James Cheo for The Straits Times
SINGAPORE – South-east Asia is on the cusp of a golden age: The economic gravity will shift to the region, yet most global investors are still under-invested here.
The 10 Asean economies may be diverse, but the opportunities are exciting in the years ahead.
Asean was powered by robust consumption, investment spending and exports in 2022 and this resilience will continue. But some of these tailwinds will start to fade with slowing global growth in 2023.
The good news with slowing growth is that inflation should peak and therefore tight monetary policy should also peak for the region. The peaking of rates as well as the weakening of the United States dollar will offer some reprieve for Asean.
The region's economy was very resilient in 2022 even with China's economy closed. This year, with China's reopening, Asean will get a big boost. Trade between Asean countries and mainland China has grown from US$40 billion two decades ago to US$850 billion (S$1.15 trillion) now.
The reason for the region's strength is that over the past decade, Asean economies have undergone a healthy reset as they de-leveraged and continued to invest in infrastructure.
As a result, companies in the region have developed resilient fundamental strengths and stronger balance sheets to withstand global uncertainty.
But Asean growth prospects are going to accelerate in the next decade, because several factors that were not as strong decades ago are now present and stronger than ever. The growth factors of the region can be illustrated by the acronym “Tiger”.
“T” is for technology or the digital economy; “I” for rising income of the middle class; “G” for the green transformation; “E” for energy infrastructure; and “R” for the Regional Comprehensive Economic Partnership, or RCEP.
Technology or the digital economy
The pandemic has accelerated Asean's Internet economy, with digital adoption becoming mainstream.
The region's digital economy is expected to accelerate and grow to US$330 billion by 2025. This growth is not by accident. Asean is home to more than 10 million online merchants, and e-commerce sales are surging, with turnover projected to rise to US$150 billion by 2025.
Digital platforms – a combination of technical innovation, new business models and value proposition – offer a range of new products and services via digital channels for the huge population.
South-east Asia continues to see growth in the number of Internet users – with 20 million new users added in 2022, raising the total number to 460 million. The use of digital technology is raising the productivity of the Asean economy, and sets the stage for the next era of growth.
Rising income of the middle class
With a population of 680 million, Asean is the third-most populous market after China and India, and comprises nearly 9 per cent of the world's population. The region enjoys favourable demographics, with a relatively young and growing working population.
The young people in Asean have come of age. Almost half of its people are aged below 30 and its sizeable labour force is estimated to peak only in 2045, some three decades after China.
This young, digitally savvy, productive and growing workforce provides a long runway for growth as the region propels forward. The rise of Asean's middle class is one of the largest economic locomotives in the world, with their consumer spending expected to double to US$4 trillion in the next decade.
Green transformation
Asean's green transformation can account for more than US$1 trillion in annual economic opportunities.
Resource extraction and energy generation are still very much coal-reliant and inefficient in the region, and must be decarbonised in a sustainable manner. Asean has set a target of a 23 per cent share of renewable energy in primary energy supply by 2025.
It is not realistic to suddenly replace fossil fuels with renewables. However, the transition to natural gas is a low-hanging fruit. The advancement of green hydrogen technology can possibly be a solution, but solar and wind have the potential to grow significantly due to substantial land mass in the region.
Furthermore, resource-rich locations in Asean could be important beneficiaries of the decarbonisation mega trend as global demand for nickel – critical in electric vehicle battery production – accelerates.
Indonesia is the key beneficiary as the country has the world's largest nickel ore reserves, accounting for a quarter of global production.
Energy infrastructure
Asean is expecting a population surge of 90 million in the next decade, which will put more stress on existing infrastructure. Cities are a key contributor to climate change, responsible for 75 per cent of carbon emissions, with transport and buildings being the largest emitters.
Smart-building solutions can unlock cost savings by adopting efficient energy usage.
But to solve climate change, the future of transport has to be electric, which is insignificant at under 1 per cent of market penetration globally. Indonesia has an ambitious target of having electric vehicles comprise 20 per cent of its total production in the next five years.
Globally, electric vehicles are expected to grow by 36 per cent annually, reaching 245 million vehicles in 2030 – more than 30 times above today's level.
Asean is coming from a low base and is expected to see bigger exponential expansion. Electric two- and three-wheelers will represent the lion's share of the total electric vehicle fleet, as this category is most suited to rapid transition to electric.
With such goals, there will be immense improvements in electric vehicle infrastructure. For example, Singapore is aiming to deploy 60,000 charging points and requiring all newly registered cars to be cleaner-energy models by 2030, and seeking to phase out internal combustion engines by 2040.
RCEP
The implementation of the Regional Comprehensive Economic Partnership – the world's largest free trade agreement – will further integrate trade and accelerate investments for the region.
It will also allow standardisation of cross-border regulations, which will promote trade efficiencies across the region.
The region is well positioned for foreign direct investments due to meaningful improvement in the ease of doing business and favourable demographic profiles. This is especially important as companies look for new locations to diversify supply chains.
Asean as a region has complementary strengths: Indonesia with its natural resources; Singapore as a key financial centre; Malaysia for its prowess in electronics manufacturing; and the strong automotive sector in Thailand.
Combining as a region through the free trade agreement, Asean has the potential to become a leading manufacturing hub of the future, one built on automation, robotics and artificial intelligence.
• The writer is the chief investment officer for South-east Asia at HSBC Global Private Banking and Wealth.