Supply chain moves, digitalization and net zero shift drive region’s momentum
Shipping containers in Bangkok: Southeast Asia now accounts for 8% of global exports and has surpassed the European Union as China’s largest trading partner. © Reuters
A year and a half into a historic interest-rate upcycle, Southeast Asia’s economic prospects continue to stand out in a world faced with high inflation and soft demand.
HSBC forecasts that the six largest economies in Southeast Asia — Indonesia, Thailand, Malaysia, the Philippines, Singapore and Vietnam — will grow 4.2% this year and 4.8% next year. This pace would far outstrip the 1.1% expansion expected in the developed world in 2023 or next year’s estimated 0.7%.
This acceleration is all the more remarkable given that inflows of Chinese tourism dollars have not returned to Southeast Asia as anticipated. For example, in Singapore and Thailand — both popular destinations for Chinese holidaymakers — tourist arrivals are running at only about one-third of pre-COVID levels.
A recovery in tourism would certainly be a welcome boon for Southeast Asia. But meanwhile, trade, the transition to net zero and digital transformation are set to power the region’s economic growth for decades to come and ensure that this dynamic region remains a global growth engine.
Southeast Asia has come a long way as a manufacturing dynamo. It now accounts for 8% of global exports and since 2020, has surpassed the European Union as China’s largest trading partner.
The region is benefiting from a restructuring of global supply chains as it sits at the crossroads of two of the world’s largest free trade agreements, the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
RCEP in particular, with its tariff reductions and business-friendly rules of origin, is increasing the appeal of Southeast Asia as a manufacturing base, a fact that more companies are recognizing. According to a recent HSBC survey, Asia-Pacific companies plan to base 24.4% of their supply chains in Southeast Asia over the next one to two years, up from 21.4% as of 2020.
As more companies diversify and adopt a “China+1” production strategy, Southeast Asia will continue to gain market share. More global foreign direct investment will be directed toward the region as the center of gravity of global manufacturing continues to shift.
The transition to net zero is a second structural trend that is bringing tremendous opportunities as Southeast Asia races to “green its grid.”
Southeast Asia is among the world’s most at-risk regions when it comes to global warming in general and rising sea levels in particular. Yet to fuel the region’s development, demand for energy continues to grow rapidly.
Most of the energy powering Southeast Asia comes from fossil fuels, so it is encouraging that Indonesia and Vietnam — two of the region’s most dynamic economies as well as two of the world’s top coal-burning countries — have each announced Just Energy Transition Partnerships with the Group of Seven and other developed nations.
Under this new funding model, tens of billions of dollars in public and private finance will be mobilized, catalyzing the decarbonization of the two countries’ power sectors and facilitating their clean energy transition.
On a related note, innovation in clean tech is also growing fast in Southeast Asia. Clean tech is at the cusp of exponential growth, and as with financial technology, companies in the region have the opportunity to localize a global technology and scale it domestically. Investment and financial support will only help accelerate its development and adoption.
The third long-term source of optimism about Southeast Asia is the digital transformation of the region’s economy.
Southeast Asia already has a vibrant digital economy, which was worth nearly $200 billion as of last year and is expected to surpass $300 billion in size by 2025. Add in an internet-connected population of 460 million, and it is evident why companies are transforming their business models to cater to changing customer behavior.
Whereas e-commerce was only a nice-to-have pre-COVID, the pandemic has underscored the criticality of an online presence to a company’s existence. The shift to direct-to-consumer business models is giving companies better control over sales, marketing and, crucially, customer data. This can not only provide the basis for real-time analysis but also helps in generating accurate forecasts.
Underpinning the explosive growth of Southeast Asia’s digital economy is the proliferation of real-time payments in the region. Thailand, for instance, is the world’s fourth-largest real-time payments market by volume, according to payments software developer ACI Worldwide. While instantaneous payments can be sent and received domestically, the real prize lies in linking up the region’s various real-time payments systems.
When that becomes a reality, we can expect a jump in the velocity of transactions, whether business-to-business or business-to-consumer. This in turn will lead to greater economic activity in the region.
Nowhere is immune to the challenges facing the global economy. The rising cost of capital will only increase the scrutiny of every investment dollar, whether it is used for moving production, decarbonizing supply chains or digitizing operations.
But as an economic engine with favorable demographics, Southeast Asia is well positioned to capture the opportunities stemming from these long-term trends. The region needs to continue to nurture and attract talent. As an industry, the finance sector will continue to play our part in realizing Southeast Asia’s growth potential.
CVD 