23 January 2019

Two decades post Asian financial crisis, how Southeast Asia can keep up stunning growth

By Tony Cripps, Chief Executive Officer, HSBC Singapore

First published in Channel News Asia, 23 January, 2019

For ASEAN to continue to prosper in 2019 and beyond, they’ll need to drive harder for regional integration, says HSBC Singapore’s Tony Cripps.

SINGAPORE: Southeast Asia’s fortunes have risen tremendously since the Asian Financial Crisis – you only have to look at the gleaming malls and airports that have sprouted in Hanoi, Jakarta and Manila, or the increasingly modern manufacturing sites of Kuala Lumpur, to get a sense of the economic buzz that permeates the region.

But now is not the time to rest easy. On the contrary, policy makers across the region should step up reform efforts designed to boost the Association of Southeast Asian Nations (ASEAN)’s openness and integration.

This is crucial both to shield its economies and businesses from the challenging and tough global backdrop, and to allow them to capture opportunities going forward.

As ASEAN’s Chair in 2019, Thailand - under the theme of Advancing Sustainable Partnerships - has set a positive tone for the region highlighting several areas of focus.

OFFSETTING A GLOBAL TRADE SLOWDOWN

The policy shifts in the US and China and, its impact on trade, coincides with the cyclical slow-down in electronics trade - one of Southeast Asia’s most integral sectors, equivalent to 25 per cent of the region’s total exports in goods.

No one wins in a trade war but the impact on ASEAN economies can be partly offset if the much-discussed supply chain diversion to Southeast Asia, from the likes of China, US and Korea, materialises.

Supply chain diversion is happening in pockets across Vietnam, Malaysia and Thailand - given they bulk-export the same products impacted by the US-China tariffs - but increasing the ease in which goods and services flow across ASEAN will make the transition more widespread.

Some important progress has already been made including the imminent launch of the ASEAN-wide self-certification scheme which allows wing certified exporters to self-certify the origin of their exports.

The ASEAN Single Window that digitises intra-ASEAN trade documents launched across Indonesia, Malaysia, Thailand, Vietnam and Singapore in early 2018, had reduced the number of days it takes to clear cross-border goods flows to one day.

But more needs to be done to smoothen the flow of goods and services across ASEAN. This includes rolling out the window to all ASEAN countries, standardising the cost and time of customs clearance across Southeast Asia and enabling the freer movement of professionals across the region.

ATTRACTING MORE INBOUND INVESTMENT

ASEAN needs to attract more investment from outside the region.

While Foreign Direct Investment (FDI) into Southeast Asia has improved post-global financial crisis, the lion’s share has gone to Singapore, Vietnam and Malaysia - not to countries like Thailand, Indonesia or Philippines where supply chains are expected to grow in future.

The levers to attract investment to ASEAN more widely are clear: Reasonable production costs, stable institutions, improved technological innovation, lowering tariffs and import barriers for production inputs, and increasing labour skills.

As the Regional Comprehensive Economic Partnership, is getting closer to a conclusion, the recently-launched Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which came into force in late 2018, is likely to be extended to more countries.

Upgrading existing trade pacts with the likes of Hong Kong and China are also on the to-do list. Again, these have been earmarked by Thailand as key initiatives in developing ASEAN’s potential.

INVESTMENT IN DIGITAL ECONOMY

Improving digital connectivity, and investment into ASEAN’s digital space to support the region’s burgeoning consumer base, can both shore up the region's supply chain potential and increase the gravitational pull for multi-nationals and companies.

The Masterplan on ASEAN Connectivity 2025 has stated that between US$220 billion to US$650 billion in additional annual economic impact in ASEAN by 2030 could be injected into ASEAN through new technology and the Internet economy.

Its potential is clearly understood with US, Chinese and Japanese companies investing in information and communications technology (ICT) over the past two years. But ASEAN’s digital advancements are still mixed.

For example, in five ASEAN countries, e-commerce represents under 3 per cent or less of total retail sales, compared to China with 23 per cent.

There have been bright spots though. ASEAN members signed the ASEAN Agreement on E-Commerce in November, one of the first in the world to have such an agreement.

However, converting agreements to tangibles like a regional electronic payment infrastructure, or enabling the cross-border movement of business, collaboration on cyber security to instil consumer and government confidence, and the development of market access regimes‎ is crucial.

DRIVING A SUSTAINABLE ASEAN

Perhaps the biggest challenge for ASEAN will come in the form of natural disaster events. Southeast Asia is one of the most natural disaster-prone regions in the world that wreaks social and economic havoc. This has only been exacerbated by climate change in recent years.

An ISEAS-Yusof Ishak Institute survey found that threats from more intense weather events resulting from climate change were more concerning for ASEAN government and business leaders than economic downturns, terrorism and military tensions.

In response, Thailand has flagged that deepening sustainable financing will be a focus for its chairmanship.

Developing regional incentive frameworks and standards, such as subsidies on the legal and banking advisory costs linked to generating green loans and bonds, will increase the cost-effectiveness and attractiveness of these financial instruments for corporates.

Weather aside, urbanisation will mean that between 2015 and 2030, more than 100 million people region-wide are expected to migrate from the countryside into towns and cities across Southeast Asia.

So how will Southeast Asia deal with the strain on resources such as food, health, and infrastructure? A key thrust will be Thailand’s commitment to continue the ASEAN Smart Cities Network, started by the Singapore Government, which involves 26 pilot cities sharing best practices on how to build more future-ready and resilient cities.

What we should expect to see is how Thailand can start concretising the ASEAN Smart Cities Network – launched in April 2018 – from a concept programme to now identifying and scoping specific projects across the pilot cities.

The US, Europe and Japan each has also announced funding initiatives in the second half of 2018 aimed at supporting the building of Southeast Asia's infrastructure as part of their countries' respective sustainable development programmes. Ensuring projects are transparent and “bankable”, and therefore the debt is sustainable, will be some of the biggest challenges for ASEAN countries.

WHERE TO GO FROM HERE?

ASEAN’s past integration efforts have driven a lot of success for the region as evidenced by the level of geopolitical and economic interest and investment that the region is receiving. But ASEAN needs to quicken the pace in order to give it a larger and stronger political and economic voice amid an increasingly fragmented and protectionist world.

It’s not going to be without distractions as the upcoming national elections in Thailand, Philippines and Indonesia this year will challenge nations to keep their eye on the reform prize.

But businesses are crying out for tangible reform that will smoothen intra-regional trade, encourage international investment and create a sustainable future.

Achieving these in 2019 will help the region both capitalise and shield itself from global events that are likely to play out over the coming years.

Disclaimer

This article was prepared by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch (“HSBC”) and published in Channel News Asia on 23 January, 2019.

The article is intended for those who access it from within Singapore and is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.

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