ASEAN Integration: What To Expect
BMI View: The Association of Southeast Asian Nations (ASEAN)'s target of creating a single market and production base by 2015 looks ambitious given the lack of consensus on key issues, the absence of pan-regional policymaking institutions, and a more cautious approach in light of the eurozone's structural problems. Still, we continue to see increased intra-ASEAN commercial and financial linkages as an evolutionary process, which will drive activity across a multitude of sectors - not least infrastructure, automotives and tourism.
Taken as a single entity, the Association of Southeast Asian Nations (ASEAN) - which is made up of Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam - would rival the more traditional BRIC emerging markets in terms of economic importance. According to our in-house data, the ASEAN's total population came in at roughly 612mn in 2011 - more than quadruple the size of Russia and behind only China and India globally. Its aggregate nominal GDP of US$2.3trn in 2012, meanwhile, would put it seventh globally (see chart), again above the likes of Brazil and India.
|In The Top League|
|Global - Nominal GDP, US$ (2012e)|
Given the sheer scale of these numbers, it is little wonder that global and local investors alike are excited at the prospect of increased regional integration of the South East Asian region. A cornerstone of the ASEAN chart signed in 2007 was the ASEAN Economic Community (AEC) Blueprint, a plan that targeted regional economic integration by 2015. The AEC's objectives include single market and production base (to allow free movement of goods, services, labour and capital); a competitive economic region (based around competition policy and infrastructure development); equitable economic development; and integration into the global economy (via unified external economic relations).
2015 Timeline Looks Unlikely
Of course, the ASEAN is not yet a single entity and our view is that the 2015 AEC timeframe will prove ambitious (with certain aspects virtually unfeasible) for a number of reasons.
Firstly, and most importantly, there is a lack of consensus on a number of key issues. The mobility of labour is one such sticking point. While the AEC Blueprint effectively calls for a single labour force across the region, it is difficult to envisage the Singapore government (which is already under popular pressure to tighten its immigration policy) to make it easier for low-paid workers to cross its borders. Another bone of contention is that liberalisation in certain industries remains a voluntary process, meaning that there is a lack of communal coercion on respective government to break down barriers to entry. The special status afforded to Malaysia's automotive industry via a combination of tariff and non-tariff protectionist policies remains in place.
Secondly, another key issue is the lack of pan-regional policymaking institutions (akin to the European Commission, for example) that will represent the interests of the ASEAN members as a whole. This suggests to us that deliberation over the finer details of the AEC may take years to iron out, if at all.
Finally, the structural problems afflicting the eurozone area, the world's largest trading bloc, have led to a more cautious approach towards economic integration. A single currency for the region remains very much off the agenda, for example. Meanwhile, the huge disparities in areas such as per capita incomes, natural resource endowments, and population sizes will make it difficult to implement a one-size-fits-all policy prescription.
|Together We're Stronger|
|ASEAN - Exports By Destination & FDI By Source|
Regional Integration Inevitable
Our skepticism on the AEC 2015 timeline does not mean that we do not continue to expect closer commercial and financial ties across the region, however. To be sure, we have already seen encouraging progress on this front. The accompanying chart shows ASEAN exports and foreign direct investment (FDI) by destination and source, respectively. In terms of exports, one clear trend has been the rise of China as a market for ASEAN goods, with the country's share rising from 3.5% in 2000 to 11.5% in 2011. However, China's increasing importance has come at the expense of developed markets not regional trade. Intra-ASEAN exports have continued to increase steadily from 22.7% in 2000 to 25.0% in 2011, and are by far the most prominent component of regional export activity. This is comforting given our view of a much slower growth trajectory for Chinese domestic demand over the medium term. On the investment side, meanwhile, we note that intra-regional FDI inflows have also increased significantly from 8.2% in 2005 to an estimated 23.0% today. With the absolute level of inflows also remaining robust, this suggests to us that ASEAN is becoming less reliant on funding from traditional creditors such as Japan, Europe and China. Likewise, this is a positive for strong, stable growth in the region going forward.
With these factors in mind, we continue to see greater ASEAN integration and connectivity in the years ahead regardless of potential delays to the AEC and this will throw up a multitude of opportunities for investors. One obvious beneficiary will be the infrastructure sector given the requirement to connect economic activity across the region. A number of cross-border projects have already been announced. For instance, a high-speed railway line connecting Singapore and Kuala Lumpur was unveiled in February 2013 (with completion earmarked for 2020), which could potentially re-define business activity on the peninsula. Meanwhile, the Singapore-Kunming rail link will look to connect Singapore, Malaysia, Thailand and Laos with China. Even projects such as Myanmar's Dawei special economic zone have a distinctly regional flavour, with the project including pipeline, highway and railroad connections to neighbouring Thailand.
|A Game Changer?|
|Location Of KL-Singapore High-Speed Rail Project|
Other winners of an increasingly integrated region will be automotive and tourism. On the auto side, we expect to see a gradual elimination of intra-ASEAN tariffs, which would make it easier for automakers to sell vehicles in the various growth markets, while component manufacturers will also benefit from the AEC as they base production in lower cost countries and then export to the rest of the ASEAN market. On the tourism front, meanwhile, we note that ASEAN tourists accounted for 46% of all regional tourist arrivals in 2011, up from just 23% in the previous year, with Thailand's tourism sector and Singapore's gaming industry well positioned to profit from this trend.