The author is senior economist for emerging Asia at Natixis Corporate & Investment Banking
From Joe Biden to Xi Jinping, global leaders are drawn to southeast Asia for three major international events: the G20 summit in Indonesia, the Asean meeting in Cambodia and the Apec meeting in Thailand.
Pressing global issues such as climate change and inflation are on the agenda but building ties with Southeast Asia is a prize for global superpower competitors and even middle-ranked ones like South Korea and Australia.
Southeast Asia is a diplomatic and business friend that everyone needs. This is not only to diversify the supply chain, but also to seek out growth opportunities as hurdles ranging from tariffs to investment curbs affect business between the US and China. Investors should pay attention and follow.
The 10-member, 680 million-person association together accounts for 3.4 percent of global gross domestic product and a 7.7 percent share of global exports.
The six largest economies in the Asean – Indonesia, Thailand, Philippines, Singapore, Malaysia and Vietnam – far from fragile from shocks such as the global energy crisis, high dollar and weakening Chinese demand. They see strong economic growth and rising foreign direct investment flows in a difficult global environment.
Singapore has gained financial services and high technology, Vietnam and Malaysia have received more FDI flows into manufacturing, and Indonesia has received high investment to tap its mineral resources, especially nickel.
Beyond greenfield investment, Southeast Asia is the largest recipient of mergers and acquisitions completed in Asia in the first half of 2022, receiving 56 percent of total inflow. Inbound transactions in Indonesia alone are twice as large as mainland China. Interestingly, it is not just the west that is deploying more capital to Asean, but also China, which is reducing 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 only economic development and capital markets but also governance, language, culture and natural resources has traditionally been considered a weakness. But Asean’s humility not only in respecting each other’s sovereignty but also in global affairs has become an advantage in the era 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 has increased the country’s attractiveness – not only for EU companies but also for Chinese groups that want access to reduced tariffs. Singapore also has an EU FTA and others are negotiating with countries such as Thailand. But it’s not just the EU. From South Korea to Japan and the US to China, countries are increasing their exposure to Asean.
That is not to say that 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 have shaken global footwear, electronics and semiconductor supply chains. There are also long-standing challenges such as the South China Sea, the protection of natural resources along the Mekong River and the dire situation in Myanmar.
However, the resilience of the region is increasing. The Asian financial crisis and market turmoil due to US interest rate hikes in 2013 taught Asean to strengthen its defenses. Foreign ownership exposure to portfolio flows has been reduced, particularly by Indonesia. The country is now emerging as the most resilient economy in the Asia-Pacific, facing global shocks with one of the best currency and equity performances this year.
Vietnam, after learning the lessons of the 2011 banking crisis, reining in real estate excesses. Although this will likely lead to a decline in the sector, it will boost sustainability down the road. Thailand is trying to diversify its economy away from tourism.
Asean’s major economies are now led by more competent technocrats in finance ministries and central banks, helping the region navigate the current crisis better than other emerging markets. However, despite this new resilience, the aftershocks of higher interest rates, weaker global demand and the energy crisis will still push the 2023 growth rate down from the higher level in 2022.
Nevertheless, even with the downturn expected in 2023, Southeast Asia emerges as the winner and prize in the geopolitical contest for investment and trade.