- Trade tensions and fears of an Emerging Markets crisis have caused a decline in the Asian and EM indices
- ASEAN-5 (Singapore, Thailand, Indonesia, Malaysia and Philippines) still have good economic fundamentals backing them
- ASEAN region will benefit from demographic changes and long term structural growth
Trade tensions between China and US have yet to simmer down and the fears of a EM crisis are still on the back of investors’ heads, causing stocks indices to continue their decline with the MSCI AC Asia ex Japan Index and MSCI EM Index down -8.1% and -9.5% year-to-date (as of 28 Sep, in SGD terms). Amongst our neighbours, Indonesia and Philippines are in the spotlight due to their fiscal and current account deficits, and external debt.
These fears have injected some volatility into Asian equity markets and we examine the ASEAN region and some of the countries of the ASEAN-5 (Singapore, Thailand, Indonesia, Malaysia and Philippines) as they still portray bright long-term prospects due to demographic changes and structural advances.
Looking at GDP growth of the ASEAN-5, Indonesia, Malaysia and Philippines have been experiencing fairly high and stable growth. Singapore being a developed economy experienced lower growth while Thailand experienced volatile growth due to the 2011 floods’ and political turmoil in 2014.
Chart 1: Year-on-year GDP Growth (%) of ASEAN-5
Indonesia, Malaysia and Philippines are expected to continue their growth trajectory throughout 2019 and 2020 whereas Thailand is expected to have lower growth relative to these three countries. Meanwhile, Singapore is forecasted to experience much lower growth to the other ASEAN-5 countries due to its status as a developed country. The Monetary Authority of Singapore (MAS) estimates that the ASEAN-4 (excluding Singapore) could average at least 6.0% growth if ASEAN becomes more integrated and structural reforms are implemented to improve productivity and competitiveness.
Table 1: Consensus GDP Forecasts for ASEAN-5
However, GDP growth is not all there is to the story. These countries also make up the third largest market in the world and subsequently benefits economically from being an integrated bloc. The combined population of ASEAN stands at more than 640 million people, larger than the US and European Union, with India and China being the two economies larger than ASEAN.
A report by McKinsey estimates that the number of consuming households in ASEAN is expected to reach 178 million by 2025. Furthermore, internet penetration still has room to grow with Internet penetration at 38.8% across the region. All these would translate to greater flow of goods and services within the region, thus boosting GDP growth through demographic growth and digitalisation.
Diagram 1: Household numbers are set to boom
Table 2: Connectivity in ASEAN
To that end, the ASEAN Economic Community (AEC) seeks to realise ASEAN’s goal of economic integration in the Master Plan ASEAN Connectivity (MPAC) 2025 through increasing infrastructure investment, digital innovation, making logistics and people mobility more seamless, and increasing the standard of regulations.
Financial Integration
While tariffs on goods have been virtually eliminated, financial integration in ASEAN is still a work in progress. The ASEAN Financial Integration Framework (AFIF) was initiated to improve financial integration by 2020 which would complement the masterplan of ASEAN Connectivity 2025. The AFIF sets out the following key thrusts:
- remove restrictions to the intra-ASEAN provision of financial services by ASEAN financial institutions
- build capacity and infrastructure to develop and integrate the ASEAN capital markets
- liberalise the flow of capital across the ASEAN region
- harmonise payments and settlements systems
- strengthen capacity building, regional financing arrangements, and regional surveillance
Banks in ASEAN play an integral role in bringing financial integration, with the first step being becoming a Qualified ASEAN Bank (QAB). A QAB allows an ASEAN bank to be re-classified as a local bank across the ASEAN economies, giving them preferential treatment over international banks. This would increase competition and spread of technology like payment systems, thus lowering business costs which are extremely beneficial to small-to-medium enterprises (SME). The Indonesian Bank Mandiri has begun operations in Malaysia as a QAB last year while there are ongoing talks between Philippines and Indonesia, and Thailand with Malaysia.
Countries, such as Cambodia and Myanmar, with low bank account ownership and financial services usage stand to benefit from financial inclusion with the Asian Development Bank (ADB) estimating that Cambodia could experience a 32% potential boost to GDP. For countries with high lending rates, e.g. Laos at 22.6%, increase in competition could help drive down interest rates, thereby allowing easier access to financing which would help stimulate economic growth.
Financial integration could bring about digitalisation of the ASEAN economies and allowing for a simpler payment system in the region. For example, digitalisation through e-commerce could open up new markets for SMEs. A recent report by Bain & Company estimates that digital integration in the ASEAN region can bring about USD 1 trillion uplift in GDP by 2025, which translates to a 40% increase in total ASEAN GDP. Currently, ASEAN’s digital economy contributes about 7% of ASEAN GDP, a far cry from China’s 16% or 35% in the US.
These frameworks could quicken the process of bringing in more convenient systems like mobile banking and e-payment systems into ASEAN countries like Myanmar and Vietnam. By introducing seamless cross-border digital payment options, the ASEAN countries would benefit through higher intra-ASEAN trade.
However, as all these are long-term structural changes, investors should have a long investment horizon to ride out the volatility and reap the benefits. Our next article addresses these concerns and the investment actions you can take.
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