March 27, 2016: The economic terrain of most of Asia and the Asia Pacific (APAC) is set to be impacted by specific shifts in the geopolitical landscape of the broader region, with three significant events of note predicted to happen this year that will impact Asia’s economic environment.

The Diplomat noted seven significant events. With relation to their impacts on the economic and investment spheres, these are the launch of the China-led Asian Infrastructure Investment Bank (AIIB), the prospects of a robust long-term peace agreement between Pakistan and India and the emergence of the ASEAN Economic Community (AEC).

2016 has been posited by the Financial Times as a year of change for investors, with capital flights from China to declining oil prices amidst a slump in oil prices as the energy industry shifts towards renewable energy sources, adding more capacity for renewable power each year than hydrocarbon energy sources.

Michael Liebreich, founder of Bloomberg New Energy Finance (BNEF), observed: “The electricity system is shifting to clean. Despite the change in oil and gas prices there is going to be a substantial build-out of renewable energy that is likely to be an order of magnitude larger than the buildout of coal and gas.”

AIIB going live

The Asian Infrastructure Investment Bank (AIIB) going liveis a major set, The January 2016 meeting of its Board of Governors signalled its commencement of operations.

Marking China’s growing ambitions as a multilateral leader and regional Great Power, it offers “an alternative vision of global governance and development than those of Western-backed institutions”, in comparison to the World Bank, Japan-led Asian Development Bank (ADB) and International Monetary Fund (IMF).

While no reliable prediction can be made, with economic power power evolving towards a centrality focused on Asia by 2050, according to PWC research, China, India, Indonesia, Japan and Russia will emerge as the major global economies by 2050, leading towards an Asian domination of the global economic landscape.

According to The Economist, the economic centre of gravity will shift towards Asia, with China forging its own economic leadership in the form of the China-led Asian Infrastructure Investment Bank (AIIB), while economic power and influence is shifting towards Asia and away from the contemporary global hegemony, the US, in a shift that was said to be accelerating in 2011.

However, an apparent decline of Western power and influence must be coupled with a deep understanding of the complex dynamics shaping the international relations and economic landscape of Asia.

The emergence of the Maritime Silk Road, which also connects all of China’s manufacturing successors along a single maritime corridor,as well as developments impacting Singapore’s strategic maritime trade such as the development of a new Vietnamese port,are part of the new developments impacting the economic dynamics of Asia and international markets.

Pakistan-India economics

Pakistan and India have a long history of rivalry, being in conflicting relations since 1947 with only occasional episodes of friendliness since then and tending towards being mixed.

Both countries have been unable to resolve their differences and develop normal diplomatic relations, with peace talks disrupted, aborted or otherwise suspended, with the status quo maintained. Recently, an attack on an Indian air force base led to the talks being delayed.

Yet, Pakistan is currently in the midst of an economic boom, with a Lamudi content piece observing that the Pakistani economy has been “meeting and exceeding targets in many business sectors since 2014 and into 2015; construction, manufacturing, retail sales and agriculture are amongst the industries seeing growth.

This has been attributed to a combination of increased security in Karachi, Pakistan’s economic centre, and the Sharif government’s positive economic policies. Investors are committing capital to Pakistan, given the more positive investor sentiment towards Pakistan’s business prospects.

For instance, a 27 per cent increase in government spending on infrastructure to 1.5 trillion rupees ($14.34 million) for 2015 has compounded the effect of increased security, stimulating construction projects in large and small cities alike. Bloomberg noted that this led to the largest initial public offering (IPO) in Pakistan in eight years by construction steel manufacturer Amreli Steel Ltd.

It has also seen $500 million invested by China to finance the expansion of Pakistan’s energy infrastructure, with its wind energy capacity possibly growing to 800 MW from the current 308 megawatts, with further investments in its solar power sector by Chinese firms. This is part of a major Chinese investment initiative in Pakistan. However, there are concerns regarding Pakistan’s debt maturing this year amid the global market turbulence.

Meanwhile, India’s economy is expected to slow or stabilise this year, though robust growth has been predicted by the International Monetary Fund (IMF). Its 2016 budget is encountering challenges, given the economic turbulence affecting the global economy.

In an interaction with CNBC, Brian Jacobsen, chief portfolio strategist at Wells Fargo Advantage Fund explained: “If Modi gets his budget correct, recapitalize the banks and have a target for continued growth, India represents a great opportunity for investors over the next few years. Outside of America, I would still put India up there as being one with the most opportunities … [and] emerging Europe.”

With India a burgeoning Great Power and central player in the larger Indo-Pacific, an increasingly strategic region of the world – driven by the rise of the Maritime Silk Road and the emergence of countries able to displace China as a manufacturing destination – India will play a crucial role in determining the economic architecture of the region.

Pakistan, while lacking the centrality of India in the region, is a key player, being a key strategic partner for China, which has heavily invested in the Gwadar port and the China-Pakistan Economic Corridor project. This is part of China’s larger Silk Road infrastructure development initiative and aimed at linking Western China to the Arabian Sea and Indian Ocean sea lanes.

However, its implementation in Pakistan has generated significant internal unease. Nevertheless, Pakistan is seeing a significant influx of Chinese capital, representing a strategic transport corridor and source of minerals for China.

While continued economic growth may help to stabilise Pakistan and lead twosome degree of peaceful relations between the two countries, 2016 is unlikely to see any positive developments in relations between the two states. The historical acrimony and the belligerence of Pakistani intelligence services in supporting terrorist operations is unlikely to lead to positive diplomatic outcomes.

ASEAN Economic Community

The ASEAN Economic Community (AEC) has been cited as a success, providing a common market estimated at more than 620 million people spread across 10 countries. It was believed that the emergence of the AEC would promote investment and trade.

Combined, the region has a gross domestic product (GDP) of US$2.6 trillion and ranks as the seventh-largest economy in the world. Its population makes it the third largest economic region by population after China and India, with a relatively young labour force as well.

According to a brief by the Asian Development Bank (ADB), ASEAN could be the fourth largest unified global economy by 2050 if current growth trends continue. Its economic openness is also notable, with total merchandise exports in excess of $1.2 trillion, accounting for nearly 54 per cent of total ASEAN GDP and 7 per cent of global exports.

The core objectives of the AEC involve deep integration, competitiveness, enhanced connectivity and sectoral cooperation, and global engagement, with the aim of facilitating the freedom of movement of goods, services, capital and skilled labour within a unified market with single production base, with freer capital flows within the region.

However, February 2016 is seeing the economic prospects of the AEC diminishing, amid the broader turbulence present in global markets. Meanwhile,e Brunei, which is critically dependent on oil, is predicted to be encountering severe economic problems.

The AEC was already predicted to encounter problems, given the fragmentation in terms of economic development between the member states, as well as population and market differences. This is in addition to the lack of strong centralised institutions or secretariat able to initiate legally binding actions, as well as the lack of a common regional identity among the population.

However, this is reflective of how ASEAN has recognised the limitations of the European Unions’ own integration drive. Concurrently, enforcement mechanisms to ensure compliance are also undeveloped.

In addition, the consensus-based ASEAN Way has been credited with reducing regional security competition and fostering economic integration, as well as influencing the Myanmar junta to opening up. However, The Economist has noted that structural barriers and organisational affairs may lead to inaction, with significant gaps in the AEC’s institutions and systems.

For instance, AEC mechanisms are insufficient to separate legitimate public policy objectives (i.e. non-tariff measures) from local protectionism. Currently, the economic integration commitments lack sufficient mechanisms to ensure compliance, raises security concerns regarding organised crime.

Other oversights include the exclusions of major economies like Australia, a G-20 member, with an economy valued at $1.61 trillion for the 2014/2015 that has a stake in Southeast Asia and with whom ASEAN has a strategic interest in engaging, given the nature of the Australia-ASEAN relationship.

As a regional middle power, engaging Australia is critical, due to its uncertainty of the appropriate course in Asia, meaning that it will tend towards being reactive and supportive of ASEAN initiatives.

In an interaction with CFO Innovation, Sandra D’amico, vice-president of the Cambodian Federation of Employers and Business Associations, and founder and managing director of human resource & business solutions firm HRINC Cambodia counselled patience, arguing:“From a business perspective, things will not change drastically and immediately.”

D’amico added, “We are already working in a regional context, whether we are importing something and reselling, or importing something and adding value and reselling, or moving business operations to take advantage of [preferential] trade.”

The AEC will amplify existing arrangements overtime, necessitating companies to engage in long-term planning and budgeting for integrating the AEC into their long term business plans. This comes as Singapore is initiating discussions regarding an FTA with the Eurasian Economic Union and an FTA to be ratified with the European Union.

Given the progress in implementing the ASEAN-China and ASEAN-India free trade agreements, AEC businesses will be operating in a market where feely trade goods and services service a population of 3.2 billion consumers. But ASEAN will need to develop more centralised institutions and strengthen enforcement mechanisms, in order to ensure the AEC is sustained and maintained into the future. By Shiwen Yap