Seeking the light: ASEAN 2021 | 2022

2020 was disproportionately hard for Southeast Asia; with an early start to the Pandemic, its economy contracted more than many other emerging markets(1). Yet the fundamentals of the region remain intact. And despite being clouded by COVID-19, the opportunities to harness growth from trade, digitalisation and sustainable growth still shine brightly.

The fundamentals

Accounting for over 8% of the world’s population, ASEAN countries combined equate to over 642 million people(2) . Dig a bit deeper and its demographic is one of dynamism, with 35% of the population under 25 years old and 65% to be classed as middle income by 2030. With expanding digital networks and growing numbers of mobile phone and Internet users – ASEAN’s growing population has more people coming online than any other region in the world, with eCommerce forecasted to grow to US$88 billion by 2025.

The result is that despite the social and economic challenges of last year, the region’s prospects have held up. Indeed, FDI has remained strong, suggesting that ASEAN is poised to gain global market share. China, for instance, now trades more with ASEAN than it does with EU or US(3).

For firms looking to embark on new opportunities in the region, or deepen their presence, it’s worth keeping an eye on three key themes that are poised to take-off: trade, digital and sustainability.

Trade: RCEP opportunity

Nearly a decade and 31 rounds of negotiations in the making, the Regional Comprehensive Economic Partnership (RCEP) – which was signed in November 2020 – is the world’s largest trade deal. Involving ASEAN, China, Japan, South Korea, Australia and New Zealand, it accounts for 30% of the world’s population and 29% of global GDP.

The pact eliminates tariffs and quotas on 65% of goods traded within the region - moving to 90% over 20 years. Of course there are some limitations to it, but it is an incredible achievement in aligning a diverse group of countries.

For Southeast Asia, RCEP opens the trading door even wider.

• Firstly, RCEP further cements ASEAN’s trade openness; giving further provisions to enable its markets to continue trading – and at a crucial point in time.
• Secondly, it deepens ASEAN’s connectivity with China, Korea and Japan, who are the global heavyweights for the electronics, automobiles, textiles and garments industries, which the region is reliant on. Having each of these markets within the trade pact means ASEAN can retain its supply chain relevance across these sectors.

RCEP also has the potential to drive important domestic regulatory reforms in areas like labour laws, investment liberalisation, cybersecurity, cross-border data rules and intellectual property protection, and streamlines various overlapping preferential trading arrangements by establishing common trade rules. This should help to reduce trade costs for businesses.

As businesses assess the long-term implications of RCEP on their path to recovery, there are some immediate steps that can be taken to get ahead of the curve. By reviewing their current commercial relationships, companies can identify gaps and understand where the greatest potential lies to forge new ties and tap into some of the fastest growing consumer markets.

They can also look at how their current supply chains – regional or global – map against the RCEP. Those who work now to understand how the deal could impact their business model will reap the greatest benefits in the future. This is not only important to companies based in the member markets, but to any firms doing business in the region.

Finally, an in-depth understanding of RCEP and its impact on tariffs for each group of goods and services will be critical for firms to reassess their pricing strategies and maintain their competitive advantage.

Digital: Building stronger digital connectivity

Digital technology has the potential to play a key role in driving the development of new industries and new growth in South East Asia, but unless the region can agree on a common set of standards for data handling and digital commerce that encourage businesses to share data, that potential is likely to remain unrealised.

The headroom for growth in ASEAN’s digital connectivity is enormous. A recent report by Bain & Company(4) concluded that the ASEAN digital economy accounts for 7% of its total GDP. In China it is 16%. In the United States, 35%. Harnessing the digital economy to power and accelerate intra-regional trade and growth could, the report concluded, lead to an uplift in GDP of US$1 trillion by 2025, with particular benefits for SMEs.

For growth to happen, already-agreed frameworks like the ‘ASEAN Digital Integration Framework Action Plan’ and the ‘ASEAN Framework on Digital Data Governance’ need to be fully implemented in order to integrate the currently disconnected rules and regulations of nations.

Sustainability: Sustainable infrastructure and greening the region

COVID-19’s impact on societal behaviours, consumption patterns and energy usage, has been a turning point in how we move forward: amidst this significant change, ASEAN has the opportunity to redirect public and private spending on infrastructure and energy investment plans.

The money needed to flow into almost every economic sector to create substantial change is vast, especially sectors that would enable or contribute to mitigating climate change. The Organisation for Economic Co-operation and Development (OECD) estimates US$6-8 trillion of infrastructure investment is required globally per year by 2030. However, HSBC estimates current total investment to be only US$1 trillion per year at the very best.

Linked to this, this challenge is compounded by the environmental threat facing the region. HSBC Global Research recently reported that of the 20 global cities most vulnerable to rising sea levels, 15 are in Asia including 5 in ASEAN.

Rapid action is needed across all areas: energy, transport, urban buildings, industrial and land.

These are formidable difficulties, but success is within grasp. Outside of the bloc, Japan, US and China continue to invest in South East Asian infrastructure.

Inside, the nations are continuing to work together. In addition to broader private investment, sustainable and green financing is getting an uplift across South East Asia. For instance, the ASEAN Capital Markets Forum (ACMF) is working to harmonise standards and regulations around green finance, providing a complete suite(5) of standards in line with international ones in order to accelerate development across Southeast Asia.

With all the change around us, expect to see a continued push to redirect dollars towards public and private sustainable infrastructure investment.

As with markets worldwide, South East Asia saw a torrid 2020. But as they look to reopen, member countries cannot approach economic recovery in isolation. Hope for the region’s future lies in its nations playing their strongest hand; acting as a collective rather than the sum of its parts. Trade, sustainability and digitalisation will be amongst the key priorities to advance as we head into a post-COVID world; businesses must keep a finger on the pulse to reap the benefits that will emerge from ASEAN’s deeper integration.

Oped by Stuart Tait, Regional Head of Commercial Banking, Asia-Pacific, HSBC for 'Investing in ASEAN 2021 | 2022'.

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