Amidst the global economic slowdown, ASEAN remains a promising region for trade and investments.

A growing middle income class, increasing regional integration propelled by the ASEAN Economic Community (AEC) and a strong connection to China’s growth engine are set to fuel growth in Southeast Asia. With consumerism and infrastructure sectors to watch, how can companies harness the opportunities while overcoming potential pitfalls?

Our Group Director for Southeast Asia, Mr Ivan Tan shared his thoughts on why “ASEAN still beckons” at the 2017 Economic Outlook Forum organised by The Business Times. We distil three key pointers from his presentation.

Ivan Speaking

Southeast Asia’s growing middle class is set to create a sizeable retail market

Having a large population of more than 600 million is clearly an advantage, especially within a fast growing region. Rising income and standards of living are set to spur rising consumer demands for a wide range of products and services. Indeed, the Asian Development Bank estimated that by 2030, nearly half a billion of population in ASEAN will be classified as middle income class. This represents close to 65% of the population by then, from 29% of the ASEAN population in 2010.

consumerism

With over 17 million middle class households, Indonesia is home to the world’s fourth largest middle class population – behind only behind the US (25.3 million), India (74 million), and China (112 million). Besides its large size, the middle class purchasing power in Indonesia is also set to increase, creating strong demand for consumer goods and services. Euromonitor International forecasts that the country’s middle class will expand to 20 million households by 2030, thereby giving rise to an important consumer market for both domestic and imported consumption. Sectors which present the most potential for Singapore firms will include the health goods and medical services, leisure and recreation, and hotel and catering.

The middle and affluent class (MAC) in Vietnam is set to more than double between 2014 and 2020 from 12 million to 33 million. MAC consumers – whose incomes are VND15 million (US$714) or more a month, are also spreading out to other provinces and cities. This means that businesses can look beyond Ho Chi Minh for opportunities.

Myanmar’s middle and affluent class is estimated to grow to about 15% of the population by 2020. While only about 25% of consumers go on vacation and fewer than 40% frequent restaurants, home entertainment products such as VCRs feature high on the shopping lists of consumers due to the lack of entertainment venues. Another point to note is the lack of stable electricity discourages the use of expensive appliances, meaning consumers are unlikely to spend on big-tocket electrical items. For example, only 18% of urban consumers own a washing machine compared to 53% which own a mobile phone.

The AEC will better integrate ASEAN’s economies and boost intra-regional trade and investments over time

ASEAN itself is already a trade driven block and we anticipate the momentum will continue in the decades ahead, given the rich stores of resources and an established manufacturing base which will be further boosted by AEC. This will the key to further drive both intra-ASEAN trade (among members of ASEAN), as well as extra-ASEAN trade (trade with countries outside ASEAN grouping) as the promises of a single production platform and a unified market will strengthen trade activities.

trade

In recent years, ASEAN has made good progress in lowering barriers to trade, services and investments. Firstly, the ASEAN – 6 saw the elimination of import duties on more than 99% of goods. Remaining countries are expected to follow suit for the next 3 years.

Secondly, as a result of the AEC, there will be a greater liberalisation of cross border trade in services. This would benefit between 90 – 108 services subsectors across ASEAN member states.

Lastly, ASEAN as a collaborative region has established a set of pro-business investment rules via the ASEAN comprehensive investment agreement (ACIA), resulting in greater protection, transparency and recourse to investors.

That being said, there are areas which ASEAN can improve in to truly meet its goal as a unified economic community. For example, it could develop a single window and the use of self-certification to better facilitate trade. Non-tariff barriers such as import licensing procedures can also be relooked at to spur greater intra-regional trade. With its low barrier to entry and operating cost, e-commerce could be a means for firms to make their first foray into markets within the region.

Booming infrastructure demand is set to create a steady pipeline of opportunities

Singapore companies will continue to find opportunities in the infrastructure sector, given the broader context of China’s OBOR and ASEAN’s current infrastructure gap.

The existing infrastructure gap also means room for investment opportunities. Slowing external demand, low commodity prices, and high household debt levels have caused ASEAN growth to decelerate steadily since 2012. However, at present, infrastructure spending by the government has increased, particularly in Indonesia, Thailand, Philippines and Singapore. This helped to stabilise domestic demand and offset slowing global growth, which is why ASEAN is actually set to be a relative outperformer across Asia and the other regions.

infra

Despite higher spending by government for infrastructure spending, private funding is still needed to close the large infrastructure gap in ASEAN. This means that companies could explore looking at structuring their investments through a public-private partnership model. Local firms can leverage the Singapore’s infrastructure ecosystem to better capture these opportunities.

The One Belt, One Road (OBOR) initiative is also set to facilitate Chinese investment into the region and encourage the flow of people and goods between China and ASEAN. Currently, China’s OBOR covers around 60 countries including most ASEAN countries.

map Sources: Xinhua; U.S. Department of Defence; Gazprom; Transneft (pipelines); United Nations (rail entry points)

OBOR unlocks several infrastructural related projects and Singapore companies could explore partnering Chinese companies to better access financing. Some examples include the Jakarta Bandung Railway and Melaka Gateway Port.

IE Singapore’s signing of an MOU with the Industrial and Commercial Bank of China Limited earlier this year is an example of an avenue provided to local firms to tap OBOR opportunities. 22 November 2016

Reposted from International Enterprise Singapore (IE Singapore)

The views and opinions expressed in this article do not necessarily reflect the official policy or position of the ASEAN Trade Union Council.