The 10 Asean countries could have a combined economic might of up to $150 trillion within two decades, and governments and businesses need to do everything possible to harness the benefits from this growth, experts say.
The Q Sentral office building, left to right, and St Regis Hotel & Residencies stand under construction in Kuala Lumpur, Malaysia, on Wednesday, Aug. 27, 2014. Malaysia's ringgit climbed to a 10-month high on speculation the pace of economic growth and prospects of another interest-rate increase will spur inflows. Photographer: Charles Pertwee/Bloomberg
Asean today has a combined gross domestic product (GDP) of about $2.5 trillion but that figure could skyrocket thanks to the potentially explosive growth that can be expected from Indonesia.
"Over the next 20-odd years the economic pie of Asean is going to be anywhere between $120 trillion and $150 trillion and about 60% of this is going to be from Indonesia alone," said Gita Wirjawan, a former Indonesian trade minister.
The consumer market alone in Southeast Asia by around 2035 would be worth $60 trillion, underlining the great potential for the future, he added.
The cities of Southeast Asia account for more than 65% of the region's GDP today. More than 90 million people are expected to move to urban areas by 2030, generating about 76% of overall GDP, said Oliver Tonby, the managing partner for Southeast Asia for McKinsey & Company.
This new wave of urbanisation will support the continued growth of the consuming class, which could double to 263 million households by 2030, a McKinsey study says.
The rise of the urban population, said Mr Tonby, would create huge demand for infrastructure, with some $7 trillion needing to be spent by 2030.
"If you do not have the infrastructure to support this movement of people, it could mean that their real wages would likely go down," Mr Gita added.
But building quality infrastructure is easier said than done in a region where massive sums of money are lost to corruption every year, agreed panelists at the Bloomberg Asean Business Summit held in Bangkok.
"Flushing out corrupt politicians is something that is being undertaken by the reform council," said MR Pridiyathorn Devakula, deputy prime minister of Thailand, outlining his government's plans to get the economy growing again.
MR Pridiyathorn said Thailand could become the regional trading hub for Asean, if businesses take advantage of new regional operating headquarters incentives approved by the cabinet. The move is seen as especially timely since the formation of the Asean Economic Community (AEC) is just one year away.
Under the new plan, companies that set up regional operating headquarters in Thailand will be exempt from tax on dividends and capital gains from investments in overseas subsidiaries. Income received from providing services to subsidiaries will also be tax-exempt, as will profits on trading from foreign sources to their foreign destinations.
FOUR OTHERS TO WATCH
MR Pridiyathorn encouraged trading companies to set up shop in Thailand as it offered the best potential for access to the rising CLMV market — Cambodia, Laos, Myanmar and Vietnam.
The CLMV group, he said, was most likely to show the strongest growth in Southeast Asia in the years ahead, possibly second only to that of Indonesia.
The planned infrastructure spending by Thailand, in dual-track rail and other projects, would greatly improve connections with these countries, MR Pridiyathorn said.
"What I think will be particularly interesting in the run-up to the AEC and beyond the year 2015 is the amount of intra-regional trade among Cambodia, Laos, Myanmar and Vietnam. These emerging economies on the continent are growing at a much faster pace than ever before, thanks to the much improved land connectivity both between the CLMV and, through Thailand, with the rest of Asean," he said.
This, he added, would greatly narrow the developmental divide between advanced and emerging economies in Asean.
Closer economic integration under the AEC will stimulate intra-Asean trade, which has already grown quite substantially: from $167 billion in 2000 to $519 billion in 2010 and $608 billion last year. A completely tariff-free AEC from the end of 2015, along with improved customs procedures and other reforms, will further fuel growth of intra-regional trade, said MR Pridiyathorn.
More regional trade will lead to more cross-border investment, an area in which a number of Thai companies are already active. They include Siam Cement Group (cement and ceramic tiles), PTT (natural gas), Pranda Group (jewellery), Amata Corp (industrial estates), Banpu (coal and power), Srithai (plastic and melamine), TCC (beverages and property), Dusit Thani and Centara (hotels), Advance Steel (water tanks) many commercial banks, motorcycle leasing business, and many others.
"Clearly, this is a win-win situation for both sending and receiving countries of such cross-border investment. Investors will gain greater access to growing local markets as well as the opportunity to take full advantage of inexpensive labour," MR Pridiyathorn said.
Regional capitals such as Kuala Lumpur will attract many of the 90 million people who will move to cities across Southeast Asia by 2030. That movement is fuelling demand for infrastructure investments that could reach $7 trillion.
ANOTHER 'BRIC' IN THE WALL
Although Southeast Asia has huge potential for growth, most businessmen and experts stressed there were inherent problems in the region that need to be tackled.
"There is always a question if any of the Asean members would make it to the BRIC level in the future and the response is that we have our own BRIC here but it is not the usual meaning [Brazil, Russia, Indonesia and China] but a new one which is Bureaucracy, Regulations, Intervention and Corruption," said Curtis Chin, an Asia Fellow and trustee of the Milken Institute.
His comments were echoed by many other participants who bemoaned ever-changing regulations, meddling by politicians, and the vast scale of outright greed on the part of officials.
"There is an elephant in the room in Europe and in Asean, and it [tests the] ability of the region to come up with a coherent regulatory framework to allow people to invest," Dr Francis Yeoh, the multi-billionaire managing director of YTL Group, a Malaysian infrastructure developer.
"The private sector has the funds but regulations need to be transparent and coherent, and you cannot change your mind halfway through an investment in infrastructure," he added.
'WEDDING PARTY'
Everyone with a stake in Asean's success is now counting down to the official formation of the AEC, but like any marriage, this integration exercise will have its ups and downs.
"December 31, 2015 is the official wedding party, the start of a marriage that is going to last for a long, long time," said Michael Zink, head of Asean operations with Citicorp. But no one expects a miracle to occur overnight.
There is clearly potential for the region's capital markets to grow, he noted. The capitalisation of stock markets in Asean was about $500 billion in the early 2000s and is now around $2.5 trillion. New potential has arisen with the creation of the Asean Trading Link involving the stock exchanges in Singapore, Malaysia and Thailand, with the Philippines likely to join soon.
Although the region's economies are valued at around $2.5 trillion, intra-regional trade is relatively low at $1 trillion. A good rule of thumb for intra-regional trade is that it should be more or less equal to GDP.
Increasing intra-regional trade is mutually beneficial for trading partners, while more cross-border investment brings much-needed private capital, technical expertise and industrial development into recipient countries. MR Pridiyathorn said that as a consequence, emerging economies experience much faster growth and this is healthy for the region as a whole.
Economic integration without a common currency is a practical way to link member countries with different levels of economic development, he added.
But a lot of work remains to be done if the region is to fulfill its rich promise.
"Of course, there will be more that we still need to do to advance Asean's community-building process and the promising road ahead will be far from easy," MR Pridiyathorn added.