Asean's future is bright and it will benefit further from emerging themes related to the consumption economy, says Standard Chartered.
The 10-country region will remain a major recipient of global foreign direct investment (FDI) as its economies are starting to recover from the protracted coronavirus pandemic, thanks mainly to consumption-led growth and an expanding middle class, according to the UK-based financial services group. In addition, pent-up tourism demand could benefit the region's economy as countries open up to international visitors.
To stimulate the economy and further attract foreign investment, the region will, however, need to expand on the areas from which it seeks growth, executives say.
Benjamin Hung, CEO for Asia of Standard Chartered, said Asean has gone through a difficult period, particularly in the second and third quarters of this year when countries imposed new Covid lockdowns, leading to a disruption of manufacturing and supply chains.
"But we are gradually seeing things improving and in fact accelerating across a number of markets," he said at a recent media roundtable held by the bank. "Notwithstanding the challenging period, I personally see Asean at a tipping point of a significant reset and there are a few significant trends that would be beneficial for Asean over the course of the next five to 10 years."
The emerging trends poised to drive further growth, he said, revolve around geopolitics, middle-class consumption power, the rise of digitisation, and an increased focus on sustainability.
"From a geopolitics standpoint … what is interesting is that China is very keen to develop closer ties and a more intimate supply chain relationship with Asean as a bloc," noted Mr Hung.
"The US is also very keen to develop Asean as an alternative in terms of the diversification of supply chains. Likewise for the European markets and within Asia, Japan, South Korea and China are very interested in investing in Asean."
Resource-rich Asean boasts a young and growing population of 660 million as well as a rising middle class. With a GDP of US$3 trillion, it is the third largest market in Asia after China and Japan. Average GDP per capita in the Asean-10 is around $5,000, and the figure is close to $5,500 for the Asean-6 markets.
"At this level, you are seeing more exponential growth in terms of consumption per capita going forward and that would be increasingly a driving force for GDP growth. We shouldn't underestimate that power to drive growth," said Mr Hung.
More multinational companies (MNCs), seeking to take greater advantage of the potential of Asean markets, are exploring a China-Plus 1 strategy in the region.
"In the past, Asean has been more of a manufacturing hub for the consumption market in the West," said Mr Hung. "Going forward, I think increasingly we will see Asean manufacturing for consumption by the East."
According to Mr Hung, despite the impact of Covid, Asean's share of global FDI rose to 14% last year from 12% in 2019. "That is a reflection of how the world sees Asean as the future and as a prospect. Notwithstanding new Covid variants or near-term challenges, we see a very positive prospect and progress in Asean."
Echoing Mr Hung's insights, Kingshuk Ghoshal, Standard Chartered's head of global subsidiaries in Singapore and Asean, said a comprehensive series of surveys and discussions held by the bank with companies coming to Asean found common themes around the consumption economy and the growing middle class.
"Lots of western MNCs want to have their production centre close to the consumption hubs, which is what Asean is emerging to be," he said. "Rather than having a long supply chain that can be disrupted, this is the time when our clients are looking at rebalancing."
Digitisation is also changing the landscape significantly in terms of how people consume and pay for things. The gross merchandise value of e-commerce in the region is expected to triple to $300 billion over the next five to six years.
Over 60% of the Asean population is in the middle class, and more than 400 million of them are internet users. "That propels a very compelling e-commerce or digital economy proposition," said Mr Ghoshal.
"In the past, Asean has been more of a manufacturing hub for the consumption market in the West. Going forward, I think increasingly we will see Asean manufacturing for consumption by the East," says Benjamin Hung, Standard Chartered CEO for Asia.
ESG INVESTMENTS
Growing consumption has led to higher demand for energy and the region, but consumers and governments alike realise that the energy of the future needs to be sustainable. This is attracting more investments related to ESG (environmental, social and governance) themes.
"Now is actually the moment for sustainable and renewable energy growth," said Mr Ghoshal. "Asean governments have come together as they have committed to making at least 23% of the energy mix from renewables by 2025. That's significant, considering much of this will come from new investments in this area."
Indonesia, for example, is seeing strong interest from Standard Chartered clients in renewable energy projects and other projects related to the transition to net-zero carbon emissions.
For example, the bank has partnered with Indonesia's PMSE to co-finance the 145-megawatt Cirata floating solar photovoltaic power project in West Java. The largest of its kind in Southeast Asia, Cirata is set to begin commercial operation in the fourth quarter of 2021, providing enough electricity to power 50,000 homes, offsetting 214,000 tonnes of CO2 emissions, and creating up to 800 jobs.
Mr Hung said Asean continues to be one of the bank's key revenue contributors in Asia. "Increased intra-regional connectivity through capital flows, integration of production networks, as well as vertical or horizontal integration of supply chains will help strengthen Asean's role in the global supply chain shift," he said.
However, connectivity must also be strengthened between the region and the rest of the world. "Asean must continue to engage in free trade agreements and deepen its engagements with global trading partners."
The signing of the Regional Comprehensive Economic Partnership (RCEP) is a positive statement of Asean's willingness to maintain open trade flows. Greater coordination and enhanced connectivity in areas from green infrastructure to digitisation will bolster regional growth for the long term.
"Lots of western MNCs want to have their production centre close to the consumption hubs, which is what Asean is emerging to be," says Kingshuk Ghoshal, head of global subsidiaries in Singapore and Asean for Standard Chartered.
MULTILATERAL TIES
"A number of our clients from various corridors, such as US-Asean, Europe-Asean, China-Asean, Intra-Asean, are most keen to have access to Asean on the back of the various free trade agreements and trade treaties that are being formalised," Mr Hung told Asia Focus.
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will continue to be beneficial for trade with participating corridors, he added.
"We are seeing clients from different trade corridors prioritising selective investment sectors. US tech companies, for instance, are investing in cloud services and data centres, medical devices and pharma, while European companies are investing into sustainable projects, specialty chemicals."
Such multilateral partnerships are also expected to bring complementary benefits in terms of sector skills and resources that will ultimately lead to a more equitable distribution of economic growth across Asean.
For example, electric vehicle (EV) manufacturers could tap the diverse yet complementary comparative advantages in the auto sectors of Thailand, Indonesia, Vietnam and Malaysia to invest, produce and source for their home markets, thereby generating jobs, skills and trade, he said. Life sciences, pharmaceuticals and electronics are also among potential growth areas for Asean.
Mr Hung also noted that Thailand's decision to reopen to international tourists starting on Nov 1 is a "good start".
"I think what Thailand is doing is definitely right. That direction is clear. The whole world has had such a significant long period of lockdowns. There is pent-up demand for travel."
ENGINE OF GROWTH
With tourism contributing 15% to Thailand's GDP, the government is preparing to reopen Bangkok and other key destinations such as Chiang Mai, Pattaya, Hua Hin and Phetchaburi to support growth into 2022.
"The Thai economy will struggle to recover without an improvement in the tourism sector, in our view," Standard Chartered said in an Oct 8 research report. The Ministry of Tourism and Sports, it added, expects 15 million visitors next year, compared with the pre-Covid total of 40 million in 2019.
"While a clearer tourism rebound is likely to emerge this quarter, we expect the sector to take at least three years to recover to pre-Covid levels," the report said.
The Ministry of Public Health expects new Covid cases to decline to about 5,000 per day before the end of October, from more than 23,000 at the peak in mid-August, although it remains concerned that daily infections could rise again later if there are consequences from further relaxation of containment measures in October.
While the near-term outlook remains challenging, Standard Chartered foresees bright prospects for the Asean economy in the medium term.
Asean is capable of growth almost twice that of the global economy in the medium term. Mr Hung said. "From that perspective, I think Asean will still be an engine of growth," he concluded.