As the economies of neighboring China and India decelerate, ASEAN is increasingly becoming a destination for investment. What do these countries have to offer global investors?
With a population of more than 600 million and a nominal GDP of $2.31 trillion, ASEAN (the Association of Southeast Asian Nations), made up of Brunei Darussalam, Myanmar, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam, is fast becoming a major economic force in Asia and a driver of global growth. As the economies of neighboring China and India decelerate, and as the U.S. shifts its focus to the East, the region is increasingly becoming a destination for investment. In support, the ASEAN Economic Community has a goal of integrating the regional economies by 2015 to make the countries more competitive with the rest of the world. Today, as growth opportunities are counterbalanced by a variety of political and economic risks, what does this group of 10 disparate countries have to offer for global investors?
Located at the heart of the Asia-Pacific region and situated across major trade routes – $5.3 trillion of global trade1 passes through its waterways each year – ASEAN is the United States’ third-largest Asian trading partner and the largest Asian destination for U.S. investment.2 It also receives the largest chunk of outgoing investment from the EU, at 24%.3 At current growth rates, ASEAN should become the fourth-largest market after the EU, U.S. and China by 2030,4 supported by an increasingly well-educated workforce, abundant natural resources and favorable geographic location.
“J.P. Morgan has been operating in Southeast Asia for 50 years and has witnessed the evolution of the sub-region from a low-cost manufacturing base to a solid pillar of Asia’s GDP growth,” says Pravin Advani, J.P. Morgan’s global trade and loan products head of global sales and the Asia-Pacific region. “We see a bright future for ASEAN as the countries strive to sharpen their overall competitiveness through closer collaboration.”
ASEAN’s next step is to meet its stated goal of regional economic integration — a single market and production base and the free movement of goods, services and labor — by forming the AEC.
“Integration within ASEAN will be a key boost to the region’s economic growth in the medium term. We are already seeing a striking increase in intra-regional trade both within ASEAN and among emerging Asia’s economies more broadly,” says Benjamin Shatil, regional Asia economist at J.P. Morgan.
One of the key stumbling blocks to integration, however, is the multitude of political, cultural and economic differences among ASEAN’s countries. Most recently, the group included three constitutional monarchies, two communist states, three republics, a sultanate and a former military junta. Per-capita GDP ranges from more than $40,000 in Singapore and Brunei Darussalam to less than $1,000 in the emerging economies of Myanmar and Cambodia.
“Economic integration for ASEAN is an ambitious goal. It is challenging, although not completely impossible,” says Agatha Lee, head of APAC trade sales for J.P. Morgan, adding that there are many hurdles to overcome, from currency regulation in economies such as Malaysia and Vietnam to political worries in Thailand, all of which are concerning to investors.
As ASEAN grows, recent research shows the region now receives more foreign direct investment (FDI) inflows than China. In 2013, Indonesia, Malaysia, the Philippines, Singapore and Thailand, known as the ASEAN-5 countries, received $128.4 billion in foreign investment, up 7% from the previous year and topping China’s FDI receipts of $117.6 billion, which declined 2.9% from 2012.5
ASEAN was also home to huge, market-moving IPOs in 2013, including a $2.1 billion listing for BTS Rail Mass Transit Growth Infrastructure Fund in Thailand6 and a $2.6 billion IPO for Mapletree Greater China Commercial Trust, Singapore’s largest-ever real estate investment trust listing.7
But with fierce global competition for foreign direct investment, can these countries create enough incentives to lure capital away from other emerging regions?
“Now that these countries are part of ASEAN, people are starting to feel a bit more comfortable about investing there, so we may even see export flows from these countries coming into the U.S., which might be cheaper than those from Latin America or Africa,” says Lee.
“The challenge of attracting foreign investment plays out in ASEAN’s economies in different ways,” adds Shatil. “In the region’s frontier markets, such as Myanmar, improving regulation and increasing transparency will be key to sustaining FDI inflows. At the other end of the spectrum, in ASEAN’s more developed economies, maintaining competitiveness will be critical.”
In spite of challenges, ASEAN’s economic performance continues to outpace the rest of the world. The Asian Development Bank estimates the bloc’s GDP growth at 5.6% in 2014, up from 5.3% in 2013.
“In addition to expanding our footprint in the region, J.P. Morgan is also deepening our presence and support for growth industries in each country as well as for our business partners,” says Advani. “We are proud to be working alongside some of the most established corporate names in Southeast Asia and look forward to another 50 years of partnership.”
For corporations that are contemplating including ASEAN in their business strategy, J.P. Morgan’s Lee has one piece of advice: “If you want to look at the ASEAN business opportunity, test a set-up in Singapore first. From there, it’s easier for you to maneuver as well as tap into the knowledge and experience of the business councils that can help you enter these newer markets.”
1 ASEAN Matters for America; http://www.asiamattersforamerica.org/sites/all/themes/eastwestcenter/pdfs/Asean_Matters_for_America_brochure2.pdf
2 Asia Matters for America; http://www.asiamattersforamerica.org/asean/
3 The EU-ASEAN relationship in twenty facts and figures; http://eeas.europa.eu/asean/docs/key_facts_figures_eu_asean_en.pdf
4 Investing in ASEAN 2013-2014; http://www.usasean.org/system/files/downloads/Investing-in-ASEAN-2013-14.pdf
5 Southeast Asia overtakes China in foreign direct investments; http://www.channelnewsasia.com/news/business/international/southeast-asia-overtakes/1021378.html
6 Bangkok SkyTrain Fund Raises $2.1 Billion in I.P.O.; http://dealbook.nytimes.com/2013/04/05/bangkok-skytrain-fund-raises-2-1-billion-in-i-p-o/
7 Mapletree REIT Jumps in Asia’s Biggest 2013 IPO: Singapore Mover; http://www.bloomberg.com/news/2013-03-07/mapletree-reit-jumps-in-asia-s-biggest-2013-ipo-singapore-mover.html