Like their peers all over the world, Southeast Asian nations have seen their economies hammered by the prolonged Covid-19 outbreak. Growth forecasts continue to be revised downward as exports plunge due to falling demand and supply chain disruption, while tourism income slumps as international travel slows to a trickle.
Foreign direct investment (FDI), for years a major engine of growth for the region, has also declined, reflecting global pressure to diversify production locations, domestic lockdowns and production disruptions. Even Vietnam, which has reported only 412 cases of Covid-19 and no deaths, saw a 4.9% year-on-year decline in FDI to US$8.65 billion in the first six months of 2020. FDI pledges -- indicating future disbursements -- dropped 15.1% to $15.67 billion.
Foreign-invested companies account for 70% of Vietnam's exports. Investors from Singapore were the top source of pledged FDI in the first half, followed by Thailand and China.
Indonesia attracted 97.6 trillion rupiah ($6.7 billion) in FDI in the second quarter, excluding banking and oil and gas. That's a 6.9% annualised drop in rupiah terms and a 3% fall in dollar terms, according to the state investment board (BKPM). Southeast Asia's largest economy also recorded a 9.2% fall in FDI in the first quarter as investors postponed decisions.
The declines aren't limited to Southeast Asia. China, which accounted for 29% of the region's investment inflows last year, saw 13% less inbound investment in the first quarter, excluding the financial sector. according to the annual World Investment Report from the United Nations.
FDI to developing economies in Asia is projected to fall by 30-45% this year because the region's status as the world's factory makes it particularly vulnerable to disruptions from the pandemic.
Greenfield investments, which include factories, research centres and offices that a company builds when it enters a foreign country, in developing Asia plunged 37% from January to March from a year earlier. Cross-border mergers and acquisitions in April, albeit showing a rebound from an apparent trough in March, are 35% below the monthly average for 2019.
Greenfield investments in automotive production and electronics announced in Asean in the first quarter of 2020 fell by 67% and 36% respectively. Manufacturing supply problems have also been a problem. Factories in Indonesia, Thailand and Vietnam source between 40% and 60% of their electronic parts and components from China, according to the UN report.
The sharp drops follow a year of record investment into China and Southeast Asia in 2019, although the Asia total slid 5% due to a dramatic fall in unrest-plagued Hong Kong and in South Korea, the result of a trade dispute with Japan.
The UN body projects global cross-border investment might not recover until 2022. It also warned that trends accelerated by Covid-19 shocks, such as reshoring in pursuit of supply chain autonomy, as well as a "policy shift toward more economic nationalism", will have "far-reaching consequences" for international production for the next decade.
But what bothers me is a statement by BKPM chief Bahlil Lahadalia, who said Indonesia needs to reconsider the benefits of being part of the Asean Economic Community (AEC), citing the decline in FDI for a second straight quarter.
"We must begin to rethink whether the Asean Economic Community has benefitted Indonesia," he said last Wednesday, noting this was a rational debate and noting Britain's decision to leave the European Union.
FDI from Singapore, the top source in Indonesia in the second quarter, held up despite the city-state posting a 41% quarterly drop in its GDP. Mr Bahlil said that showed it was a merely a hub for investment from elsewhere.
I would suggest that Indonesia look at what is happening not just in Asean but also across Asia as direct investment is down nearly everywhere. In Vietnam, which was among the first countries to contain Covid and lift virtually all domestic restrictions despite the long border and extensive trade with China, FDI has also dropped and economic weakness persists.
Meanwhile, President Joko Widodo has said the Covid outbreak, with 93,657 cases reported so far, is not expected to peak in Indonesia until August or September. This and other domestic factors has no doubt prompted the drop in investment flows.
At a time when the economic and FDI outlook is shaky, regional cooperation should be strengthened not reduced. Questioning the benefits of a regional grouping while other countries are seeking to join regional and multilateral agreements seems to be a short-sighted view. I hope such talk is not taken seriously by the leaders of Indonesia or any Asean state; otherwise what we have achieved so far will be wasted.