The writer is senior economist for emerging Asia at Natixis Corporate & Investment Banking
From Joe Biden to Xi Jinping, global leaders are being drawn to south-east Asia for three large international events: the G20 summit in Indonesia, the Asean meeting in Cambodia and the Apec gathering in Thailand.
Pressing global issues such as climate change and inflation are on the agenda but building ties to south-east Asia is in itself very much a prize for competing global superpowers and even middle ranking ones such as South Korea and Australia.
South-east Asia is the diplomatic and business friend that everyone needs. This is not just to diversify supply chains, but also to seek out growth opportunities as hurdles that range from tariffs to investment curbs affect business between the US and China. Investors should take note and follow suit.
The 10-member, 680mn-people association together accounts for 3.4 per cent of global gross domestic product and 7.7 per cent of global export share.
The six largest economies in Asean — Indonesia, Thailand, the Philippines, Singapore, Malaysia and Vietnam — are far from fragile from shocks such as the global energy crisis, a higher dollar and weakening Chinese demand. They are seeing strong economic growth and foreign direct investment inflows are surging in a difficult global environment.
Singapore is gaining ground in financial services and high-tech, Vietnam and Malaysia are receiving more FDI inflows into manufacturing, and Indonesia is receiving record-high investments to tap into its mineral resources, especially nickel.
Beyond greenfield investment, south-east Asia was the largest recipient of completed mergers and acquisitions in Asia in the first half of 2022, receiving 56 per cent of total inbound flows. Inbound transactions in Indonesia alone were two times greater than for mainland China. Interestingly, it is not just the west that is deploying more capital to Asean, but also China, which has reduced offshore M&A deals elsewhere.
With Cambodia’s GDP per capita as low as $1,612 in 2021 and Singapore as high as $64,840, the region’s diversity in not just economic development and capital markets but also governance, language, culture and natural resources have traditionally been seen as a weakness. But Asean’s humility not just in respecting each other’s sovereignty but also in global affairs has become an advantage in an age of global power competition.
Asean is also receiving geopolitical support to expand market access. Vietnam’s signing of a free trade agreement with the EU in 2019 catapulted the country’s attractiveness further — not just for EU companies but also Chinese groups wanting access to reduced tariffs. Singapore also has an EU FTA and others are under negotiation with countries such as Thailand. But it is not just the EU. From South Korea to Japan and the US to China, countries are increasing exposure to Asean.
That is not to say Asean itself cannot be a source of risk for investors, from messy domestic politics in Thailand and Malaysia to Covid-19 lockdowns in the third quarter of 2021 that shook global footwear, electronic and semiconductor supply chains. There are also longstanding challenges such as the South China Sea, the protection of natural resources along the Mekong River and the deteriorating situation in Myanmar.
However, the region’s resilience is improving. The Asian financial crisis and market turmoil over a rise in US interest rates in 2013 taught Asean to beef up its defences. Exposure to foreign ownership of portfolio flows has largely been reduced, especially by Indonesia. The country is now emerging as the most resilient economy in Asia-Pacific, facing global shocks with one of the best currency and equity performances in the year to date.
Vietnam, having learnt lessons from its 2011 banking crisis, is reining in real estate excesses. While this will probably lead to a downturn of the sector, it will boost sustainability down the road. Thailand is trying to diversify its economy away from tourism.
Major Asean economies are now led by more competent technocrats in finance ministries and central banks, helping the region navigate this present crisis better than other emerging markets. Yet, despite this new resilience, the aftershock of higher interest rates, weaker global demand and the energy crisis will still push 2023 growth rates down from higher levels in 2022.
Nonetheless, even with a cyclical downturn expected in 2023, south-east Asia is emerging as both a winner and a prize in the geopolitical contest for investment and trade.