tone for the region highlighting several areas of focus.1
Here is what we think are some of the key themes for ASEAN in 2019 and why.
The policy shifts in the US and China and, its impact on trade, coincides with the cyclical slow-down in electronics trade - one of South-east Asia’s most integral sectors, equivalent to 25 percent of the region’s total exports in goods.2
No one wins in a trade war but the impact on ASEAN economies can be partly offset if the much-discussed supply chain diversion to South-east Asia, from the likes of China, US and Korea, materialises.
Supply chain diversion is happening in pockets across Vietnam, Malaysia, and Thailand - given they bulk-export the same products impacted by the US-China tariffs - but increasing the ease in which goods and services flow across ASEAN will make the transition more widespread.
Some important progress has already been made including the imminent launch of the ASEAN-wide Self-Certification scheme which allows wing certified exporters to self-certify the origin of their exports.3 And the ASEAN Single Window - which digitizes intra-ASEAN trade documents – which was launched across Indonesia, Malaysia, Thailand, Vietnam and Singapore in early 2018 - means the number of days it takes to clear cross-border goods flows has come down from 5-10 days to one.4
But more needs to be done to smooth the flow of goods and services across ASEAN.
This includes rolling out the window to all ASEAN countries, standardizing the cost and time of customs clearance across South-east Asia and enabling the freer movement of professionals across the region.
A second key area on ASEAN’s to-do list - and relevant for the supply chain story - involves attracting more investment from outside the region.
Yes, Foreign Direct Investment (FDI) into South-east Asia has improved post-Global Financial Crisis, but the lion’s share has gone to Singapore, Vietnam and Malaysia - not to countries like Thailand, Indonesia or Philippines where supply chains are expected to grow in future.5
The levers to attract investment to ASEAN more widely are clear: reasonable production costs, stable institutions, improved technological innovation, lowering tariffs and import barriers for production inputs, and increasing labour skills.
After lengthy negotiations, the Regional Comprehensive Economic Partnership (RCEP), which spans 16 countries, nearly 3.5 billion people and 40 percent of global GDP, is getting closer to a conclusion.6 The recently-launched Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which came into force in late 2018, is likely to be extended to more countries.7 And upgrading existing trade pacts with the likes of Hong King and China are also on the to-do list. Again, these have been earmarked by Thailand as key initiatives in developing ASEAN’s potential.8
Improving digital connectivity, and investment into ASEAN’s digital space to support the region’s burgeoning consumer base, could be another game-changer – both to shore up the region's supply chain potential and to increase the gravitational pull for multi-nationals and companies.
The Masterplan on ASEAN Connectivity 2025 has stated that between US$220-650 billion in additional annual economic impact in ASEAN by 2030 could be injected into ASEAN through new technology and the internet economy.9
Its potential is clearly understood with US, Chinese and Japanese companies investing in information and communications technology (ICT) over the past two years. In fact, 2017 was a breakthrough year for ASEAN ICT investment in terms of volume and scale.10
But ASEAN’s digital advancements are still mixed. For example, in five ASEAN countries, e-commerce represents under 3 percent or less than total retail sales, compared to China with 23 percent.11
There have been bright spots though. ASEAN members signed the ASEAN Agreement on E-Commerce in November, one of the first in the world to have such an agreement.12 However, converting agreements to tangibles like a regional electronic payment infrastructure, or enabling the cross-border movement of business, collaboration on cyber security to instil consumer and government confidence, and the development of market access regimes is crucial.
Perhaps the biggest challenge for ASEAN will come in the form of natural events rather than man-made ones.
South-east Asia is one of the most natural disaster-prone regions in the world with its impact wreaking social and economic havoc. This has only been exacerbated by climate change in recent years.
No wonder that its importance was illustrated by a ISEAS-Yusof Ishak Institute survey13 which found that threats from more intense weather events resulting from climate change were more of a concern for ASEAN government and business leaders than economic downturns, terrorism and military tensions.
In response, Thailand has flagged that deepening sustainable financing will be a focus for its chairmanship. Developing regional incentive frameworks and standards (such as subsidies on the legal and banking advisory costs linked to generating green loans and bonds) which will increase the cost effectiveness and, therefore, attractiveness of these financial instruments for corporates.
Weather aside, urbanization will mean that between 2015 and 2030 more than 100 million people region-wide are expected to migrate from the countryside into towns and cities across South-east Asia.14
So how do you deal with the strain on resources such as food, health, and infrastructure? A key thrust will be Thailand’s commitment to continue the Singapore government’s ASEAN Smart Cities Network which involves 27 pilot cities sharing best practices on how to build more future-ready and resilient cities.
Relatedly, and joining China’s Belt and Road Initiative, the US, Europe and Japan each announced funding initiatives in the second half of 2018 aimed at supporting the building of South-east Asia's infrastructure as part of their countries' respective sustainable development programmes15. Ensuring projects are transparent and ‘bankable’, and therefore the debt is sustainable, will be some of the biggest challenges for ASEAN countries
ASEAN’s past integration efforts have driven a lot of success for the region as evidenced by the level of geo-political and economic interest and investment that the region is receiving.
But ASEAN needs to lift the pace further in order to give it a larger and stronger political and economic voice amongst an increasingly fragmented and protectionist world.
It’s not going to be without distractions as the national elections of several countries including Malaysia’s back in 2018 and Thailand, Philippines and Indonesia in 2019 will challenge nations to keep their eye on the reform prize.
But businesses are crying out for tangible reform that will smoothen intra-regional trade, encourage international investment and create a sustainable future. Achieving these in 2019 will help the region both capitalize and shield itself from global events that are likely to play out over the coming years.
A contribution piece by Tony Cripps, Chief Executive Officer, HSBC Singapore, first published in Channel News Asia on 23 January 2019.
5 HSBC Global Research: ASEAN Perspectives, 28 August 2018
9 Master Plan on ASEAN Connectivity 2025, p.48.
13 State of Southeast Asia: 2019 survey, conducted by the ASEAN Studies Centre at ISEAS - Yusof Ishak Institute