ASEAN’s Strength in Numbers

Market watchers remain fixated on the slow descent to a more sustainable growth rate in China. The country’s economic ascension through the 1990s and 2000s and the strong stimulus package that bolstered growth to stratospheric levels after the 2008-09 global crisis were once-in-a-lifetime gifts to the global economy and those corporations leveraged off the global economic and trade cycle. Two reasons suggest concerns with a slowing China are overstated.  

First, China is now a $10 trillion economy. Even if China were to grow at just 5%, it would still be adding $500 billion to the global economy – roughly the size of Norway or Argentina’s GDP – each year. Do not lose sight of the fact that though China is slowing, it is now a truly leviathan economy.

Second, we believe that just as China is slowing, the ASEAN economies are building the base for a more interconnected and productive economic union that will attract foreign direct investment (FDI) and see the ASEAN emerge as the new ‘Factory Asia’ in the next decade.

In December 2015, the 10 economies of the ASEAN will form the ASEAN Economic Community (AEC), the most ambitious milestone to date in establishing a true free-trade area across Southeast Asia.

The prognosis for the AEC is good. The youthful economies of Southeast Asia will become the key drivers of Asian growth. By 2030, more than half of the 650 million people in Southeast Asia will be under the age of 30, many of whom will be part of an emerging middle class with high rates of consumption. Beyond its role as the world’s emerging consumer, we also believe Southeast Asia will take up China’s mantle as the ‘world’s factory’ over the next 15 years, as companies move to take advantage of cheap and abundant labour in areas such as the Mekong River Basin, Vietnam and Indonesia.

All for one, one for all
Since its humble beginnings in the 1960s, the ASEAN has grown to become one of the largest economic zones in the world, with a combined GDP approximately the size of the UK’s, dramatically improving the standard of living for its people along the way, and demonstrating an enviable level of internal stability. This should give us confidence that ASEAN will ultimately achieve its ambitious goal of a single market and single production platform, because the bloc has a track record of overcoming challenges.

The ASEAN as a single entity is a larger, higher-growth, lower-volatility economic region than many appreciate. We are hopeful that the AEC will draw closer attention to these fundamentals. The AEC will hasten the process of economic integration between its 10 member countries, we believe.

In terms of economic size, the ASEAN is already the seventh largest economy in the world, just ahead of Brazil.  It is a high-growth region and we believe that over the coming decade the ASEAN will grow faster than China, and just a little bit slower than India on average. Hence, the ASEAN should be rightly considered the third pillar of Asian growth, alongside India and China.  

What is least appreciated, is that the ASEAN is a low-volatility region. Taking the average volatility in growth from 2000-2013 – a period that included the global financial crisis and the 2013 ‘taper tantrums’ – the ASEAN has had lower volatility in its growth rate than the developed world and other major emerging economies.

Finally, the ASEAN is not leveraged. The average level of debt to GDP is below 50% and in a world where financial markets are becoming increasingly discerning about levels of debt, as reflected in the pricing of exchange rates and debt instruments, this would also suggest that over time, low GDP volatility should be reflected in low financial market volatility. Leverage has historically been a volatility multiplier.

Full integration
To take a step back, in 2003, the ASEAN’s leaders resolved to establish the AEC with a comprehensive list of ambitious targets aimed at creating a free-trade bloc where goods, services, capital and labour would be allowed to move freely between member states. We do not believe all of those targets will be met by 2015 and there are many challenges to a fully integrated ASEAN bloc, including inadequate infrastructure linkages and low levels of financial integration in the region.

In our view, a borderless economic community will not emerge for at least another 15 years and, even then, it is unlikely to develop into a bureaucratically administered entity like the European Union. However, good progress has already been made in some areas, such as trade integration and the reduction of tariffs, and ultimately we expect the AEC to unlock synergies within the region, which will usher in a new era of higher potential growth. An example would be the production technology and sophistication of Malaysia and Singapore with the cheap and abundant labour of Cambodia and Myanmar.

Click to enlarge

ASEAN’s potential
With a projected economic growth rate only marginally behind China and India’s, the ASEAN is on track to emerge as the world’s third pillar of growth, and it will be the fifth largest economy in the world by the end of the decade. Put another way, in 2000 the bloc constituted only 1.9% of world GDP, but by 2025 that share will have more than doubled. While the growth profile of the various economies within the ASEAN will vary widely, most members will chart a comfortable trajectory upwards.

Productivity improvements and labour force expansion will drive most of that growth in the ASEAN, along with increased trade ‘fragmentation’ in the region – the process by which multinational companies break up the manufacture of more elaborate goods into components – leading to a rise in trade of those components and an extension of global supply chains.

Increased fragmentation will spur trade within the ASEAN and with its key partners. It will also spur FDI as companies seek to further utilise specialised pools of labour across the region. Over the medium term, we believe more production platforms will migrate south from the expensive bases of north Asia to the cheaper markets of the ASEAN.

Looking ahead to 2025, we expect the extension of supply chains to drive intra-ASEAN trade to over $1 trillion in value and drive extra-ASEAN trade higher too. China will dominate that trade with the ASEAN. In fact, our projections indicate that the value of trade between the ASEAN and China will exceed the combined value of the ASEAN’s trade with Japan, the US and Europe. FDI into the ASEAN will also grow strongly, having eclipsed FDI into China for the first time in 2013.

Economic ascension
Our confidence on the outlook for the ASEAN is not misplaced, nor is it isolated.  The world’s largest corporations and multinational enterprises are voting with their feet and moving into the ASEAN.  The past five years have seen a dramatic increase in foreign direct investment inflows, that is companies setting up factories and production facilities, to the point where FDI into the ASEAN has now eclipsed FDI into China for the first time. FDI will be the key enabler of the ASEAN economies industrialising and modernising. We are confident that the ASEAN will emerge as the new “Factory Asia” in coming decades and corporate treasurers should start planning for that dynamic now.

Contact
Glenn Maguire
Chief Economist, South Asia,
ASEAN and Pacific
ANZ Research
Glenn.Maguire@anz.com

This article is reproduced with permission of the Australia and New Zealand Banking Group Limited. It is based on ASEAN: the next horizon published in April 2015. The information in this article is provided for information purposes only, it is general in nature, does not take into account the objectives, financial situation or needs of any person and is subject to the ANZ General Disclaimer which is available on the ANZ website at http://anzlive.force.com/ANZGeneralDisclaimer