Investment and financial dynamics in Asia are structurally changing and will continue to integrate financially. This trend will continue through 2025, presenting significant opportunities in the region, a conference was told.
At the event, “Australia and Thailand in an Integrated Asia”, held by the Australian-Thai Chamber of Commerce, Gilles Plante, Asia-Pacific chief executive officer for ANZ, said Asia learned many lessons from its own crisis in 1997 and was better placed to weather the global crisis a decade later.
However, there are challenges ahead for Asia. One is to avoid regulatory fragmentation. Asean countries need to ensure they take a coordinated view across borders rather than national approaches.
Another is to avoid inhibiting cross-border activity. Supporting trade and capital flows is fundamental to economic growth in Asia – and globally, Plante said. This implies the need to build cooperative regional regulation and avoid extra-territoriality issues.
Financial markets are underdeveloped in many parts of Asia, he said. The regulatory agenda needs to encourage the growth of regional banks and development of capital markets, not just regulation of markets.
Plante, who has lived through both the recent global financial crisis and the Asian crisis in 1997, which is when he joined the Australia and New Zealand Banking Group, said one difference between the two was the structural change in markets and behaviour. Asia was able to draw from its experience during the 1997 crisis to cope with the one in 2008.
Since the 1997 crisis, Asia has been less leveraged and has adopted more conservative policies and risk profiles.
“We have seen a shift in investment behaviour in Asia where trade and investment flows were predominantly going from Asia to the West: The ‘traditional’ model was for Asian countries, led by Japan and followed by China, to export goods to the West. These Asian countries would accumulate reserve surpluses and invest their cash surplus back to the West by buying US Treasuries and, to a lesser extent, European assets,” Plante said.
He said these US and European assets were considered to be among the safest investments in the world – they had a very strong triple-A sovereign rating – and were very liquid.
Western markets are still very liquid and still attract global investments. However, ANZ’s analysis has found that there is definitely a shift of Asian investments from the West to Asia.
Asia’s balance of payments has undergone a structural shift over the past five years, with lower current-account surpluses. However, reserve accumulation has continued as capital inflows have, to a large extent, offset the decline in the current account.
The clear trend ANZ has been seeing is a substantial rise in intra-Asian flows, which the bank thinks will be an increasing feature of the Asian financial landscape.
Across Asean, the percentage of long-term debt funded by Asia increased from 16 to 51 per cent from 2001 to 2010, and the short-term debt from 15 to 70 per cent.
Plante said there were two parallel dynamics at work here. First, developed Asian nations such as Japan with a current-account surplus are no longer exclusively investing in the United States or Europe. Instead, they are looking for investment opportunities in the developing economies of Asia.
“Asia is diversifying its investment portfolio and increasingly looking at investing a greater share of their portfolio in emerging Asia. This is seen in bond and equity investment, but also through foreign direct investments. Developing nations of Asia, which are predominantly in South and Southeast Asia, need funding to further their economic growth. For example, they need funding to improve their infrastructure – better roads, bigger ports,” Plante said.
“As a result, we increasingly see investment flows going from North to South, with Asia increasingly financing Asian growth. The rich Asian countries are turning to Asia for their future rather than the US or Europe. They are investing in an Asian future.”
This shift in behaviour in Asia happened before the global crisis of 2008. That event accelerated the change, but the seeds had already been planted well before.
Asean remains a diverse region with uneven levels of development, but its growth story has strengthened in aggregate, noted. Growth in Asean has caught up with that of India, expanding an average of 5 per cent year on year in the first half of 2012, and the growth gap with China has narrowed.
Part of the story is that China and India have slowed, but the upturn in Asean growth has caught the attention of investors.
The Asian Development Bank estimates that about US$60 billion (Bt1.84 trillion) of infrastructure investment alone will be needed across Asean in roads, rail, power and water each year over the next 10 years.
Indonesia now accounts for nearly half of Asean-5 growth in gross domestic product and, after China, is now the second-fastest-growing large emerging market in Asia. Most recently GDP grew 6.2 per cent in the third quarter of this year, bringing the year-to-date expansion to 6.3 per cent.
The Philippine economy is regaining momentum after decades and its growth rate is not far behind that of Indonesia, growing 5.9 per cent in the second quarter and 6.3 per cent in the first.
Malaysia’s growth has remained resilient through the global slowdown, averaging 5.1 per cent year on year over the past six quarters. But Vietnam slowed to 5.4 per cent in the third quarter of this year, below its long-term growth rate of 6.9 per cent, as it is grappling with difficulties in its banking system.
Thailand remains a country with significant growth potential notwithstanding the floods of last year, and the subsequent global slowdown that has weighed on its economic recovery. The rebound from the floods has been rather sharp, and the country’s GDP is expected to grow by nearly 6 per cent this year.
Plante said a common theme among the three fastest-growing economies of Southeast Asia was that he had seen a sustained pick-up in investment, for the first time since the 1997 crisis.
In turn, the investment upturn has been supported by the stable consumption of a growing middle class, improved policy credibility, deepening financial markets and improved balance of payments.
Another region-wide theme is the growth of intra-regional trade. This is limiting some of the downside impacts from falling demand from the West.
In particular, the emphasis on intermediate goods reflects deepening regional production networks.
Plante said Thailand remained unique in three important ways.
First, as the second-largest economy in the region, with a well-developed manufacturing base, it is set to capitalise on growing income levels of and demand from Asean economies. The Thai government’s plan includes about Bt2.3 trillion in road and rail investment over the next seven years, mainly in transport.
Second, if Chinese costs – particularly labour costs – continue to increase, intermediary manufacturing could spill over to Thailand, which has a well-established track record of manufacturing expertise, with sound infrastructure to back it up.
Third, Thailand is situated next door to a reawakening Myanmar and rapidly growing Cambodia and Laos. It is truly well positioned to provide aid, expertise and financing and to boost regional connectivity, which will spur future trade and growth opportunities across the region.
Overall, looking across Asean, resilient economic growth and activity in the region has resulted in a flurry of capital-raising activity, heightened regional cross-border merger bids and acquisitions.
The trend of local/Asian multinationals finding new markets within Asia is exciting, Plante said, as it opens the door to new business opportunities and reinforces ANZ’s long-term faith in Asia relying on other Asian markets for growth and financing.
OPPORTUNITIES IN INDIA AND CHINA
Plante said GDP growth in Asean had recently caught up with India’s. In addition, its growth gap with China has narrowed.
“We believe that leading Asean economies should be able to maintain their high growth rates. And their geographic location and proximity between the two rising giants is an advantage and not a threat. The shift towards a more consumption-driven economic model in China, and ongoing reforms and the outward orientation of India, creates strategic opportunities for Asean, especially for Thailand,” he said.
First, ANZ’s economists estimate that a pick-up in consumption-driven GDP growth in China will increase intra-regional Asian trade by nearly the same amount as US demand boosted Asian trade in the past decade.
In particular, the shift in China’s growth model will continue to drive opportunities in intermediate goods and agricultural products. Both of these are areas where Thailand has an advantage through its solid manufacturing base and its comparative advantage in food production and exports.
Meanwhile the Asean–India Free Trade Agreement (AIFTA), which came into effect in 2010, could eventually open the doors to services trade and unlock opportunities for Thai companies in more value-added areas such as information technology, consulting and finance.
With its well-developed tourism infrastructure, Thailand is also primed to take advantage of the leisurely pursuits of the huge middle classes of China and India, Plante said. The Kingdom could also become a hub for commercial interactions and travel linkages between Myanmar, and the greater Mekong region, with China, India and Indonesia.