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Saturday April 21, 2012

Unleashing Asean’s dynamism

IF market size is what defines economic potential in today's increasingly competitive world, then surely Asean has a compelling growth story to tell.

With a combined population of 600 million, or about 8.5% of the world's population, and a growing middle-class and young population, as well as solid macroeconomic fundamentals, Asean is a huge and attractive market for companies to grow their businesses.

At the 20th Asean Summit in Phnom Penh, Cambodia, early this month, International Trade and Industry Minister Datuk Seri Mustapa Mohamed described Asean as a bloc that “is certainly growing to be an economic force to be reckoned with”.

Its economy is booming; increasingly being driven by strong domestic demand and emerging markets.

Pang: ‘Asean has to respond to the changing game through deeper integration,’

Mustapa noted that growth in this union of 10 nations, comprising Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, would continue at a healthy pace, even as the world braces for some challenging times ahead.

Super-cycle

According to the latest estimates of the International Monetary Fund (IMF), Asean's gross domestic product (GDP) on average is expected to grow by at least 5% this year, while the two Asian giants, China and India, are expected to grow at 8.8% and 6.9%, respectively.

This is in contrast to the global GDP growth forecast of 3.5% for 2012, and 1.4% for advanced economies, comprising the United States, Eurozone and Japan.

Among the Asean countries, Laos is expected to outperform with a growth rate of 8.4%, while Cambodia, Indonesia and Myanmar are expected to see growth coming in at more than 6%.

Experts believe domestic and emerging markets will play an increasingly important role in supporting Asean's economic growth, as the ongoing weakness in advanced economies means demand from the region's traditional customers will have take a back seat in the years to come.

“When you have a domestic demand story supporting an elevated and stable growth trajectory, and an increasingly strong middle-class driving business expansion and government liberalisation, the impact will clearly be positive on the economy,” Singapore-based David Roes, the CEO of Asean Investment Advisors Pte Ltd tells StarBizWeek.

Roes sees Asia as being enraptured in a super-cycle, whereby growth will remain elevated relative to the developed world for some years to come.

“High growth will attract capital, which, in turn, will enhance the ability of businesses and emerging economies to accelerate growth and development,” Roes explains.

Now, it seems every business wants a piece of Asia, where the growth prospects are so appealing.

Destry: ‘Asean will be the next hot spot and key driver for the global economy amid the weakening role of developed countries.’

According to CIMB Asean Research Institute CEO John Pang, many international businesses have been actively looking for a base in Asia to tap the vast opportunities in trade and investments.

Much of the attention, nevertheless, has been centred on China and India, the two hottest economies in Asia. Asean as a bloc has the ability to challenge that, and market itself as a credible alternative.

With an economy worth more than US$2 trillion (RM6.14 trillion) as of last year, Asean is collectively the third-largest economy in Asia after China and Japan. It is even bigger than India. What's more, Asean's economy is set to grow consistently to reach a GDP size of more than US$3 trillion by 2015. By then, China's economy would be worth around US$10.5 trillion, compared with US$7.3 trillion last year, while India's would be around US$2.4 trillion, compared with around US$1.7 trillion last year.

“Asean will be the next hot spot and key driver for the global economy amid the weakening role of developed countries,” says Destry Damayanti, the chief economist of PT Bank Mandiri in Indonesia,.

“The economic rebalancing that developed countries are expected to undergo is a long process, hence recovery of these nations would be slow. Asean as a new economic power is expected to play a vital role for the development of the global economy in the future,” she explains.

New heights

Asean is attractive, no doubt. But for it to deliver in today's world, the region needs to have scale, as CIMB Group Holdings Bhd managing director and CEO Datuk Seri Nazir Razak has very often put it.

To Nazir, a fervent advocate of Asean regionalisation, it is simple: Asean countries cannot tap the advantages of their collective economic size without integration. The Asean Economic Community (AEC) has to be at the core of the region's response to the rise of Asia, especially China and India, amid the rebalancing of the global economy.

“The fundamental shift is accelerating in the global economic landscape with the decline of the West and rise of China. Asean has to respond to the changing game through deeper integration,” Pang says.

“It's a mistake for any Asean country to see itself as self-sufficient in a world where there's not much growth. We need to leverage on one another's strength to take advantage of regional and global opportunities,” he adds.

The idea to deepen regional integration through the formation of AEC by 2015 was founded about a decade ago by regional policymakers. The vision is for a single market and production base to prevail in the region, with free movement of goods, services, investments, skilled labour and freer flow of capital.

“Creating a larger and more stable trading block makes competitive sense,” Roes says.

“If capital and labour were able to flow freely within Asean, then resource allocation would become much more efficient and effective, and that would ultimately attract even greater amounts of longer-term capital into the region,” he explains.

To experts, integration is key to Asean's greatness.

Roes says Asia is enraptured in a supercycle, whereby growth will remain elevated relative to the developed world.

For one thing, the collective strength of countries in the region can put it in a good position to manage the intense competition stemming from the rise of China and India, as well as the ongoing works of other regional trading blocs such as the European Union and North American Free Trade Agreement.

In addition to that, Destry says, the establishment of AEC will strengthen the position of the member countries and enhance their bargaining power in international negotiations.

According to global publisher and consultancy Oxford Business Group (OBG), Asean has to work together as an integrated block to attract investors looking for new destinations, or run the risk of losing out to other markets.

“I think Asean undersells itself internationally and is at risk of missing a historical opportunity to emerge as an alternative to BRIC (Brazil, Russia, India and China),” OBG's regional editor for Asia, Paulius Kuncinas, argues.

He laments the fact that the potential of the region has not been properly communicated to the outside world even during an opportune time like the recent Asean Summit.

“Despite ambitious economic integration goals, the Asean is still viewed internationally as a proxy for Indonesia's huge market opportunity,” he points out.

Although Indonesia has been clearly marked out as the main engine of growth in Asean for the next five to 10 years, the country will still benefit from a well integrated and functioning Asean to attract large capital inflows, Kuncinas says.

“This is because big ticket investors do not want to place all of their eggs in one basket and would be more comfortable if they could channel a portion of their funds through Asean entry hubs like Malaysia, especiallythis year, when investors are looking to hedge their exposure to China, the US and Europe,” he explains.

Industry observers note that despite the apparent benefits that the AEC could bring to member countries, there has been a lack of specific measures to accelerate the integration agenda in recent years. With the AEC only three years away from now, there is still a lack of cohesiveness and policy coordination among member countries, and this raised doubts over whether the integration goals can be fully realised by 2015.

“There is an urgency to accelerate the integration agenda; the world is not going to wait for us but unfortunately, we are not moving fast enough,” Pang says.

For instance, Pang points out, for 2010 to 2011, only 68.6% of all measures and initiatives proposed under the AEC blueprint for the period has been achieved.

Essentially, there are five elements to realise the AEC. These include political will; policy coordination and resource mobilisation; implementation of commitments; capacity building and institutional development; and public-private consultations and engagement.

Pang notes that more work need is needed to engage the private sector to sell the idea of an AEC, strengthen connectivity, address the development divide among member countries, and build stronger institutional support and better macroeconomic and policy coordination.

“Despite the grand objective of AEC, the agenda is still hindered by certain kind of nationalistic views', especially on the ground, and the inability of certain parties to see the bigger picture,” Pang argues.

“I think Asean is taken more seriously by the international community than the member countries themselves,” he laments.

Challenges ahead

Asean has come a long way to achieve the regional cooperation that it has today. It is noted that the region has made significant progress in reducing tariff barriers. The result of this has been greater intra-regional trade, as evident the trade volume between member countries having tripled to more than US$400bil over the last 10 years.

But some of these trade barriers are perceivably “low-hanging fruits” that are easily achievable.

The road to deeper integration in the days ahead will be increasingly challenging.

“Challenges in the next scorecard will include agriculture, non-tariff barriers, financial integration, and the integration of the less-developed CLMV (Cambodia, Laos, Myanmar and Vietnam),” Pang notes.

According to economists, integrating this politically and economically diverse bloc is not going to easy because many countries still have reservations over certain parts of the AEC. This is especially so when it comes to preservation of local interests in certain business areas (the automobile industry for Malaysia is a case in point), and the free mobility of professionals, which could cause brain drain in some countries, as their skilled labour are drawn to other places that could offer a more attractive remuneration (for instance, an accountant in Thailand moving to Singapore which pays better).

For Asean to move towards deeper integration, consensus among the governments of member countries is required, yet, this is not easily achieved, as individual sovereignty is prioritised over driving Asean as one region.

And not all private-sector companies buy into the idea of one region.

For instance, Patrick Walujo, co-founder and CEO of Indonesia-based private equity firm PT Northstar Pacific, once noted that Indonesian corporations are not interested in expanding beyond their shores, as they regard the huge domestic market as sufficient for them. Indonesia corporations, he said, are instead very vigilant towards competition from external players entering their markets.

“There are potential risks associated with public sentiment, when foreign businesses establish their presence in Indonesia,” Walujo said at the CIMB Asean Conference last year.

To pacify the locals, he said, there was need to ensure that there was reciprocity in terms of benefits to the domestic economy and businesses. In addition, companies should also be made to understand the potential gains that they could reap from Asean's enlarged consumer market.

Indonesia is the largest economy in South-East Asia, and one of the fastest growing in the world. With a population of 240 million, or 40% of the Asean's total population, the country indeed boasts a big domestic market that can support its economy. A growing middle-class and an abundance of natural resources are also working in the country's favour.

There are high expectations that Indonesia could lead the way towards deeper integration among member countries in Asean.

In Pang's opinion, the country is well-positioned to do so, given its heft. With a seat in G20 (Group of 20 most influential economies in the world), Indonesia, Pang argues, could well represent Asean's voice in the global arena.

Not simple

But things are not always as simple as it seems.

“Indonesia's participation in the AEC is driven by its anticipation of a free world trade, and to simultaneously secure national interests,” Destry explains.

“Many factors must be considered by the Government and business players in Indonesia so that the implementation of the AEC in 2015 can provide positive impacts for the country and its people as a whole,” she adds.

Countries in Asean are currently in different stages of development.

According to the World Bank, Singapore and Brunei are the only Asean countries that are considered high income. Malaysia and Thailand are categorised as upper-middle income economies, while Indonesia, the Philippines, and Vietnam are lower-income economies. Cambodia, Laos and Myanmar, on the other hand, are low-income.

“Each country has its own relative strength and weaknesses. However, as barriers between the Asean countries are reduced, the region as a whole should be able to combine their strengths and emerge more forcefully to compete on the international field,” Roes argues.

An analysis by management consulting group Accenture shows that among the Asean countries, Singapore is the only one that is innovation-driven.

Malaysia is close to transforming itself into an innovation-driven economy, but like Thailand, it is still an efficiency-driven economy. Indonesia is on the boundary of efficiency-driven and factor-driven, while the rest are still very much factor-driven.

“There is a gap between the original members of Asean and the CLMV in terms of economic development in a two-tiered Asean,” Pang says, adding that each country has to work hard to reform its economies to benefit from the opportunities ahead.

For instance, he says, Brunei has to reinvent a new economic model to get beyond its dependence on crude oil, while Malaysia has to accelerate its reform measures, lest it risks losing its relative importance as its neighbouring countries move ahead.

On the progress of Myanmar, Pang says, “The country is transforming so fast at breakneck speed I think the development of Myanmar will be a strong catalyst for Asean's growth.”

The AEC is upon us. Integration of member countries may or may not be fully realised by 2015, but one thing is for sure, now is the time for businesses to hasten their efforts to tap the rising opportunities and establish market share in a hot economy.

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