The writer is Senior Economist for Emerging Asia at Natixis Corporate and investment banking
From Joe Biden to Xi Jinping, world 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 forging ties with Southeast Asia is in itself a price for competing global superpowers and even those in rank. intermediary such as South Korea and Australia.
Southeast Asia is the diplomatic and trade friend everyone needs. It’s not just about diversifying supply chains, but also about seeking growth opportunities, as obstacles ranging from tariffs to investment restrictions affect business between the United States and China. Investors should take note and follow suit.
The association of 10 members and 680 million people together accounts for 3.4% of global gross domestic product and 7.7% of global export share.
The six largest Asean economies – Indonesia, Thailand, the Philippines, Singapore, Malaysia and Vietnam – are far from fragile in the face of shocks such as the global energy crisis, the rising dollar and the weakening of Chinese demand. They are experiencing strong economic growth and foreign direct investment inflows are increasing in a challenging global environment.
Singapore is gaining ground in financial services and high technology, Vietnam and Malaysia are receiving more FDI in manufacturing, and Indonesia is receiving record investment to exploit its mineral resources, particularly nickel.
Beyond start-up investments, Southeast Asia was the main recipient of mergers and acquisitions carried out in Asia in the first half of 2022, receiving 56% of total inflows. Inbound transactions in Indonesia alone were twice as large as for mainland China. Interestingly, it is not just the West that is deploying more capital to Asean, but also China that has reduced offshore M&A deals elsewhere.
With Cambodia’s GDP per capita as low as $1,612 in 2021 and Singapore’s as high as $64,840, the region’s diversity, not only in economic development and capital markets, but also in governance, language, culture and natural resources, has traditionally been seen as a weakness. But ASEAN’s humility, not only in respecting each other’s sovereignty but also in global affairs, has become an advantage in an era of global 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 catapulted the country’s attractiveness, not only for European companies, but also for Chinese groups wishing to benefit from reduced tariffs. Singapore also has an FTA with the EU and others are being negotiated with countries like Thailand. But it’s not just the EU. From South Korea to Japan and from the United States to China, countries are increasingly exposed to ASEAN.
That’s not to say Asean itself can’t be a source of risk for investors, from the messy domestic politics in Thailand and Malaysia to the shackles of Covid-19 lockdowns in the third quarter of 2021. global supply chain for footwear, electronics and semiconductors. There are also long-standing 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 following a US interest rate hike in 2013 taught ASEAN to strengthen its defenses. The foreign ownership exposure of portfolio flows was largely reduced, particularly by Indonesia. The country is now emerging as the most resilient economy in Asia-Pacific, in the face of global shocks with one of the best performances in currencies and equities since the start of the year.
Vietnam, having learned the lessons of its 2011 banking crisis, is curbing real estate excesses. While this will likely lead to a slowdown in the industry, it will bolster sustainability over time. Thailand is trying to diversify its economy away from tourism.
Major Asean economies are now led by more capable technocrats in finance ministries and central banks, helping the region weather this current crisis better than other emerging markets. Yet, despite this newfound resilience, the aftershock of rising interest rates, weak global demand and the energy crisis will continue to depress 2023 growth rates from higher levels in 2022.
Nonetheless, even with a cyclical downturn expected in 2023, Southeast Asia is emerging as both a winner and a prize in the geopolitical competition for investment and trade.
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