SPANNING countries as diverse as Thailand, the Philippines and Singapore, the Association of Southeast Asian Nations tends to get far less attention than China and India.
To underestimate the region, however, would be a mistake. The GDP of its ten members now totals more than $2.5 trillion – about 25 per cent more than India’s. If Asean were one economy, and current growth trends continue, it could be the world’s fourth-largest economy by 2050. Rising affluence means the number of middle-class households will top 120 million by 2025, roughly double the 2010 number.
The question is: How can the region turn impressive projections into a future reality?
Boosting intra-regional trade is one sure way of spreading wealth. Intra-Asean trade accounts for approximately 25 per cent of Southeast Asia’s total, compared to 50 per cent in the EU.
To help address this shortfall in potential, Asean’s member countries have formed the Asean Economic Community (AEC), which aims to liberalise the flow of goods, services, capital, and ultimately, skilled labour across the region.
If fully implemented, the extra steps envisaged under the AEC could raise Asean’s GDP by 5 per cent by 2030 – a welcome development for countries like Thailand following subdued growth and currency volatility in 2015.
The opening up of services across the region under the AEC framework will be of particular interest to Thailand. Asean’s intra-regional flow of services has lagged that of goods - a paradox given the service sector’s importance to most Asean economies, including Thailand, where it accounts for just over 50 per cent of GDP.
Despite its domestic importance, the services share of intra-regional trade only hit 20 per cent in 2015. There is plenty of scope for the AEC to help drive that proportion higher.
The AEC gives Thai companies a clear platform to expand abroad to take advantage of growth in neighbouring countries, and Thailand has been pro-active in preparing for AEC. The corporate sector has a strong degree of awareness, and this should ultimately help the country take the most advantage of further integration.
Meanwhile, the bedrock of Asean’s long-term growth story rests on a trio of factors.
First, the region is already an important manufacturing hub. Toyota manufactures more than 700,000 vehicles a year in Thailand, for example. Now, China’s shift towards higher-tech manufacturing means more and more of the traditional, labour-intensive manufacturing that was once based in China is moving to Asean nations.
Second, consumer-spending power is growing rapidly. By 2030, Asean will have added another 120 million inhabitants and overall affluence is rising.
Third, Asean is home to a trusted international financial centre, in Singapore. Increasing financial liberalisation could help lower transaction costs and facilitate investment flows into Asean, aiding economies like Thailand.
Economically, the countries of Southeast Asia face near-term headwinds, like many others around the world. But the region’s economic assets, combined with extra lubricant from the AEC, will make it ever more important as a location to manufacture in, source from, and sell to.
Kelvin Tan is Chief Executive Officer, HSBC Thailand