22 February 2021

Reigniting drivers of growth key to ASEAN’s economic resilience

Pivoting towards the Asian global growth engine is one of the major world transitions of this century. And a strong contributor has been the economic emergence of ASEAN.

Southeast Asia’s trade and economic integration, relatively lower labour costs, and the growing wealth amongst its 650 million-strong population has made it a key destination for many multinational companies (MNCs) that are seeking new opportunities to produce, invest and sell.

Despite the economic impact from Covid-19, the region’s medium-term prospects, opportunities and global relevance remain intact, and so should its allure to MNCs.

In fact, over the past year, export flows across electronics, pharmaceuticals, commodities, and mining have continued at pace, ASEAN’s supply chains have remained resilient, and Foreign Direct Investment (FDI) has continued.

But the region is not without its challenges.

Vaccinations will not be substantially rolled out across the region until 2022, which will stunt its consumption growth as lockdowns continue. It will also see increasing competition for private investment from other emerging economies, like India.

To continue its growth trajectory, ASEAN needs to focus on reigniting its tried and tested drivers of growth: exports, infrastructure development and foreign direct investment.

This will require the ASEAN markets to individually and collectively pull several policy reform levers.

Utilisation of free trade agreements to build more resilient exports and supply chains
The region’s global supply chains – spanning electronics, automobiles, textiles and garments – have become deeply interwoven with the global economy because of ASEAN’s lower cost labour and the region’s ability to remove trade and investment tariffs between the association’s 10 member states. This has led to many MNCs opening production bases across the region.

While traditional tariffs have eroded, non-tariff barriers have proliferated in their place. In fact, the EU-ASEAN Business Council estimates that there are now some 6,000 separate non-tariff barriers to trade across the region.1

Ratifying the recently signed ASEAN-led Regional Comprehensive Economic Partnership (RCEP) agreement can help to reduce trade costs for businesses by seeking to eliminate many of these barriers within the region, whilst simultaneously opening the region up to more trade activity across some of its major trade partners, like China. In fact, ratifying RCEP will further cement the China-ASEAN trade corridor which became the most important trade axis globally in 2020, overtaking the EU-China and US-China trade corridors2.

Examples of non-tariff barriers that have been addressed include increasing the minimum threshold for goods that require a Certificate of Origin (reducing red-tape for businesses already under pressure), automating customs clearance processes, and removing legal requirements for having physical documentation as part of the process for trade activity.

FDI reform to support infrastructure, manufacturing and export growth
Nearly all ASEAN markets have announced specific nation-building infrastructure projects, in the past six months, in a quest to stimulate economic activity.

But government budgets, already under strain from fiscal relief measures aimed at protecting jobs and small businesses from the economic fallout of Covid-19, will be hard pressed to pay for these projects.

This will make FDI even more important in years to come. Historically, strong exports typically attract investment across other areas like manufacturing production and transport and that has been the case for ASEAN, which has been able to attract a growing share of the FDI pie.

But against a backdrop of shrinking global FDI supply, and rising competition from the likes of India - who is seeking to muscle in on ASEAN’s electronics assembly - ASEAN markets will need reforms to its investment frameworks to make it easier for MNCs to invest across the respective markets.

Examples include revisions of negative investment lists, tax incentives for certain sectors, and processes to speed up investment approvals. Many of these changes are sitting within the respective countries’ legislatures, but there is a very strong impetus for these bills to be converted into reality.

Shifting the skills and availability of the labour market
According to the World Bank, ASEAN has a labour force consisting of approximately 350 million people but a lot of it is underutilised due to factors like informal sector participation and low female participation, which impacts productivity. This can be masked in times of economic vibrancy, but the cracks emerge in down cycles, like we’re seeing now.

This will be a challenge for several ASEAN markets particularly as their in-country labour costs begin to rise as more demand and commercial activity begins to pivot to the region.

To maintain competitiveness, labour reforms are needed. These include easing labour laws and restrictions, transitioning labour to more formal and productive sectors, developing industry-relevant skills programmes, encouraging greater immigration to supplement the domestic labour force and investing in enabling more female participation in the workforce.

Improving the free cross border flow of digital payments
ASEAN’s growing population has more people coming online than any other region in the world, with eCommerce forecasted to grow to US$88 billion by 2025.

We expect to see impressive growth in digital payments due to a combination of increased access to banks, rising smartphone penetration, and growing merchant acceptance of QR code payments.

But until the region can agree on a common set of standards for cross-border data management and digital commerce, that potential is likely to remain unrealised, and threats, like cybercrime, will also go unchecked. Indeed, Bain Capital estimates that if ASEAN markets successfully harness eCommerce potential, it could result in a GDP uplift of US$1 trillion by 2025.

To grasp the opportunities that digital presents, already-agreed frameworks like the ‘ASEAN Digital Integration Framework Action Plan’ and the ‘ASEAN Framework on Digital Data Governance’ need to be fully implemented in order to integrate the currently disconnected rules and regulations of member nations.

The frameworks are there – but execution is needed
Covid-19 may have put a short-term brake on Asia’s growth story, but the long-term trajectory of increasing prosperity remains unchanged. The fundamental building blocks of economic success are not only still intact, in many ways they have been strengthened by the pandemic’s push to reshape supply chains and shift to digital.

But if Southeast Asia is to reap the full benefits and opportunities for growth and international investment, it will have to recognise and address some of the challenges that go alongside them including working together to simplify trade; harmonising standards on data handling and transfer; and the revisiting policies linked to labour and FDI.

A contribution piece by Priya Kini, Head of Global Banking, HSBC Singapore, published in The Straits Times on 22nd February 2021.


2 HSBC Global Research, Fred Neumann: Asia economic outlook