Nomura

ASEAN: One body, many faces

  • The Association of Southeast Asian Nations (ASEAN) is on the radar of global investors and multinationals, impressed by its fast-expanding economies and diverse growth engines, but there are misconceptions about the region's homogenity
  • Whatever the investment sector, government and policy trends will have a bearing on how ASEAN economies perform both individually and as a group

ASEAN is on the radar of global investors and multinationals, impressed by its fast-expanding economies and diverse growth engines. Beyond the unified front, what challenges does this group face?

ASEAN is on the radar of global investors and multinationals, impressed by its fast-expanding economies and diverse growth engines. Beyond the unified front, what challenges does this group face?

As China’s labour-intensive manufacturing industries fan out across the wider region and local firms flex their muscles in capital-light industries such as ride-hailing and e-commerce, a significant number of blue-chip companies ranging from Nike to Intel have moved into ASEAN. But those yet to set foot in this promising region often suffer from two misconceptions.

The first is their tendency to view ASEAN as a homogenous group. "One Vision, One Identity, One Community" might be the organisation’s motto, but the reality is a fragmented and diverse set of nations. "Some investors and the media portray the region as a group of countries that are quite similar in terms of their fundamentals and growth prospects, but the reality is that it’s a very diverse group," says Euben Paracuelles, Nomura's senior economist for Southeast Asia.

“On the one hand you have small, open countries like Singapore and Malaysia,” he says, “and on other side you have the likes of Indonesia, which is populous and more of a classic ‘emerging market’, where politics and economics are not always in sync. So you have to get to the details on what policymakers are thinking and what reforms they have in mind. Thinking of them as one group and investment class or destination is not going to be helpful.”

Income is an obvious area of difference: it ranges from a first-world salary of US$51,880 a year in Singapore to just US$1,190 in Myanmar. But other forms of diversity also matter. “One key feature of Southeast Asian markets is the high level of fragmentation, not just geographically and culturally but also in terms of language, economic development, access to infrastructure, and income demographics,” says a spokesperson for Grab, the ride-hailing app which—in a sign of the rising power of home-grown firms in the digital age—recently bought Uber’s Southeast Asia business. “We understand Southeast Asia—its challenges, its opportunities, its problems, its regulatory landscape—which puts us in a better position to come up with solutions that can have a huge impact on people’s daily lives.”

The second common misconception concerns ASEAN countries’ level of integration with each other, says Mr Paracuelles. "There is a view that because it has been a group for 50 years, ASEAN is well integrated, but only about 25% of ASEAN's total trade goes to the region," he says.

Growth potential

Integration would help countries leverage their differences, enabling wealthy, ageing populations to import labour and allowing capital-rich economies to find new sources of growth in emerging ones. Members have sought to boost commerce over the years, signing the Investment Guarantee Agreement (1987), adopting the ASEAN Financial Integration Framework (2011) and formally establishing the ASEAN Economic Community in 2015. More work is need tackle trade costs; ASEAN economic ministers have targeted a 10% reduction by 2020, and China’s much-publicised US$900bn Belt and Road Initiative, an infrastructure investment splurge, could be a game-changer.

European and US investors have a footprint in the region, but their share of total regional investment spending is falling behind Asian capital, according to Mr Paracuelles. They have long liked Singapore, a world-class business hub with efficient infrastructure that invests in intensive, future-oriented industries. Biopolis, an international R&D centre, has attracted global players including Procter & Gamble, Merck and Novartis with its facilities and its expertise networks. “Biopolis offers access to a community of leading public and private biomedical research institutes and organisations,” says Cheong Wee Lee, director of the biomedical and electronics cluster. “The shared facilities and purpose-built spaces offer companies a ‘plug and play’ experience, while the co-location of private and public organisations encourages collaborations and tapping of synergies to further their business growth.”

Some have gone beyond Singapore, mostly in manufacturing-specific investments. California-headquartered Intel opened a US$1bn chip testing and assembly factory in Vietnam in 2010, and Nike’s top two locations globally, in terms of workforce numbers, are Vietnam and Indonesia. The region’s rapid growth means there are plenty of other countries and sectors that deserve investors’ attention. The Philippines is riding a two-decade boom, with per-capita gross national income tripling from US$1,220 in 2000 to US$3,580 in 2016 and with GDP growth now in the 6-7% band, giving the country a promising combination of high growth, infrastructure build-out, a young population and widely spoken English.

Even manufacturing investment destinations like Vietnam and Indonesia have many sources of momentum. Vietnam’s stockmarket is one of the best-performing in the world as investors bet on the country's "mini-China" model of state-guided development. Indonesia’s growth, in the 5% range, might appear modest but is coming from productive sources. “This is from infrastructure building, which ultimately leads to acceleration of growth via productivity improvements,” says Mr Paracuelles. “They are building the foundations to raise their medium-term potential growth.”

Among the newer sectors attracting investment, the digital platforms industry ranks high. Burned by past failures, notably in missing the Chinese e-commerce wave, Western investors don’t want to miss the chance to benefit from future growth in the ASEAN digital economy, with the region's population forecast to surpass 700m by 2030. “These are sectors that are fast-growing and serving a need the government would find impossible to provide [for],” says Mr Paracuelles.

Some Western firms are opting to back bright national businesses directly through venture capital and private equity. Alphabet, Google’s parent company, has put money into Indonesian ride-hailing and online payments app Go-Jek, joining existing investors KKR and Warburg Pincus.

Underlying circumstances

Whatever the investment sector, government and policy trends will have a bearing on how ASEAN economies perform both individually and as a group. Of late, there has been a shift towards relaxing foreign-ownership rules and increasing the availability of guarantees for big-ticket investments like infrastructure—a crucial sector to unify the region that can deliver returns for investors of 10-15% in the ASEAN region, according to Mr Paracuelles.

But this is a still a region that can be hit by external headwinds, like the capital outflows that occurred recently when US Treasury yields spiked. Domestic challenges include population ageing, notably in Singapore, Thailand and Vietnam; this lowers productivity and brings fiscal costs as these countries try to build future-proof social security systems. And political volatility is widespread. Malaysia’s recent shock election—with a turnout of 76%—will change control of parliament for the first time. Myanmar enjoyed a boom in foreign direct investment around the time of its landmark election in November 2015, with FDI surpassing US$9bn year on year from March 2015-2016, but since then it has been volatile and fallen overall, with the country's sunny emergence from military rule darkened by ethnic conflict and the Rohingya migrant crisis.

“In the end, in this region as elsewhere, the key to political stability will be forming institutions that are stronger than individual leaders,” says Mr Paracuelles.

Regional diplomatic spats—notably over the disputed territories of the South China Sea—play their role too. ASEAN members are differently affected by these tensions. Some have claims on the territories (China, Vietnam, the Philippines, Taiwan, Malaysia and Brunei), and those without claims have economic or political relationships with those that do, which complicates attempts to solve the problem in regional forums.

It seems that unity in ASEAN, as in Europe, is easier to declare than to achieve.

Produced by (E) BrandConnect, a commercial division of The Economist Group, which operates separately from the editorial staffs of The Economist and The Economist Intelligence Unit. Neither (E) BrandConnect nor its affiliates accept any responsibility or liability for reliance by any party on this content.

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